Principles of Quantitative Development

1.3 NEED FOR SPEED

In today's financial markets, opportunities are transient. The skyrocketing commodity prices of early 2008, for instance, generated a strong demand for cost-effective hedging. Banks that could roll out structured products to meet customized hedging requirements reaped handsome benefits from this demand. Hedging essentially caps the customer's upside exposure while subjecting them to unlimited downside risks. Because of the dizzying fall in commodity prices (especially in energy) that soon followed during the second half of 2008, the banks that could provide the hedging structures again made even more profit. Rolling out such hedging solutions on short notice to benefit from the market fluctuations of this kind necessarily calls for the agility and flexibility that only an in-house trading system can provide.

Due to such enticing profit potential, an increasing amount of assets under management gets earmarked for exotics trading. In fact, this influx of institutional investments was at least partly to blame for the wild fluctuations in commodity prices. However, the influx also underscores the importance of exotic and structured products. Coupled with this emphasis on exotics trading is the increasing sophistication of the clients who demand customized structures reflecting their risk appetite and market views.

The net result of the changing financial market attitude is the need for more mathematical modelling and speedier deployment than ever before. The need ...