FX Options Pricing

A major American Bank with Foreign Exchange trading floors around the world wanted to simplify the publication of implied volatilities for its FX Option pricing. The books are typically handed over from traders in the far east to London and then to new York.

By using Excel to publish the implied volatilities, the bank was able to keep the traders happy and capable of developing their models. The implied volatilities would then be centralised in an object oriented database (via CORBA and C++).

Because the bank had marketing teams around the world in more locations than trading floors, the issue of access to the pricing capability was critical. When a salesperson wanted to calculate a fair price for an option (initially vanilla, but now also exotic, digital, barriers, etc) they would use an Java applet which would contact a middle-tier of servers each responsible for a vertical part of the application: time line server, currency server, static data server, curve server and the pricing engine (based on a modified Black-Scholes algorithm).

This architecture was really leading-edge at the time of development (late 1996) and it is still in use today in London and around the world. It was an example of complex technical integration with Excel, C++, Java, Unix & Windows and an OO database. The system also linked to MUREX for the management of the options once traded.

ObjectLab provided the architecture, the technical mentoring and was an important part of the development team.

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