Financial Engineering Associates, Inc. (FEA), a leading developer of derivative pricing technologies, announces the release of @INTERESTÃ 4.0 -- the latest edition of the company’s software for pricing, hedging, & risk management in interest-rate markets.
@INTEREST 4.0 adds a Brace, Gatarek, and Musiela (BGM) model for cap and swap option valuation to the product’s already broad option modeling functionality. FEA @INTEREST users can now choose from the BGM, as well as the Black ’76, Ho and Lee, Hull and White, Black and Karasinski, and Cox, Ingersoll, and Ross option pricing models. FEA @INTEREST software values cash and derivative instruments used in interest-rate markets.
The BGM model in @INTEREST is a one-factor analytical model that values caps, forwards, and swap options. BGM models term rates rather than the "short", or instantaneous, rate to represent the entire yield curve. BGM has two main advantages. The model is autocalibrating and pricing is highly consistent across instruments.
The BGM model is calibrated using commonly available market data -- volatilities for caps. Cap volatilities are input directly into the model. In contrast to models like Black ’76 in which volatility inputs vary from instrument to instrument, in the BGM model volatilities are consistent across instruments. Hedges, therefore, are equivalent.
“For example, using Black ‘76 to value bond options, the volatility is the bond price or yield; and for swap options the volatility is the specific swap rate. Using BGM, the same three-month term rate volatilities are used for multiple instruments,” comments Mark Garman, FEA Chief Scientist and President.
As with each FEA release @INTEREST 4.0 delivers increased computational speed – doubled for many functions; as well as calendaring and risk measure feature refinements, including business-day theta choices. FEA head of sales Laurent Birade also notes, “FEA’s @INTEREST is a premium interest rate package with better model selection, broad instrument coverage, more upgrades, and faster speed than what the low-cost vendors offer. The robustness of the interest rate models in low interest rate markets, such as that of Japan, makes @INTEREST one of the best tools for interest rate traders.”
Exchanges, auditors, traders, risk managers, investment funds, financial institutions, insurance companies, brokers each choose FEA’s highly-customizable analytics to manage market risk. @INTEREST 4.0 is a set of Excel spreadsheet add-ins and includes FEA-designed templates for use or adaptation. IntrlibÃ, the @INTEREST companion product, is an object library for customization of FEA technology within third-party systems. FEA markets its analytics directly, and as embedded components of systems offered by FEA Alliance Partners, including Alstom (NYSE:ALS), Caminus (Nasdaq:CAMZ), PeopleSoft (Nasdaq:PSFT), Algorithmics, Inc., Triple Point Technology, and EFA Software, as well as two dozen other well-known companies.