ABN Amro equities unit in SciComp deal

Derivatives pricing software vendor SciComp has licensed its SciFinance and SciXL products to ABN Amro's equity derivatives group.

ABN Amro is using software from the Texas-based firm to design and validate derivatives pricing codes. “We are confident that SciFinance will streamline our workflow for prototyping derivative pricing models. We will use SciXL to run models in Excel without extra programming steps,” said Andrew Greaves, managing director of equity derivatives at ABN Amro.

SciFinance automatically generates custom codes - called C codes - based on brief specifications of derivatives structures. ABN Amro believes the system will reduce both the time and costs involved in developing a new model, as it can automate the process as well as formalising the concepts that analysts and traders use.

“Some codes can be produced in a matter of minutes. More complex codes may take longer. The time depends on the speed of the computer as well as the complexity of the derivative product being priced,” said Stacy Formby, director of marketing communications at SciComp.

SciFinance believes its pricing tools will allow analysts to refine new algorithms without any manual programming, and can free-up time to focus on complex options. It claimed its approach is more accurate than traditional pricing methods, such as in-house coding.

“Because of the automation, SciFinance-generated codes are typically more reliable and consistent than manually generated codes written by different people over a long period of time… Manually generated codes often diverge from their original purpose and can be modified without documentation,” Formby said.

The SciXL component was added to the product range in September last year - it automatically integrates the pricing models generated from SciFinance into Excel add-in programmes and spreadsheets.

However, the SciFinance system itself is not needed to run the codes, and can be used without the SciXL module. “It can generate C codes that can easily be interfaced to existing production systems,” said Formby.

SciFinance allows clients to generate codes with two different classes of numerical methods for pricing derivatives. ABN Amro has chosen the original method used in the SciPDE module, which uses finite difference techniques to solve systems of Partial Differential Equations. According to Formby, these methods are more accurate than traditional lattice methods but have not been as widely used as they are more difficult to programme.

Formby added that PDE methods can also be more accurate than Monte Carlo methods, but they cannot be used for all derivative types. SciComp is therefore releasing SciMC, a new module that will allow customers to generate codes using Monte Carlo methods. “We've found that the codes can run up to 100 times faster than other simulations and general Monte Carlo engines,” claimed Elaine Kant, president of SciComp.

According to Formby, the price range for these pricing tools starts at about $5,000, and can exceed $1 million, depending on the number of components adopted.

SciComp's present clients also include the US's Merrill Lynch, Bank of America and Bear Stearns, as well as Belgium's KBC.

This article appeared online at RiskNews.net.