DerivaTech Consulting, a New York-based FX options software specialist, has developed a new exotics valuation methodology that applies Monte Carlo simulation across entire volatility surfaces. Vendor officials describe the new technique as “groundbreaking” in terms of speed and accuracy. It is incorporated into the latest release of DerivaTech OTC, the company’s flagship product.
Previous versions of DerivaTech OTC included volatility surface generation, but the version 5.0 release is the first to use these surfaces within Monte Carlo simulation to price exotic options and structures. The new feature can also be used to simultaneously price small portfolios of up to 48 options, says Daljit Saund, DerivaTech’s recently hired sales director.
Saund says the FX industry has traditionally been “sceptical” of rolling out Monte Carlo to traders due to worries about the technique’s speed and practicality. However, DerivaTech has now “cracked” these problems, he says: “It’s pretty fast – you click the mouse and get an answer back in seconds.” Howard Savery, the vendor’s senior vice president for business development, adds that the system’s performance is “well within tolerance levels for quoting to customers”.
Other enhancements in OTC 5.0 include: a strip generator with an unlimited number of legs for structuring complex trading strategies; new derivative measurements; and “tuned up” volatility surface generation that accounts for the nuances of long-dated instruments and emerging market currencies. Some of the enhancements came about from customer requests, says Saund, while others – such as the Monte Carlo pricing functionality – were developed by the vendor alone.
Looking forward, DerivaTech intends to continue its strategy of focusing on FX options pricing and risk management software. “There is a market for specialists like ourselves,” says Saund, adding that the major software houses have neglected the complexities of FX options in the rush to develop all-purpose trading and risk systems. This creates a market niche for “small nimble players that can integrate into these massive infrastructures”, he adds.