Focus Option Pricing

Fraunhofer ITWM

The main subject of option pricing is focused on the derivation of pricing formulae and the development of numerical algorithms for the computation of the price of exotic derivatives.

Derivatives are financial instrument whose value is determined by the price of an underlying asset (e.g. a stock or an interest rate). Within the trading assets of large banks the option trading is a large item in particular in declining markets. Banks often offer derivatives with very complex payment structures to ensure that investors have even in weak market periods acces to attractive products with limited downside risk but still offer existing profit opportunities. Such certificates ensure that the investor suffers no loss ("Capital Guaranteed Products") and on the other hand limit the banks payout.

When pricing such derivatives we produce realistic market models which are able to represent the market prices of the standard products very well, and to model the price trend of the basic securities sufficiently close to reality.
Our software solutions include efficient numerical methods that enable you to price derivatives with a complex payment structure by these models in a time-saving manner.

We feature expertise in the area of stochastic (Heston-Model) an local volatility models, that we gathered in numerous projects together with our partners from industry. Among other things we implemented a comprehensive Heston-framework which combines modern calibration methods with pricing exotic options (via Monte-Carlo simulation). Furthermore we developed an Excel application to be able to process actual market data user-friendly.

In another application we successfully implemented a model for the pricing of convertible bonds which is based on jump diffusion processes.

Tools

  • Heston-Pricer
  • ESO-Pricer

References and Partners