The Universal Local Stochastic Volatility Framework with Jumps Introduced for Fast & Accurate Pricing of Exotic FX and EQ Barrier Options

New York, NY – September 24, 2013 – Numerix (www.numerix.com), the leading provider of cross-asset analytics for derivatives valuations and risk management, today announces new model innovation now available in Numerix CrossAsset, its flagship analytics framework for structuring, pricing and managing the risk of any derivative. The Universal Local Stochastic Volatility Model with Jumps (ULSVJ) helps to make pricing and risk tools for semi-exotic derivatives such as barrier options more accurate and robust in terms of performance.

This functionality is sought after by many buy-side and sell-side firms, proving especially impactful for market makers, or those who trade with market makers in semi-exotic FX and EQ options. Sophisticated hedge funds can also leverage the new model to match the market prices in these options as nearly instantaneous calibration is possible. The ULSVJ framework can be used in conjunction with a range of FX and EQ options including European, American and Bermudan exercise and Digital Options (both Cash-or-nothing and Asset-or-nothing), all of which can also be combined with barriers.

“The development team continues to move Numerix CrossAsset forward with modern models and methods, ensuring that our product stays ahead of the curve and continues to be the best commercially available analytics library in the market,” said Steven R. O’Hanlon, Chief Executive Officer & President of Numerix “We have also put a great focus on ensuring that the Numerix model library and pricing architecture can scale in enterprise risk systems, and we continue to allocate much strategic bandwidth in this area.  We’re excited to bring this new functionality to market further enabling a consistent pricing framework that spans a wide range of standard technology platforms and asset classes, fostering transparency throughout the market.”

The Universal Local Stochastic Volatility Framework with Jumps & Methodology

The major focus of this release is the addition of fast pricing and calibration for EQ and FX vanilla and semi-exotic options with the new ULSVJ framework, which produces fast and accurate prices, and stable Greeks. These options are priced in a modern finite difference approach for both diffusion and jumps pioneered by Dr. Andrey Itkin and Dr. Peter Carr[1].

The methodology is further elaborated on in recent research by Dr. Itkin[2] where he proposes a new, unified approach to solving jump-diffusion PIDEs (partial integro-differential equations) based on the operator splitting technique and matrix exponential method. The research demonstrates that the proposed method succeeds in improving the speed and accuracy of pricing and risk analysis when applied to semi-exotic equity and FX options.  

The ULSVJ framework supports the following:

•    Black - Scholes Model with/without jumps in spot
•    Local Volatility (Dupire) Model with/without jumps in spot
•    Constant Elasticity of Variance (CEV) Model for instantaneous variance with/without jumps in spot
•    Local Stochastic Volatility (LSV) Model with/without jumps in spot
•    Mixing fraction between stochastic volatility and local volatility, REPO curves, discrete and continuous dividends, etc.

Tom Davis, Vice President of Client Solutions at Numerix adds: “With this release and newly introduced framework we’ve once again reinforced the fact that we have the most advanced models and methods in the industry. The underlying methodology brings speed, accuracy and increased range of applicability for finite difference methods.”

1 A. Itkin and P. Carr “Using Pseudo-Parabolic and Fractional Equations for Option Pricing in Jump Diffusion Models”
http://link.springer.com/article/10.1007/s10614-011-9269-8
2 A. Itkin “Efficient Solution of Backward Jump-Diffusion PIDEs with Splitting and Matrix Exponentials” http://arxiv.org/pdf/1304.3159v1.pdf

About Numerix
Numerix is the award winning, leading independent analytics institution providing cross-asset solutions for structuring, pre-trade price discovery, trade capture, valuation and portfolio management of derivatives and structured products. Since its inception in 1996, over 700 clients and 75 partners across more than 25 countries have come to rely on Numerix analytics for speed and accuracy in valuing and managing the most sophisticated financial instruments. With offices in New York, London, Frankfurt, Milan, Stockholm, Tokyo, Hong Kong, Singapore, Dubai, South Korea, India and Australia, Numerix brings together unparalleled expertise across all asset classes and engineering disciplines. For more information please visit www.numerix.com.

Emily Ahearn
Director of Public Relations
Numerix
Phone 646 898 1294
Email: eahearn@numerix.com

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