As promised in the previous post, now some further examples of DEXISION’s modeling capabilities.
Caplets, swaptions and Bermudan swaptions are important derivative instruments. This post provides a presentation and a video demonstrating how to model and value these instruments with DEXISION—our On Demand Derivatives Analytics suite.
To ease the exposition, the examples are rather simplified and stylized. Nevertheless, the short rate model is calibrated to real German bund yields and the structures are easily adjusted to represent real world products.
DEXISION’s major promise is Real-Time Financial Engineering—i.e. the modeling of complex derivatives or financial trades within minutes instead of hours or days. This post illustrates that it is not only a promise but that DEXISION can generally deliver.
When it comes to a real world, productive environment in an investment bank, 30,000+ lines of C/ C++ code are not uncommon for a software module that prices, hedges, trades and risk manages a single type of derivative instrument. Just imagine how long it takes to write the code, debug it, test it, integrate it into the existing infrastructure and to maintain and update it afterwards. For a productive environment where the underlying business may be made up of thousands of trades per year and millions of dollars traded (or even earned), such effort seems worthwhile or even necessary.
But imagine now a decision maker on the buy side who has to decide upon investing in the same type of financial instrument offered by the same investment bank. Could she afford to invest lots of days for writing code to decide upon the offer made by the investment bank?
Or consider a quant who has brilliant ideas for a number of new products. Could he afford to invest numerous days into each and every early-stage idea? The odds are that in both cases the answer is No. But this is exactly the point where the capabilities of DEXISION can help out.
Typical derivatives analytics suites follow a product-oriented approach in that they offer different modules and functions for pre-defined types of financial products (like a Bermudan swaption). If there is no module for the (maybe custom-tailored/ OTC) product you want to value, you have to go back to coding again.
Other analytics suites offer developer kits which allow—mainly by relying on some kind of pseudo-finance-language—to shorten the development cycle for financial models and to generate source code semi-automatically. But even these approaches do not free the user from debugging, testing, writing additional code for graphical analyses, maintaining the code, etc.
DEXISION, in contrast, allows to build financial models effortlessly by relying on fundamental building blocks (like a number of standard stochastic processes) and to instantly value the instrument modeled as well as to analyze it graphically. In addition, DEXISION provides comfortable parameter management (e.g. for different volatility scenarios) and functions to calibrate, for example, a stochastic short rate model to market data.
To illustrate Real-Time Financial Engineering @Work, the simple example of an option trade with two European options on the S&P 500 index (a “Strangle”) may be helpful.
PRESENTATION—Financial Trade Description, Assumptions and Screenshots
This presentation introduces the Strangle trade consisting of two European options long on the S&P 500 index. It describes the trade, the assumptions made and shows step by step how to model, value and graphically analyze the trade with DEXISION.
VIDEO—Modeling the Financial Trade and Valuing it for 5 Volatility Scenarios
This video (ca. 4:30 min) shows how to model the trade with DEXISION. (Remark: Screens and masks of the videos are somehow compressed due to low resolution of the videos.)
VIDEO—Graphical Analysis of some Simulation and Valuation Results
This video (ca. 1:40 min) shows how to graphically analyze selected aspects of the simulation and valuation of the trade with DEXISION.
Modeling such trades from scratch is obviously rather easy. However, DEXISION’s major strength lies not in this particular area but rather in the modeling of complex, structured products. I will provide examples for this area—i.e. beyond a ‘first steps’ setting—in the near future.
In the meantime you may want to try it by yourself. You can register for a trial account of DEXISION for free and the whole procedure only takes 30 seconds. Just visit DEXISION TRIAL REGISTRATION.
Python for Financial Engineering?! Some time ago unthinkable, soon to be a standard. Since its inception, Visixion firmly believes in Python—DEXISION’s core is completely built with Python and NumPy. The SEC may further help to establish this powerful language in the financial community.
A recent cover story of Wilmott Magazine already titled “Python Takes a Bite” —relating to the steady rise of Python in the financial community. A recent proposal by the SEC may accelerate this trend. Read the rest of this entry »
DEXISION is Visixion’s Web-based Derivatives Analytics suite which implements a completely new approach to derivatives pricing and management.
A recent study revealed how burdensome it can be to develop derivatives analytics in-house: “Celent’s analysis suggests that firms pursuing in-house efforts for derivative analytics require an upfront investment of at least $9 million.” (see Celent Website). However, for bigger banks and investment banks derivatives business can represent a billion dollar game such that these efforts are often justifiable.
A different picture emerges for smaller banks, the derivatives buy-side and in particular in the academic field. Read the rest of this entry »
As expected, the Global Derivatives Conference 2010 was a real highlight with a line-up of practitioners and academics that is unique in this field. To name a few (rather random selection):
Next week there will be the Global Derivatives Trading & Risk Management 2010 conference in Paris (main conference from 18-20 May). Once again, there seems to be a line-up of the Who-is-Who in derivatives research and practice. Read the rest of this entry »
Prophet of Innovation—Joseph Schumpeter and Creative Destruction. By Thomas K. McCraw; Belknap Press, 719 pages (hardcover edition), 2007.
This is a very enlightening and timely book on one of the greatest (economic) thinkers of the last century—Joseph Alois Schumpeter (1883-1950). The book’s main body comprises 500 pages while more than 200 further pages contain detailed notes. Read the rest of this entry »
Uups, it is already three weeks ago that I returned from NYC from where I wanted to report here briefly. As before my trip, times have been busy since then … Read the rest of this entry »
It has been quite busy these days. But now, I am sitting at Frankfurt Airport waiting to board for New York.
I am excited to attend this year’s Financial Engineer of the Year Gala Dinner ceremony at the New York Stock Exchange (see the Web site of the IAFE). This year’s winner is Richard Roll who undoubtedly has contributed so many important things to the discipline that I would not even try to summarize them. Just visit the Web site with his CV. Read the rest of this entry »
On Thursday and Friday last Week (14./ 15. January 2010), the Campus for Finance 2010 conference took place at the WHU in Vallendar. As expected, it was once again a great event with outstanding speakers and a perfect organization (apart from the short breaks due to a rather tight schedule). Read the rest of this entry »
