Complex trades – how to compute them

An interesting conversation I had, explaining people what are the different options when you start doing complex trades and how to be able to value them. So I feel like sharing to everyone.

The problem is that you’ll often need to price new exotic trades as quickly as possible and the question is how to best achieve it. So let’s go through the different options:

  • Use what you have (aka the BS answer (BS = Black Scholes!)). That might sound basic but it will give you a rough approximation (sometimes very rough) of the trade actual value. Far from ideal but if you do have a very limited amount of them, that could work and cost/effort is low
  • Use a proper model/payoff description with Murex. This is usually the best solution but compared to the previous one, there are some limitations: the payoff needs to be covered by Murex, the model needs to be available in your version and the payoff might need to be tested in your version. So it usually results in a longer time to market and a high cost. This is ideal for products you’ll have a bit of volume on and currently being used.
  • FleX. This assumes that you have your own model library and you also have the skills to plug it in into Murex. While there is some effort to achieve it and performance might come as an interesting question, this can be a very valid solution especially if you are looking at maintaining/expanding your model library. If you do not have such a library, the effort/cost might be a killer.
  • Other systems for low volume. There are systems which can return a price for more or less any product. Is the price very accurate? Is the model very efficient? Not really, they’re usually Monte Carlo based but these systems tend to be very good for very small volume and you also get a great time to market. Top that with the ease of importing trade valuation in Murex and have it flying through to report, accounting and you get a very solid solution. Of course, if the volume does increase then you should consider solution number 2 for these payoffs.

So as I had the discussion much before and recently, a mix of the solutions above is the best. Thinking about time to market is quite important and you can then integrate all that into Murex so that all your products are into the same system.