CWI develops price models for financial derivatives

The risks of trading complicated financial contracts can be unclear to a certain extent. In order to get a better insight in the determination of prices of such financial derivatives, CWI researcher Anton van der Stoep developed and improved financial mathematical research methods.

Publication date: 25-03-2019

Banks and other financial institutions aim to trade financial derivatives, while having a detailed understanding of the risks they face when trading these products. In his PhD thesis, CWI’s Anton Van der Stoep improves and develops financial mathematical methods that model the prices of complicated financial products, typically referred to as financial derivatives. On 25 March 2019 he will publicly defend his thesis Pricing and Calibration with Stochastic Local Volatility in a Monte Carlo Setting at the Delft University of Technology.

Van der Stoep analyzed a specific category of financial mathematical models. Such models assume that the ‘speed’ by which the price of a certain financial quantity varies, such as the stock price, interest rate or foreign exchange rate, is stochastic. This speed is also known as volatility.

Price back
Van der Stoep’s main goal was to design these models so that they can accurately model the prices of complicated financial contracts, that depend on the foreign exchange rate. At the same time, these models must accurately and efficiently ‘price back’ the most simple products that are most intensively traded in the market. In other words, the model must be well calibrated to the most simple products. The main numerical technique Van der Stoep applied to accomplish this, was Monte Carlo simulation.

Trading risks
Van der Stoep’s research allows more accurate modelling of the behaviour of prices of complicated financial contracts. By using improved models, banks and other financial institutions will get a better insight in their current profit-loss position and the risks they face by trading such products.

Funding
Van der Stoep is part of CWI’s Scientific Computing group, which develops efficient mathematical methods to simulate and predict real-world phenomena with inherent uncertainties. His research was funded by Rabobank and supervised by Prof. Kees Oosterlee.