In this article, we build a very simple PDE solver for the Black-Scholes Equation. Using the Finite Volume Discretization Method, we derive the equations required for an efficient implementation in Matlab. The implicit Euler time-stepping of the solver guarantees a stable behavior and convergence. All posts in this series: Basics of a PDE solver in Matlab Pricing American options with […]
Modern risk management is a real challenge. Today, I played with my levitation device. I noticed that most people do not believe that levitation is real. In fact there is a formal proof that levitation in a static magnetic field cannot be stable. This situation is similar to common believes in financial markets. In the […]
In option pricing, two technical terms often create confusion. One term is “risk-neutral” and the other “real-word”. You hear these terms in the context of option pricing, backtesting, risk management and hedging. In this article I try to clarify the terminology. Background First, we start with “risk-neutral”. The term risk-neutral refers to option pricing: The […]
In the last decade, gold constantly rose in value. In this post, we will use public data to look into the value relationship of gold and money. Value of gold measured in different currencies Gold is definitely one of the oldest currencies. Until 1971, USD and gold were essentially the same using a fixed conversion rate. […]
Monte-Carlo simulation is a very import tool for assessing all kinds of risks and chances. It it widely used in project management, option pricing and business valuation. Often, the input data and the reporting should be placed in MS Excel. This article presents the different options available for combining Monte-Carlo simulation and MS Excel.
The Cost of Redundancy Expensive resources spent on computer grids are often wasted. An example from the financial industry teaches how repeated and redundant calculations can eat up all the computing power. Theta Proxy, a simple and yet generic solution, has the potential to save millions in server costs. Nowadays much of the computation time […]
Theta Proxy XL is a new product from my company Thetaris. It promises speed-ups of several orders of magnitude. Here, I present some benchmark results. These will help you to decide when to apply Theta Proxy XL and when to stay with plain MS Excel. Test Case 1: European Option VBA Monte-Carlo Code (2 free […]
A good library design requires a separation of the functionality into modules with an appropriate API. The size of the modules is determined by the application. While for a simple trading application a good API might contain everything from fitting the stochastic processes to pricing an option under a single function, this is completely insufficient for assessing model […]
Under the current stress of the financial crisis, governments all over Europe discuss the introduction of a transaction tax for financial instruments. Especially, the German and French government propose a 0.1% tax on every equity trade and 0.01% tax on derivative instruments. This does not sound large, but what would happen to guarantees of life insurances, e.g. […]
One of the most popular portfolio protection trading strategies is the Constant Proportion Portfolio Insurance (CPPI). This strategy maximizes the exposure in stock at each rebalancing time while ensuring that the portfolio level never drops under the so-called floor. Modeling Financial Transaction Tax The currently proposed financial transaction tax is nothing else than a proportional […]
Computer Aided Finance - Money and Math 