Sunday, December 06, 2009
Saturday, October 17, 2009
Volatility surface management - Part 2
Volatility surface is a 3d object with option volatilities, option strikes and option expiries on the 3 axes.
The volatility at any point on the surface is used in pricing an option with the corresponding strike and expiry. Rather than have a simple grid of these points, a more intutive and flexible approach is to manage the grid by using parameteric surfaces. i.e.The volatiliy surface is represented by some graphical parameters(specifications) which will plot the values. This way, its easier to tweak just one meaningful parameter and it will reflect the new values for a set of strikes or expiries. Eg. If 'Skew' is a parameter, then increasing this value for a particular volatiliy curve(Vol vs Strikes for a particular expiry) will increment the vol values for all the ITM call options.
A number of volatility functions can be defined, each of them behaving differently in varied market scenarios. Few of the criterion are
In liquid markets(like Equities), you have the advantage of using the market bids and asks to formulate your implied volatility curve. This way you always follow the market and quote your prices within the market bid-ask spread. Today all insitutions components that automatically fit the volatility surface to the market bids and asks. Easier said than done, as this will need to filter out all the noise in the market and keep our assumptions data up-to-date. Not a trivial thing, considering how dynamic the enviroment can be with corporate actions, acquisitions, algo engine quotes etc.
A few more advanced features into this functionality can be
The volatility at any point on the surface is used in pricing an option with the corresponding strike and expiry. Rather than have a simple grid of these points, a more intutive and flexible approach is to manage the grid by using parameteric surfaces. i.e.The volatiliy surface is represented by some graphical parameters(specifications) which will plot the values. This way, its easier to tweak just one meaningful parameter and it will reflect the new values for a set of strikes or expiries. Eg. If 'Skew' is a parameter, then increasing this value for a particular volatiliy curve(Vol vs Strikes for a particular expiry) will increment the vol values for all the ITM call options.
A number of volatility functions can be defined, each of them behaving differently in varied market scenarios. Few of the criterion are
- Using parameters that can be easily conceptualised into surface dynamics. Eg. Skew, Kurtosis, Smile etc
- Each parameter can be further defined to have a specific economic meaning Eg The long term skew might be the debt to asset ratio of the corporate [ofcourse you don't make up such things, you mathematically prove them..:)]
- Orthogonality - how change in one parameter affects the other.
In liquid markets(like Equities), you have the advantage of using the market bids and asks to formulate your implied volatility curve. This way you always follow the market and quote your prices within the market bid-ask spread. Today all insitutions components that automatically fit the volatility surface to the market bids and asks. Easier said than done, as this will need to filter out all the noise in the market and keep our assumptions data up-to-date. Not a trivial thing, considering how dynamic the enviroment can be with corporate actions, acquisitions, algo engine quotes etc.
A few more advanced features into this functionality can be
- to avoid market volatility moves due to your own firm market quotes
- analyse the tick by tick vol data to identify arbitrage opportunities and trade against them
Friday, September 18, 2009
Measuring your trading application performance
I completely support the idea of collaboration when it comes to sharing and reusing resources between parties. But its not easy when the involved are competing for the top spot in the league tables. However just found out about Securities Technology Analysis Centre which provide various trading systems performance benchmarks in consultation with all the big boys(council members) on the street. Will be interesting to see how it works. Apparently your firm needs to be a member of the council to gain access to all the information and test harnesses etc. Wonder how much it costs and how much of your secret sauce you will have to divulge before you join.
Thursday, September 17, 2009
Finance data visualization
Today I bumped into something extremely interesting and it has changed the way I look at the topic - Advanced finance data visualisation techniques.
Banks today are spending significant time and effort selecting 3rd party vendors to chart data, graph data etc. The focus primarily is on the quality of the graphs, easy API to use, good documentation and licensing costs. The exercise is a no-brainer. The more time we spend, the better decision we make. Some of the popular vendors being ChartFX, Infragistics, Nevron etc. All of them have their pros and cons. Some support WPF, some don't etc. One can come up with a big feature comparison table.
But are the right questions being asked? Are traditional visualization methods good enough? Are treemaps and heatmaps the end of the road? I had to see Lineplot's tick data video to trigger this creative left side of my brain. Simple and intutive! I guess, the developer's job to build these are trivial compared to the upfront costs required to get these ideas funded and supported by the business.
On a slightly different track, another video here makes it quite easy to understand the business concept. Probably not something a front office technology team could be building , but neverthless interesting to know that there are firms out there using these to woo their clients. Definitely something all sales teams should look into, in addition to adopting all the "inbound marketing" techniques which seems to be the "mantra" for the day.
Banks today are spending significant time and effort selecting 3rd party vendors to chart data, graph data etc. The focus primarily is on the quality of the graphs, easy API to use, good documentation and licensing costs. The exercise is a no-brainer. The more time we spend, the better decision we make. Some of the popular vendors being ChartFX, Infragistics, Nevron etc. All of them have their pros and cons. Some support WPF, some don't etc. One can come up with a big feature comparison table.
But are the right questions being asked? Are traditional visualization methods good enough? Are treemaps and heatmaps the end of the road? I had to see Lineplot's tick data video to trigger this creative left side of my brain. Simple and intutive! I guess, the developer's job to build these are trivial compared to the upfront costs required to get these ideas funded and supported by the business.
On a slightly different track, another video here makes it quite easy to understand the business concept. Probably not something a front office technology team could be building , but neverthless interesting to know that there are firms out there using these to woo their clients. Definitely something all sales teams should look into, in addition to adopting all the "inbound marketing" techniques which seems to be the "mantra" for the day.
Wednesday, September 16, 2009
Project Management Software
I am at a stage in my career where I'm beginning to look beyond technical and functional skills that are required to make it big in an organisation. Project management is going to be an eventual step in my career someday, but will try to push it away for as long as I can. I started looking at project management software available and was astounded by the number of players in the market. Microsoft project plans(MPP) are a thing of the past and now the buzz word seems to be "colloborative project management". Create plans on the web that can be shared and updated by loads of people. It definitely is a big plus over MPPs where the thick desktop client never keeps you motivated enough to update your gantt charts. Sharing the plan with other stakeholders and making the whole process more transparent will definitely improve the chances of the project, better tracking real life events.
Clarizen seems to be the 3rd best tool after @Task and Daptive PPM (refer reviews). But I played around with the interface and it seems to be very easy to use. It includes various other enterprise level management tools like Billing, Expenses, Issues etc. I'm not sure how this can integrate well with already existing infrastructure in an organisation for such tasks. The only 3rd party integrations seems to be with MPP and Microsoft outlook. Are there others? What about other bug tracking tools, JIRA etc?
A lot of questions in my head at this stage. Is there a more specific suite of tools aligned to agile methodologies? Are there any open source ones out there? Are these specialised to IT development?
I'll find out and put my thoughts down.
Clarizen seems to be the 3rd best tool after @Task and Daptive PPM (refer reviews). But I played around with the interface and it seems to be very easy to use. It includes various other enterprise level management tools like Billing, Expenses, Issues etc. I'm not sure how this can integrate well with already existing infrastructure in an organisation for such tasks. The only 3rd party integrations seems to be with MPP and Microsoft outlook. Are there others? What about other bug tracking tools, JIRA etc?
A lot of questions in my head at this stage. Is there a more specific suite of tools aligned to agile methodologies? Are there any open source ones out there? Are these specialised to IT development?
I'll find out and put my thoughts down.
Tuesday, September 15, 2009
Volatility surface management - Part 1
Front office traders in a sell-side derivative houses can involve in a variety of businesses. A few of them are :
Flow - High net worth investors/Buy Side/Coporates willing to buyorsell options to finance or hedge their respective portfolios. Profit making is primarily through commissions.
Option Market Making - Dealer quotes a buy and sell price to maintain liquidity in the market and has to honour any trades done against them. Money is made through spreads.
Exotics business - Special clients requiring complicated products which involves combinging various vanilla products.
All of these have one fundamental technical requirement to do well. Pricing of options, which involves pumping various inputs(market data or derived market data) into mathematical pricing models(quant libraries) to generate a fair price of the option. The fair price is the value of the option based on the firm's model assumptions and other data eg. credit worthiness.
Volatility surface management has always been a critical aspect of the derivatives pre-trading pricing activity for front office trading. In addition to volatility, the other assumptions data that go into the Black Scholes formula for pricing an option are spot price(K), options strike(S), interest rate(r), time to expiry (t), dividend schedule (d) and borrow cost rate(b).
Flow - High net worth investors/Buy Side/Coporates willing to buyorsell options to finance or hedge their respective portfolios. Profit making is primarily through commissions.
Option Market Making - Dealer quotes a buy and sell price to maintain liquidity in the market and has to honour any trades done against them. Money is made through spreads.
Exotics business - Special clients requiring complicated products which involves combinging various vanilla products.
All of these have one fundamental technical requirement to do well. Pricing of options, which involves pumping various inputs(market data or derived market data) into mathematical pricing models(quant libraries) to generate a fair price of the option. The fair price is the value of the option based on the firm's model assumptions and other data eg. credit worthiness.
Volatility surface management has always been a critical aspect of the derivatives pre-trading pricing activity for front office trading. In addition to volatility, the other assumptions data that go into the Black Scholes formula for pricing an option are spot price(K), options strike(S), interest rate(r), time to expiry (t), dividend schedule (d) and borrow cost rate(b).
Thursday, September 10, 2009
Sunday, July 26, 2009
Monday, July 20, 2009
Book Review : CityBoy by Geraint Anderson
Rating : 3/5
Overall, its a quick read book. Nothing spectacular about it. Fairly crude!
It takes atleast 3 chapters for one to start getting into the book and be actually convinced that Geraint is not trying to write a book to make things sound cool, but that they are actual events of his life. A lot of the talk about chinese wall breakdown and analyts maintaining the "buy" or "hold" strategies based on the quality of beer they get treated to, is already common knowldge to the investment banking junta. But its shocking to realise that it still exists today after it was blamed as a major cause of the dot com bubble (refer "Blood on the street") .
Neverthless its interesting to view the City through an Analyst's lens. Now when I bump into one of them in the office, I'll probably just be looking for the blood shot eyes and black circles to prove my conviction. Though he tries to stereotype every investment banker as a druggie who takes part in sex orgies (like himself), those characteristics dont match with any of the bankers I work with on a daily basis. But it seems very possible to have a few Geraints in some of the desks, as it seems to be a very critical component in some of the the client schmoozing businesses that run in the banks.
I completely give it to Geraint to have the ba$%s to openly offend each and every banker on the street. But he should know better than any of us that these ppl are mentally so tough, and even lashing them in public is not going to stop them from doing whatever possible to continue minting money. (That doesn't mean to say they should be lashed, because then I might be an indirect victim since I feed into this rich food chain:)
The bank aliases are intriguing, but very easy to google and hunt down.
Megashite - Dresdner Kleinwort
Banque Inutile - Soc Gen
Scheissebank - Commerzbank
Mighty Yankbank - Citigroup
Managed to dig this out as well :http://excellence.thomsonreuters.com/awards/extel/brokerage-rankings/2004/pan-european-survey- Go to Equity Sectors -> Utilities
Overall, its a quick read book. Nothing spectacular about it. Fairly crude!
It takes atleast 3 chapters for one to start getting into the book and be actually convinced that Geraint is not trying to write a book to make things sound cool, but that they are actual events of his life. A lot of the talk about chinese wall breakdown and analyts maintaining the "buy" or "hold" strategies based on the quality of beer they get treated to, is already common knowldge to the investment banking junta. But its shocking to realise that it still exists today after it was blamed as a major cause of the dot com bubble (refer "Blood on the street") .
Neverthless its interesting to view the City through an Analyst's lens. Now when I bump into one of them in the office, I'll probably just be looking for the blood shot eyes and black circles to prove my conviction. Though he tries to stereotype every investment banker as a druggie who takes part in sex orgies (like himself), those characteristics dont match with any of the bankers I work with on a daily basis. But it seems very possible to have a few Geraints in some of the desks, as it seems to be a very critical component in some of the the client schmoozing businesses that run in the banks.
I completely give it to Geraint to have the ba$%s to openly offend each and every banker on the street. But he should know better than any of us that these ppl are mentally so tough, and even lashing them in public is not going to stop them from doing whatever possible to continue minting money. (That doesn't mean to say they should be lashed, because then I might be an indirect victim since I feed into this rich food chain:)
The bank aliases are intriguing, but very easy to google and hunt down.
Megashite - Dresdner Kleinwort
Banque Inutile - Soc Gen
Scheissebank - Commerzbank
Mighty Yankbank - Citigroup
Managed to dig this out as well :http://excellence.thomsonreuters.com/awards/extel/brokerage-rankings/2004/pan-european-survey- Go to Equity Sectors -> Utilities
Friday, June 19, 2009
Tuesday, March 17, 2009
Moneyness
Moneyness is a measure used in equity derivatives to understand the profitability of an option. Its extensively used to compare volatilities across different underlyings.
Moneyness can be measured in standard deviation or percentage terms.
In percentage terms it is simply (Strike Price/Spot Price)* 100.
We can also define Forward moneyness, which is (Strike Price/Forward Price)* 100 and gives us an idea of how much the option is in-the-money compared to its forward price
The logs of Spot moneyness and Forward moneyness are also used by some traders.
In Standard deviation terms it can be measured in various ways :
Moneyness can be measured in standard deviation or percentage terms.
In percentage terms it is simply (Strike Price/Spot Price)* 100.
We can also define Forward moneyness, which is (Strike Price/Forward Price)* 100 and gives us an idea of how much the option is in-the-money compared to its forward price
The logs of Spot moneyness and Forward moneyness are also used by some traders.
In Standard deviation terms it can be measured in various ways :
- ln(Strike Price/Fwd Price) / (ATMVol * sqrt(Term) )
- ln(Strike Price/Fwd Price)/(sqrt(Term))
Monday, March 09, 2009
Trading software vendor products
- Orc
- Numerix
- OpenLink
- Reuters - JRisk Kondor+
- Misys - Opics , summit
- Calypso Technology: Calypso
- Murex: Asset Manager, MXG2000, Mx.3
- Openlink: Endur & Findur
- Principia Partners: Principia
- royalblue: Fidessa
- Sophis: Risque & Value
- Sungard: Front Arena
- Temenos: Globus & T24
- Trema: Finance Suite / Finance KIT
- Wall Street Systems: WSS
- TrayPort
- SuperDerivatives
- FFastFill
Subscribe to:
Posts (Atom)