Breaking down

Dislocation in financial markets has caused pricing models for structured credit models to go haywire, causing banks to question their inputs. Does this mean banks have to change their correlation assumptions? Has this had an effect on regulatory or economic capital? Duncan Wood investigates

The credit crisis has shown no respect for the derivatives industry's cherished traditions - even going so far as to kick sand in the face of the pricing techniques first developed in 1973 by Nobel prize winners Fischer Black and Myron Scholes. The Black-Scholes model showed that equity options could be valued by inferring volatility from market prices, and this insight has become the cornerstone for derivatives pricing - including valuation of the credit products that have been at the heart of