Over the years, Townhouse has gained a reputation for being the go-to for abstract, and complicated valuations. But this one took the cake. It came from a large American bank with an unusual, no make that a one-of-a-kind, derivative product.


Our client’s initial ask was to create a valuation model for a product that was tied to new market tax credits. In short, the option was based on tax benefits and whether or not there would be a recapture event. Needless to say, the product was very specialized and the risks were peculiar. The twist was that the product was so customized that it was illiquid. With no way to trade it, we couldn’t just go out and get a price for it. That made modeling out these derivatives an unusual challenge.

What we did

We put together an A-Team of people with experience modeling this kind of derivative and set to work coming up with a theory for how we would create a model. We opted for a Monte Carlo simulation that would give our client a range of possible outcomes and the likelihood that each would occur for a number of scenarios that they entered. Using this model enabled us to come up with risk metrics for a host of possible occurrences. Next, we ran the simulations through about 10,000 trials and came up with a curve that enabled our client to ascertain the likelihood the option would be in the money. We even pushed the model a step further so that it could give our client metrics to arrive at one value not a series of values.

How it worked

The Monte Carlo simulation ended up paying big dividends because our client has been able to reuse it to realize millions in accounting benefits.