The principal objective of the pricing function is to ensure that assets are priced fairly. Fair pricing should reflect those pricing levels where, at a particular point in time, assets could be liquidated in the normal course of business. Proper valuations and pricing are not only important information content for various reporting functions such as client reporting, performance measurement, and risk analysis. They can be even more critical where they become the basis of contractual financial transactions between investing parties. As an example, open-end pooled vehicles such as mutual funds or hedge funds allow investors to join or leave the investment pool by transacting at the pool's NAV per share.2 Needless to say, any inaccurate valuations would lead to an unfair and inappropriate wealth transfer between transacting parties. In other words, valuations need to be fair to all—purchasing, redeeming, and remaining investors.3
Let us begin with some high-level themes and principles to describe the framework and objectives in which a valuation oversight function should be positioned.
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