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Derivative Valuation

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.

Please contact consultus@pa.wagner.com to inquire about our consulting services in derivative valuation.