Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 34 • Prices and rates used for reevaluation should be taken from independent sources. Where in-house prices are used, independent review procedures using third-party data sources should be in place, including independent models. 2) Developing Market Valuation Methodology • Physical and derivatives portfolios of energy providers should be valued based on appropriate bid or offer levels. • Mid-market valuation adjustments should allow for expected future costs such as unearned credit spread, closeout costs, investing and funding costs, and administrative costs. • Futures, swaps, forwards, and physical assets should be valued against the appropriate market-based curves. • Single-variable options should be valued against market price and volatility curves. • Dual-variable options should be valued against market price, volatility, and correlation curves between two variables. • Reserves should be taken in accordance with approved accounting policies. 3) Calculating Profit and Loss • Components of revenue should be measured regularly and in sufficient detail to understand the sources of risk.7 • P&L should be calculated daily. • P&L calculations should include cumulative month-to-date and year-to-date results. 4) Measuring Market Risk • A consistent measure should be used daily to calculate the market risk of derivatives positions and compare it with market risk limits.8 • Market risk is best measured as value at risk using probability analysis. • Transactions (e.g., OTC options, assets, and contracts) containing embedded option exposures or dynamic risks should be measured using individual “Greek” risk exposure measurements including absolute price or rate change (delta), convexity (gamma), volatility (vega), time decay (theta), basis or correlation, and discount rate (rho).9 • Parameters for calculating VaR and other risk metrics (e.g., EaR and DEaR), issuing limits, and back-testing the methodology within each business unit should comply with guidelines established by the ROC. • A standard set of time buckets should be used to represent common market granularity. 7 The Group of 30—Recommended Best Practices for Risk Management, July 1993 8 Ibid 9 Ibid