Options contracts and other derivative instruments have become everyday
tools for professional money managers and corporate treasurers. Some seek
to hedge existing positions with options contracts, while others use them
to speculate on the price movements of underlying instruments. Many
traditional transactions involve embedded options, such as the pre-payment
option available with many mortgages. Derivatives are growing more complex
every day to meet the needs of all of these participants.
Math Finance took a large leap forward with the discovery of the
Black-Scholes formula for the valuation of European-style equity options.
Since then much work has been done to expand this theory to encompass
options with different exercise rights, options on fixed income
instruments, and much more.
Wagner Math Finance experience with many continuous and discrete models for
option pricing, in both the equity and fixed-income markets. We have
developed a software library using a a form of the multi-factor
Heath-Jarrow-Morton (HJM) interest rate model, each factor introducing
independent random shocks to the forward rate curve with magnitude decaying
exponentially with time to maturity. The software accepts a description of
the terms of the derivative contract, constructs a forward rate curve from
the published prices of fixed rate instruments, estimates volatility
parameters from market prices, and values the options contracts using
arbitrage pricing theory.
to inquire about our consulting services in derivative valuation.