# In the Absence of Liquid Markets How Can a Determining Party Justify Its Valuation Methodology? ▴ Question

**Published:** 2025-08-03
**Categories:** Question

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## Concept

A determining party confronts a foundational challenge when liquid markets cease to provide observable price signals. The task becomes one of constructing a [defensible valuation](https://prime.greeks.live/area/defensible-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) architecture, a system of logic and evidence that can withstand scrutiny from auditors, regulators, and investors. This process moves valuation from a simple act of price observation to a complex act of price determination. The justification for a [valuation methodology](https://prime.greeks.live/area/valuation-methodology/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in such an environment rests upon a disciplined, transparent, and replicable process that is grounded in established financial principles and a clear understanding of the asset’s specific characteristics.

The core of this justification is the adherence to a recognized framework, with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, [Fair Value Measurement](https://prime.greeks.live/area/fair-value-measurement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), providing the dominant operational blueprint. ASC 820 establishes a precise definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an [orderly transaction](https://prime.greeks.live/area/orderly-transaction/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) between market participants at the measurement date. This definition introduces several critical system components ▴ the concept of an “orderly transaction” which presupposes exposure to the market for a period before the measurement date, and the perspective of “market participants,” which requires the determining party to adopt the assumptions that unrelated, knowledgeable parties would use in pricing the asset.

> The absence of liquid markets necessitates a shift from price discovery to a structured, evidence-based process of price determination.

This framework is built upon a hierarchy of inputs, a classification system that organizes the data used in valuation techniques into three levels based on their observability. This hierarchy is fundamental to justifying the chosen methodology. Level 1 inputs are unadjusted quoted prices in active markets for identical assets, the most reliable evidence of [fair value](https://prime.greeks.live/area/fair-value/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Level 2 inputs are observable inputs other than Level 1 prices, such as quoted prices for similar assets in active markets, or inputs derived principally from or corroborated by observable market data.

Level 3 inputs are [unobservable inputs](https://prime.greeks.live/area/unobservable-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), reflecting the [determining party](https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)’s own assumptions about what market participants would use in pricing the asset. Illiquid assets, by their nature, rely heavily on Level 3 inputs, placing the burden of proof squarely on the determining party to document and support the reasonableness of its assumptions.

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## The Architecture of Defensibility

Justifying a valuation methodology for an illiquid asset is an exercise in architectural design. It requires building a structure of logic that is internally consistent and externally verifiable wherever possible. The first principle of this architecture is the selection of an appropriate valuation technique. ASC 820 specifies three broad approaches ▴ the [market approach](https://prime.greeks.live/area/market-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), the [income approach](https://prime.greeks.live/area/income-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), and the cost approach.

The selection is a strategic decision, guided by the nature of the asset and the availability of reliable data. A methodology gains credibility when the chosen approach aligns with how market participants would theoretically value such an asset.

The second principle is the rigorous documentation of all inputs and assumptions. For [Level 3 inputs](https://prime.greeks.live/area/level-3-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), this is paramount. Every significant assumption, from projected cash flows and growth rates in an income approach to the selection of comparable companies in a market approach, must be supported by a clear rationale and tangible evidence.

This documentation serves as the system’s audit trail, allowing a third party to understand the logic and replicate the process. It is the articulation of the determining party’s judgment, transforming subjective inputs into a structured, defensible output.

The third principle is the consistent application of the chosen methodology. A valuation policy that changes without a clear, justifiable reason tied to changes in the asset or market conditions undermines its own credibility. Consistency demonstrates a commitment to a disciplined process, a core tenet of institutional-grade operations. This systematic application, combined with robust documentation and a foundation in established frameworks like [ASC 820](https://prime.greeks.live/area/asc-820/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), forms the bedrock upon which a determining party can justify its valuation in the challenging environment of illiquid markets.

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## Strategy

The strategic imperative for a determining party valuing [illiquid assets](https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is to construct a [valuation framework](https://prime.greeks.live/area/valuation-framework/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that is robust, transparent, and defensible. This strategy is an exercise in risk management, where the primary risk is the challenge to the valuation’s credibility by auditors, regulators, or stakeholders. The strategic framework, therefore, must be designed not only to produce a reasonable estimate of fair value but also to create a comprehensive and logical narrative that supports the conclusion. The foundation of this strategy is the disciplined application of ASC 820, which provides the necessary structure and principles for this task.

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## Selecting the Core Valuation Approach

The initial strategic decision is the selection of the primary [valuation approach](https://prime.greeks.live/area/valuation-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). ASC 820 outlines three approaches, and the choice among them is dictated by the specific characteristics of the asset and the availability and reliability of data. The justification for the entire valuation rests on the appropriateness of this initial choice.

- 
**The Market Approach** ▴ This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. For illiquid assets, this often involves sourcing data from private transactions, broker quotes for similar but not identical assets, or analyzing publicly traded companies that are deemed comparable. The strategic challenge here is the justification of the “comparability” of the selected companies or transactions and the quantification of adjustments for differences.

- 
**The Income Approach** ▴ This approach converts future amounts, such as cash flows or earnings, to a single current (discounted) amount. The most common application is the [Discounted Cash Flow](https://prime.greeks.live/area/discounted-cash-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (DCF) method. The strategy revolves around developing and substantiating a set of unobservable (Level 3) inputs, including financial forecasts, long-term growth rates, and a [discount rate](https://prime.greeks.live/area/discount-rate/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that reflects the risk inherent in the asset and the uncertainty of the cash flows.

- 
**The Cost Approach** ▴ This approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). This method is most often applied to tangible assets or early-stage companies where future income streams are highly speculative and no comparable market transactions exist. The strategic focus is on accurately estimating the costs of recreating an asset of similar utility.

In many cases, a multi-pronged strategy employing more than one valuation technique is advisable. Using multiple approaches provides a range of values and serves as a cross-check, strengthening the overall justification. The final concluded value might be a weighted average of the outcomes, or one approach might be selected as primary with the others used for corroboration. The key is to document the rationale for the weighting or selection.

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## The Fair Value Hierarchy a Strategic Classification

A core component of the valuation strategy is the classification of all assets and liabilities within the ASC 820 [fair value hierarchy](https://prime.greeks.live/area/fair-value-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This classification is a direct statement about the observability of the inputs used in the valuation and, therefore, about the degree of judgment involved.

- 
**Level 1** ▴ Assets valued using unadjusted quoted prices in active markets. The strategy is simple ▴ use the market price.

- 
**Level 2** ▴ Assets valued using observable inputs other than quoted prices. The strategy involves identifying appropriate observable data (e.g. interest rate yield curves, credit spreads for similar entities) and applying standard valuation models.

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**Level 3** ▴ Assets valued using unobservable inputs. This is where the bulk of illiquid assets reside. The strategy must be deeply procedural, focusing on the development, documentation, and back-testing of internal models and assumptions. This includes establishing a formal valuation committee, maintaining detailed records of all inputs, and performing periodic reviews to ensure the assumptions remain relevant.

> A robust valuation strategy anticipates scrutiny by embedding transparency and rigorous documentation at every stage of the process.

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## Quantifying Illiquidity the Discount for Lack of Marketability

A critical strategic element in valuing private or illiquid securities is the application of a Discount for Lack of Marketability ([DLOM](https://prime.greeks.live/area/dlom/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)). This adjustment quantifies the value reduction an investor would require to compensate for the inability to readily convert the asset to cash. Justifying the magnitude of the DLOM is a frequent point of contention.

The strategy for determining the DLOM involves referencing empirical studies and analytical models. Several methods exist:

- 
**[Restricted Stock](https://prime.greeks.live/question/how-has-the-rise-of-systematic-internalisers-changed-the-competitive-landscape-for-traditional-stock-exchanges/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Studies** ▴ These studies analyze the price difference between publicly traded shares and restricted shares (identical but not freely tradable) of the same company. The observed discounts provide an empirical basis for a DLOM.

- 
**Pre-IPO Studies** ▴ These compare the price of a company’s stock in private transactions shortly before its Initial Public Offering (IPO) with the public offering price. The difference is used as an indicator of the DLOM.

- 
**[Option Pricing](https://prime.greeks.live/area/option-pricing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Models** ▴ A theoretical approach that models the DLOM as the cost of a put option. The logic is that an investor holding an [illiquid asset](https://prime.greeks.live/area/illiquid-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is effectively writing a put option; the DLOM is the premium for that option. The model requires inputs for volatility, time to liquidity, and risk-free rate.

The following table compares these strategic approaches to quantifying the DLOM:

| DLOM Approach | Core Principle | Key Inputs / Data Sources | Strategic Considerations |
| --- | --- | --- | --- |
| Restricted Stock Studies | Empirical analysis of price differentials between restricted and publicly traded shares of the same company. | Transaction data from private placements of restricted stock. | Provides direct market evidence, but the holding periods and characteristics of restricted stock may differ from the subject interest. |
| Pre-IPO Studies | Empirical analysis of price differences between pre-IPO private transactions and the subsequent IPO price. | Data on private funding rounds and IPO prospectuses. | Reflects a transition to liquidity, but pre-IPO transactions may involve strategic investors or other factors not solely related to marketability. |
| Option Pricing Models | Theoretical model equating the DLOM to the price of a European put option, representing the cost to hedge against price declines during the illiquid period. | Stock price volatility, expected term to a liquidity event, risk-free rate, and dividend yield. | Offers a quantitative, replicable model, but is highly sensitive to the unobservable input of the expected term to liquidity. |

A comprehensive strategy will often consider multiple DLOM approaches to arrive at a supportable range. The final selected discount must be justified in the context of the subject company’s specific facts and circumstances, including its size, profitability, and industry, as research shows these factors influence the size of the discount.

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## Execution

The execution of a defensible valuation methodology is a procedural and analytical undertaking. It translates the strategic framework into a series of operational steps, models, and documented outputs. This phase is about demonstrating methodical rigor.

For a determining party, success is measured by the ability of the valuation file to withstand detailed, expert scrutiny. Every calculation must be traceable, and every judgment must be anchored to a clearly articulated rationale supported by evidence.

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## The Operational Playbook a Step-By-Step Valuation Process

Executing a valuation for a Level 3 asset requires a disciplined, sequential process. This playbook ensures that all necessary steps are completed and documented, forming a complete audit trail.

- 
**Information Gathering** ▴ Systematically collect all relevant information. This includes historical and projected financial statements of the subject company, articles of incorporation, shareholder agreements, details of recent capital raises, and any management presentations. Concurrently, gather external market data such as economic forecasts, industry reports, and data on comparable public companies and transactions.

- 
**Valuation Approach Selection and Justification** ▴ Formally select and document the primary valuation approach (Market, Income, or Cost) and any corroborating approaches. The documentation must explicitly state why the chosen approach(es) are most appropriate for the asset in question, referencing its nature and the quality of available data.

- 
**Model Construction and Input Calibration** ▴ Build the financial models. If using a DCF model, this involves inputting financial projections and calibrating the key assumptions ▴ the discount rate (often a Weighted Average Cost of Capital, or WACC) and the terminal growth rate. If using a market approach, this involves selecting the comparable companies, calculating relevant valuation multiples (e.g. EV/EBITDA, P/E), and making explicit, quantified adjustments for differences in size, growth, and risk.

- 
**Application of Discounts and Premiums** ▴ Quantify and apply any relevant discounts or premiums. The most common for private assets is the Discount for Lack of Marketability (DLOM). The process for calculating the DLOM must be fully documented, whether using an option pricing model or referencing empirical studies. The specific inputs and sources for the DLOM calculation must be retained.

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**Review and Concurrence** ▴ The preliminary valuation conclusion should be subjected to an internal review process, ideally by a valuation committee or a party independent of the initial preparer. This review challenges the assumptions and calculations, ensuring the logic is sound. All review comments and their resolution must be documented.

- 
**Final [Valuation Report](https://prime.greeks.live/area/valuation-report/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ Compile a comprehensive valuation report. This report is the ultimate deliverable of the execution phase. It should narrate the entire process, from the definition of the valuation assignment to the final conclusion of value. It must include sections on the valuation approaches considered, the rationale for the selected approach, detailed support for all significant inputs and assumptions, and the calculation of all discounts and premiums. The report should be a self-contained document that allows a reader to understand and replicate the analysis.

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## Quantitative Modeling and Data Analysis

The core of the execution phase is the quantitative analysis. Below are examples of the kind of data tables and models required to support a valuation conclusion. This level of detail is essential for justification.

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## Example Discounted Cash Flow Model

A DCF analysis for a hypothetical private technology company might look as follows. The key is the clear articulation of both the [cash flow](https://prime.greeks.live/area/cash-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) projections and the derivation of the discount rate.

| DCF Component | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Terminal Year |
| --- | --- | --- | --- | --- | --- | --- |
| Revenue | $10,000,000 | $13,000,000 | $16,250,000 | $19,500,000 | $22,425,000 | $23,100,000 |
| EBITDA Margin | 15.0% | 18.0% | 20.0% | 22.0% | 23.0% | 23.0% |
| EBIT | $1,000,000 | $1,540,000 | $2,150,000 | $2,890,000 | $3,557,750 | $3,664,500 |
| Taxes (at 25%) | ($250,000) | ($385,000) | ($537,500) | ($722,500) | ($889,438) | ($916,125) |
| Unlevered Net Income | $750,000 | $1,155,000 | $1,612,500 | $2,167,500 | $2,668,312 | $2,748,375 |
| Plus D&A | $500,000 | $800,000 | $1,100,000 | $1,400,000 | $1,600,000 | $1,650,000 |
| Less Capex | ($700,000) | ($900,000) | ($1,200,000) | ($1,500,000) | ($1,700,000) | ($1,750,000) |
| Less Change in NWC | ($300,000) | ($350,000) | ($325,000) | ($292,500) | ($263,250) | ($270,000) |
| Unlevered Free Cash Flow | $250,000 | $705,000 | $1,187,500 | $1,775,000 | $2,305,062 | $2,378,375 |

The discount rate (WACC) calculation requires equally detailed support:

- 
**Cost of Equity Calculation** ▴ Using the Capital Asset Pricing Model (CAPM), starting with a [risk-free rate](https://prime.greeks.live/area/risk-free-rate/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (e.g. 10-year Treasury yield), an equity risk premium, and a calculated beta. The beta for a private company must be derived from a set of public comparables, unlevered to remove their debt effects, averaged, and then re-levered to the subject company’s target capital structure.

- 
**Cost of Debt Calculation** ▴ Based on the credit rating of the company or interest rates on its existing debt.

- 
**WACC Formula** ▴ WACC = (E/(D+E)) Cost of Equity + (D/(D+E)) Cost of Debt (1 – Tax Rate). Assuming a target capital structure of 20% debt and 80% equity, and a calculated Cost of Equity of 20% and a Cost of Debt of 8%, the WACC would be 17.6%.

The terminal value, calculated using the Gordon Growth Model (Terminal Value = Final Year FCF (1 + g) / (WACC – g)), and the subsequent discounting of all cash flows to present value completes the enterprise valuation. From this, net debt is subtracted to arrive at the marketable equity value, before the application of the DLOM.

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## Justifying the Discount for Lack of Marketability

How is the DLOM percentage determined? The justification requires a formal model. Using a [put option](https://prime.greeks.live/area/put-option/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) model (e.g. the Black-Scholes-Merton model adapted for this purpose) provides a quantitative basis.

- 
**Volatility** ▴ Estimated from the standard deviation of stock returns of the comparable public companies. (e.g. 45%)

- 
**Time to Liquidity** ▴ An estimate of the holding period until a sale or IPO. This is a critical Level 3 input. (e.g. 3 years)

- 
**Risk-Free Rate** ▴ The yield on a government bond matching the time to liquidity. (e.g. 4.5%)

- 
**[Dividend Yield](https://prime.greeks.live/area/dividend-yield/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ The expected dividend yield of the company. (e.g. 0%)

Plugging these inputs into an option pricing model might yield a DLOM of 25%. The determining party must document the source for each input. Alternatively, referencing restricted stock studies that show discounts for companies with similar characteristics (e.g. size, profitability) can provide a range (e.g. 20% to 35%) within which the selected 25% is deemed reasonable.

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## System Integration and Reporting

The output of the [valuation process](https://prime.greeks.live/area/valuation-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) does not exist in a vacuum. It must be integrated into the firm’s broader operational architecture. The final valuation figures are critical inputs for:

- 
**Investor Reporting Systems** ▴ The Net Asset Value (NAV) of a fund is directly impacted by the valuation of its illiquid holdings. The valuation report serves as the primary source document for the NAV calculation and must be available to auditors and investors upon request.

- 
**[Risk Management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Systems** ▴ The valuation figures are used to calculate portfolio exposures, risk metrics (like Value at Risk), and to monitor concentration limits. An inaccurate valuation leads to a misstatement of portfolio risk.

- 
**Compliance and Regulatory Filings** ▴ For registered investment advisors, valuation policies and procedures are a key area of examination by bodies like the SEC. The ability to produce a complete and logical valuation file on demand is a core compliance requirement.

The execution of a valuation methodology is a cycle of data gathering, modeling, documentation, and review. Its success hinges on a commitment to transparency and the creation of a detailed, evidence-based record that can justify the final conclusion of value to any interested party.

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## References

- Gibson, Rajna, et al. “The Valuation of Illiquid Assets ▴ A Focus on Private Equity and Real Estate.” 2013.

- Akram, Muhammad. “How to value illiquid investments.” Private Equity Wire, 14 Feb. 2024.

- Abbott, Ashok. “Discount for Lack of Liquidity ▴ Understanding and Interpreting Option Models.” Journal of Business Valuation and Economic Loss Analysis, vol. 4, no. 1, 2009.

- Financial Accounting Standards Board. “Fair Value Measurement.” Accounting Standards Codification Topic 820.

- Hertzel, Michael, and Richard L. Smith. “Market discounts and shareholder gains for placing equity privately.” The Journal of Finance, vol. 48, no. 2, 1993, pp. 459-85.

- Bingham, Dennis, and KC Conrad. “An Analysis of Discount For Lack of Marketability Models and Studies.” QuickRead, National Association of Certified Valuators and Analysts, 28 Nov. 2012.

- Damodaran, Aswath. “The value of control ▴ Implications for control premia, minority discounts and voting share differentials.” Stern School of Business, 2005.

- Israel, Ronen, et al. “The retailization of illiquid assets ▴ Designing an optimal valuation framework.” Houlihan Lokey, 2021.

- Nelson, Scott. “Valuation is a process that requires both art and science.” Lowenstein Sandler LLP, 28 Jan. 2021.

- PwC. “Fair value measurements and inactive markets.” Viewpoint, 31 Mar. 2022.

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## Reflection

The architecture of a defensible valuation is a reflection of an organization’s internal discipline. The methodologies and models are the tools, but the integrity of the process itself is the ultimate justification. A determining party must view its valuation framework not as a static compliance exercise, but as a dynamic system of intelligence. How does this system adapt to new market information?

How are its assumptions challenged and its outputs stress-tested? The process of valuing an illiquid asset reveals the robustness of a firm’s entire operational and intellectual framework. The true measure of success is a valuation that is not only correct on the measurement date but is the logical output of a system built for enduring credibility.

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## What Is the True Cost of an Indefensible Valuation?

Beyond the immediate financial restatement, an indefensible valuation erodes the most critical asset of any financial institution ▴ trust. It calls into question the entirety of the firm’s risk management and governance structures. Therefore, the investment in a robust valuation framework is an investment in institutional integrity. It is the foundation upon which all other strategic decisions are built.

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## Is Your Valuation Process an Asset or a Liability?

A well-structured valuation process is a strategic asset. It enables confident capital allocation, provides clarity to investors, and satisfies regulatory requirements. A poorly structured process becomes a significant operational liability, consuming resources in audits and regulatory inquiries and creating uncertainty around the firm’s financial position. The question for any determining party is whether their current system provides a competitive edge or presents a systemic risk.

![A futuristic apparatus visualizes high-fidelity execution for digital asset derivatives. A transparent sphere represents a private quotation or block trade, balanced on a teal Principal's operational framework, signifying capital efficiency within an RFQ protocol](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-via-prime-os.jpg)

## Glossary

<a href="https://prime.greeks.live/area/valuation-methodology/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent central hub with precise, crossing blades symbolizes institutional RFQ protocol execution. This abstract mechanism depicts price discovery and algorithmic execution for digital asset derivatives, showcasing liquidity aggregation, market microstructure efficiency, and best execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-platform-microstructure.jpg)

## Valuation Methodology

Meaning ▴ Valuation Methodology refers to the structured framework or set of techniques employed to determine the economic worth of an asset, company, or financial instrument. </a><a href="https://prime.greeks.live/area/defensible-valuation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central split circular mechanism, half teal with liquid droplets, intersects four reflective angular planes. This abstractly depicts an institutional RFQ protocol for digital asset options, enabling principal-led liquidity provision and block trade execution with high-fidelity price discovery within a low-latency market microstructure, ensuring capital efficiency and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-core-system-for-high-fidelity-execution-and-aggregated-liquidity.jpg)

## Defensible Valuation

Meaning ▴ Defensible valuation, in the domain of crypto investing and digital asset management, denotes a rigorous, evidence-based assessment of an asset's worth that can withstand scrutiny from auditors, regulators, and other financial stakeholders. </a><a href="https://prime.greeks.live/area/fair-value-measurement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise metallic and transparent teal mechanism symbolizes the intricate market microstructure of a Prime RFQ. It facilitates high-fidelity execution for institutional digital asset derivatives, optimizing RFQ protocols for private quotation, aggregated inquiry, and block trade management, ensuring best execution](https://options.greeks.live/wp-content/uploads/2025/07/advanced-principal-trading-systems-driving-high-fidelity-institutional-digital-asset-derivatives-rfq-execution-protocols.jpg)

## Fair Value Measurement

Meaning ▴ Fair Value Measurement is an accounting principle and valuation technique that assesses the price at which an asset could be sold or a liability settled in an orderly transaction between market participants at the measurement date. </a><a href="https://prime.greeks.live/area/orderly-transaction/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two precision-engineered nodes, possibly representing a Private Quotation or RFQ mechanism, connect via a transparent conduit against a striped Market Microstructure backdrop. This visualizes High-Fidelity Execution pathways for Institutional Grade Digital Asset Derivatives, enabling Atomic Settlement and Capital Efficiency within a Dark Pool environment, optimizing Price Discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-system-nodes.jpg)

## Orderly Transaction

Meaning ▴ An Orderly Transaction refers to a trade or exchange of assets conducted in a structured, transparent, and non-disruptive manner, typically adhering to established market rules and leading to efficient price discovery without causing undue market volatility or instability. </a><a href="https://prime.greeks.live/area/fair-value/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision metallic dial on a multi-layered interface embodies an institutional RFQ engine. The translucent panel suggests an intelligence layer for real-time price discovery and high-fidelity execution of digital asset derivatives, optimizing capital efficiency for block trades within complex market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-high-fidelity-execution-system.jpg)

## Fair Value

Meaning ▴ Fair value, in financial contexts, denotes the theoretical price at which an asset or liability would be exchanged between knowledgeable, willing parties in an arm's-length transaction, where neither party is under duress. </a><a href="https://prime.greeks.live/area/unobservable-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise geometric prism reflects on a dark, structured surface, symbolizing institutional digital asset derivatives market microstructure. This visualizes block trade execution and price discovery for multi-leg spreads via RFQ protocols, ensuring high-fidelity execution and capital efficiency within Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-precision-execution.jpg)

## Unobservable Inputs

Meaning ▴ Unobservable Inputs are assumptions, estimates, or data points used in financial valuation models that are not directly derived from observable market data but originate from the reporting entity's own judgments. </a><a href="https://prime.greeks.live/area/determining-party/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A glowing green torus embodies a secure Atomic Settlement Liquidity Pool within a Principal's Operational Framework. Its luminescence highlights Price Discovery and High-Fidelity Execution for Institutional Grade Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/illuminated-rfq-protocols-for-institutional-digital-asset-derivatives-trading.jpg)

## Determining Party

Meaning ▴ In the precise terminology of complex crypto financial instruments, particularly institutional options or structured products, the Determining Party is the pre-designated entity, whether an on-chain oracle or an agreed-upon off-chain agent, explicitly responsible for definitively calculating and announcing specific parameters, values, or conditions that critically influence the payoff, settlement, or lifecycle events of a contractual agreement. </a><a href="https://prime.greeks.live/area/income-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Angular metallic structures precisely intersect translucent teal planes against a dark backdrop. This embodies an institutional-grade Digital Asset Derivatives platform's market microstructure, signifying high-fidelity execution via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-high-fidelity-execution-system-architecture.jpg)

## Income Approach

Meaning ▴ The Income Approach, when applied to the valuation of crypto assets or blockchain projects, determines value based on the present value of future economic benefits generated by the asset or project. </a><a href="https://prime.greeks.live/area/market-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Brushed metallic and colored modular components represent an institutional-grade Prime RFQ facilitating RFQ protocols for digital asset derivatives. The precise engineering signifies high-fidelity execution, atomic settlement, and capital efficiency within a sophisticated market microstructure for multi-leg spread trading](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-system.jpg)

## Market Approach

Meaning ▴ The Market Approach, in the context of crypto asset valuation and investment analysis, refers to a valuation method that estimates the value of an asset or company by comparing it to similar assets or companies that have recently been sold or are actively traded in the market. </a><a href="https://prime.greeks.live/area/level-3-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Transparent conduits and metallic components abstractly depict institutional digital asset derivatives trading. Symbolizing cross-protocol RFQ execution, multi-leg spreads, and high-fidelity atomic settlement across aggregated liquidity pools, it reflects prime brokerage infrastructure](https://options.greeks.live/wp-content/uploads/2025/07/cross-protocol-rfq-execution-digital-asset-derivatives-microstructure-system.jpg)

## Level 3 Inputs

Meaning ▴ Level 3 Inputs refer to unobservable inputs in financial valuation methodologies, representing an entity's own assumptions about market participant expectations for an asset when observable market data is unavailable. </a><a href="https://prime.greeks.live/area/asc-820/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent, multi-faceted component, indicative of an RFQ engine's intricate market microstructure logic, emerges from complex FIX Protocol connectivity. Its sharp edges signify high-fidelity execution and price discovery precision for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-optimized-for-best-execution.jpg)

## Asc 820

Meaning ▴ ASC 820, or Accounting Standards Codification 820, establishes the authoritative guidance for measuring fair value within US Generally Accepted Accounting Principles (GAAP). </a><a href="https://prime.greeks.live/area/valuation-framework/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The abstract visual depicts a sophisticated, transparent execution engine showcasing market microstructure for institutional digital asset derivatives. Its central matching engine facilitates RFQ protocol execution, revealing internal algorithmic trading logic and high-fidelity execution pathways](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-for-institutional-digital-asset-derivatives.jpg)

## Valuation Framework

Meaning ▴ A Valuation Framework is a structured methodology or set of principles utilized to determine the intrinsic or fair market value of an asset, company, or project. </a><a href="https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A segmented teal and blue institutional digital asset derivatives platform reveals its core market microstructure. Internal layers expose sophisticated algorithmic execution engines, high-fidelity liquidity aggregation, and real-time risk management protocols, integral to a Prime RFQ supporting Bitcoin options and Ethereum futures trading](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-core-microstructure.jpg)

## Illiquid Assets

Meaning ▴ Illiquid Assets are financial instruments or investments that cannot be readily converted into cash at their fair market value without significant price concession or undue delay, typically due to a limited number of willing buyers or an inefficient market structure. </a><a href="https://prime.greeks.live/area/valuation-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision-engineered modular components, with transparent elements and metallic conduits, depict a robust RFQ Protocol engine. This architecture facilitates high-fidelity execution for institutional digital asset derivatives, enabling efficient liquidity aggregation and atomic settlement within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-optimizing-high-fidelity-execution-and-liquidity-aggregation.jpg)

## Valuation Approach

Meaning ▴ A 'Valuation Approach' refers to the specific methodology or set of techniques employed to determine the economic value of an asset, liability, or business entity. </a><a href="https://prime.greeks.live/area/discounted-cash-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision digital token, subtly green with a '0' marker, meticulously engages a sleek, white institutional-grade platform. This symbolizes secure RFQ protocol initiation for high-fidelity execution of complex multi-leg spread strategies, optimizing portfolio margin and capital efficiency within a Principal's Crypto Derivatives OS](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-platform-secure-rfq-protocol-initiation-for-optimal-block-trade-execution.jpg)

## Discounted Cash Flow

Meaning ▴ Discounted Cash Flow (DCF) is a widely recognized valuation methodology that estimates the intrinsic value of an asset, project, or company based on its projected future cash flows, discounted back to their present value. </a><a href="https://prime.greeks.live/area/discount-rate/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Robust polygonal structures depict foundational institutional liquidity pools and market microstructure. Transparent, intersecting planes symbolize high-fidelity execution pathways for multi-leg spread strategies and atomic settlement, facilitating private quotation via RFQ protocols within a controlled dark pool environment, ensuring optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-microstructure-prime-os.jpg)

## Discount Rate

Meaning ▴ The Discount Rate is a financial metric representing the rate used to determine the present value of future cash flows or expected returns, particularly in the valuation of crypto assets and investment opportunities. </a><a href="https://prime.greeks.live/area/fair-value-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise metallic central hub with sharp, grey angular blades signifies high-fidelity execution and smart order routing. Intersecting transparent teal planes represent layered liquidity pools and multi-leg spread structures, illustrating complex market microstructure for efficient price discovery within institutional digital asset derivatives RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-for-high-fidelity-execution-across-market-microstructure-dynamics.jpg)

## Fair Value Hierarchy

Meaning ▴ The Fair Value Hierarchy is an accounting framework that categorizes inputs used to measure the fair value of assets and liabilities into three levels, reflecting their observability and reliability. </a><a href="https://prime.greeks.live/area/dlom/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A layered, spherical structure reveals an inner metallic ring with intricate patterns, symbolizing market microstructure and RFQ protocol logic. A central teal dome represents a deep liquidity pool and precise price discovery, encased within robust institutional-grade infrastructure for high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-orchestrating-rfq-protocols-for-high-fidelity-execution-and-multi-asset-liquidity.jpg)

## Dlom

Meaning ▴ DLOM, or Discount for Lack of Marketability, represents a reduction in the value of an asset due to its limited liquidity or the absence of an established, active trading market for it. </a><a href="https://prime.greeks.live/question/how-has-the-rise-of-systematic-internalisers-changed-the-competitive-landscape-for-traditional-stock-exchanges/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A dark blue, precision-engineered blade-like instrument, representing a digital asset derivative or multi-leg spread, rests on a light foundational block, symbolizing a private quotation or block trade. This structure intersects robust teal market infrastructure rails, indicating RFQ protocol execution within a Prime RFQ for high-fidelity execution and liquidity aggregation in institutional trading](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-framework-multi-leg-spreads-best-execution-capital-efficiency.jpg)

## Restricted Stock

Systematic Internalisers re-architected market competition by offering principal-based, discrete execution, challenging exchanges on price and market impact. </a><a href="https://prime.greeks.live/area/illiquid-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A transparent, angular teal object with an embedded dark circular lens rests on a light surface. This visualizes an institutional-grade RFQ engine, enabling high-fidelity execution and precise price discovery for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-engine-high-fidelity-execution.jpg)

## Illiquid Asset

Meaning ▴ An Illiquid Asset, within the financial and crypto investing landscape, is characterized by its inherent difficulty and time-consuming nature to convert into cash or readily exchange for other assets without incurring a significant loss in value. </a><a href="https://prime.greeks.live/area/option-pricing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A layered, cream and dark blue structure with a transparent angular screen. This abstract visual embodies an institutional-grade Prime RFQ for high-fidelity RFQ execution, enabling deep liquidity aggregation and real-time risk management for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-layered-structure-for-institutional-digital-asset-rfq-execution.jpg)

## Option Pricing

Meaning ▴ Option Pricing is the quantitative process of determining the fair economic value of a financial option contract, which bestows upon its holder the right, but not the obligation, to execute a transaction involving an underlying asset at a predetermined price by a specified expiration date. </a><a href="https://prime.greeks.live/area/valuation-report/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision mechanism, potentially a component of a Crypto Derivatives OS, showcases intricate Market Microstructure for High-Fidelity Execution. Transparent elements suggest Price Discovery and Latent Liquidity within RFQ Protocols](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-crypto-derivatives-rfq-engine-high-fidelity-execution.jpg)

## Valuation Report

Meaning ▴ A Valuation Report in crypto finance is a formal document that presents the detailed analysis and conclusion regarding the economic value of a digital asset, blockchain protocol, or crypto-related business. </a><a href="https://prime.greeks.live/area/cash-flow/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, multi-segmented sphere embodies a Principal's operational framework for institutional digital asset derivatives. Its transparent 'intelligence layer' signifies high-fidelity execution and price discovery via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-digital-asset-derivatives-execution-engine.jpg)

## Cash Flow

Meaning ▴ Cash flow, within the systems architecture lens of crypto, refers to the aggregate movement of digital assets, stablecoins, or fiat equivalents into and out of a crypto project, investment portfolio, or trading operation over a specified period. </a><a href="https://prime.greeks.live/area/risk-free-rate/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Mirrored abstract components with glowing indicators, linked by an articulated mechanism, depict an institutional grade Prime RFQ for digital asset derivatives. This visualizes RFQ protocol driven high-fidelity execution, price discovery, and atomic settlement across market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-rfq-high-fidelity-execution-microstructure.jpg)

## Risk-Free Rate

Meaning ▴ The Risk-Free Rate is a theoretical rate of return on an investment with zero financial risk over a specified duration. </a><a href="https://prime.greeks.live/area/put-option/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract composition featuring transparent liquidity pools and a structured Prime RFQ platform. Crossing elements symbolize algorithmic trading and multi-leg spread execution, visualizing high-fidelity execution within market microstructure for institutional digital asset derivatives via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-trading-system-precision-engineering-facilitating-high-fidelity-execution-via-rfq-protocols-and-optimal-liquidity-aggregation.jpg)

## Put Option

Meaning ▴ A Put Option is a financial derivative contract that grants the holder the contractual right, but not the obligation, to sell a specified quantity of an underlying cryptocurrency, such as Bitcoin or Ethereum, at a predetermined price, known as the strike price, on or before a designated expiration date. </a><a href="https://prime.greeks.live/area/dividend-yield/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Robust metallic structures, symbolizing institutional grade digital asset derivatives infrastructure, intersect. Transparent blue-green planes represent algorithmic trading and high-fidelity execution for multi-leg spreads](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-microstructure-1.jpg)

## Dividend Yield

Meaning ▴ Dividend Yield, in the context of traditional finance, measures the annual dividend payments relative to a stock's current share price. </a><a href="https://prime.greeks.live/area/valuation-process/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A symmetrical, multi-faceted structure depicts an institutional Digital Asset Derivatives execution system. Its central crystalline core represents high-fidelity execution and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-engine-microstructure.jpg)

## Valuation Process

Meaning ▴ The Valuation Process refers to the systematic procedure employed to determine the fair economic worth of an asset, liability, or financial instrument. </a><a href="https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Curved, segmented surfaces in blue, beige, and teal, with a transparent cylindrical element against a dark background. This abstractly depicts volatility surfaces and market microstructure, facilitating high-fidelity execution via RFQ protocols for digital asset derivatives, enabling price discovery and revealing latent liquidity for institutional trading](https://options.greeks.live/wp-content/uploads/2025/07/optimized-rfq-protocol-dynamics-for-institutional-crypto-derivatives.jpg)

## Risk Management

Meaning ▴ Risk Management, within the cryptocurrency trading domain, encompasses the comprehensive process of identifying, assessing, monitoring, and mitigating the multifaceted financial, operational, and technological exposures inherent in digital asset markets. </a>

**Tags:** [Valuation Methodology](https://options.greeks.live/area/valuation-methodology/), [Dividend Yield](https://options.greeks.live/area/dividend-yield/), [Level 3 Inputs](https://options.greeks.live/area/level-3-inputs/), [Risk-Free Rate](https://options.greeks.live/area/risk-free-rate/), [Cash Flow](https://options.greeks.live/area/cash-flow/), [Illiquid Assets](https://options.greeks.live/area/illiquid-assets/)	

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The 2002 ISDA Agreement defines a commercially reasonable procedure as an objective, good-faith valuation to find a terminated deal's economic equivalent.

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Quantitative models establish fair value for illiquid assets by systematically linking them to observable market data and intrinsic cash flows.

- 
### [Beyond Buy and Hold How to Turn Your Stocks into Cash Flow](https://options.greeks.live/guide/beyond-buy-and-hold-how-to-turn-your-stocks-into-cash-flow/)
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Transform your stock portfolio from a passive asset into a dynamic, income-generating engine with professional options strategies.

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---

**Original URL:** https://options.greeks.live/question/in-the-absence-of-liquid-markets-how-can-a-determining-party-justify-its-valuation-methodology/
