ÖYour Derivatives Problems Last revised: 6/28/00

Which of the following describes you best?

• I wish I had a better handle on my pricing and risk management systems.
• I wish I or our [Pick one: modeler, programmer, controller, auditor] knew more more about [Pick one: our pricing models, our computational algorithms, ways to test models].
• I'd like to have another opinion about the value of that weird option.
• I wish somebody could work with the auditors to suggest some policies, procedures, and systems that would let us keep the Derivatives desk under more effective control.
• There are three kinds of people in the world: 1. Those who make things happen. 2. Those who have things happen to them. 3. Those who say what happened? Right now, I'm in camp #3. I want to be in #1.
• I've got it all covered. All systems AOK. All my guys know everything they need to know. When I want your opinion, I'll tell what it is. We keep our auditors on a 'need to know' basis. I don't get ulcers -- I give ulcers! 

Controlling and documenting front office and back office systems that you don't completely trust.

You're playing in a game with high stakes, and you need to be in control of the your models and systems. You or your team members are wondering:
(1) How should we model the underlying's stochastic movements?
(2) How do we turn the contract into mathematical language?
(3) Which of nine potential pricing models is best for our situation?
(4) What tests tell me where our model breaks down?
(5) Did the programmers code the model right?
(6) How do we document our models to satisfy the people who maintain the code, auditors, and regulators?

The Group can design, code, test and evaluate, maintain, and document your models. We've done it many times before.

Educating your systems people, controllers, and auditors about the theoretical and practical foundations of Investment, Risk Management, Derivatives, and/or Financial Engineering.

You just hired a brilliant Russian mathematician. He's got a million tricks for solving quantitative problems, such as finite element code for modeling the freezing of ice in a flask. They didn't have any computers at his lab in Russia, so he figured out how to solve this problem on the back of an envelope. Unfortunately, he's spinning his wheels a bit on your problems. You need someone with Investment, Risk Management, Derivatives, and/or Financial Engineering experience to point him in the right direction.

The Group can educate your programmers, trainees, traders, and regulators in the essential elements of option pricing that they need to do their jobs. We've been translating the language of business into the language of mathematics – and vice versa – for over two decades.

Obtaining an independent valuation for exotic options.

You have a fiduciary responsibility to mark inventory accurately. The plaintiff's bar will make you pay for any real or imagined discrepancy. However, you can't find people or software to independently value some of the exotic deals.

The Group can independently value your inventory for accounting or legal purposes.

Technical assistance in controlling and auditing a Derivatives desk from a quant who's done it before.

You know that traders can play games with inventory value, but not whether your traders are playing them. You want to feel more comfortable that you have procedures and systems in place to increase the probability that a desk's P&L and Risk Measures approximate reality.

The Group can help your internal auditors set up policies, procedures, and systems for controlling the more complicated Derivative products, then help your controllers follow the policies and use the procedures and systems.

Doing a post mortem examination on a Derivatives model that failed.

One of your Derivatives desks just recognized a loss of $50 million. The traders are blaming their systems. The modelers are say their models are standard, and that either the traders used bad inputs or the coding is wrong. The coders say their code passed all tests. The controllers say they verified the inputs. You don't want it to happen again, but you don't know what needs fixing.

The Group can tell you if

• the trades were mispriced and why
• the risk management was bad
• the model was inappropriate for the product or trading strategy
• the code didn't implement the model correctly
• the controllers could have caught the problem
• you can implement new controls and procedures to prevent a repeat.