Summitâs Multi Underlying Structured Trade, or MUST, is a unique trading application that allows users to create new, innovative trade types whose underlyings span multiple asset classes (e.g., interest rates, FX, and equities). Trade characteristics can include any number of heavily customized trade legs with embedded payoff formulas, plus user-defined variables that encompass trade input options and intermediary payoff variables to model path dependency, or output variables. MUST employs a dedicated Brace-Gatarek-Musiela (BGM) pricing model, but users may add their own proprietary model if so desired.
"MUST is an extremely powerful tool for traders whose business includes highly structured trades that are very difficult to enterâmuch less priceâusing traditional front-office trade entry systems," said Guillaume Aubert, Director of Business Development in Summitâs New York headquarters office. "It will simplify life not just in the front office, but for risk managers and back office professionals."
"Before an organization will work with a novel trade type," Aubert elaborated, "it must be confident that the instrument can be reliably entered, accurately priced, adequately handled in terms of risk management, and seamlessly processed by the back office. Obviously, the approval process can take a long time."
In the past, introducing a new trade type involved a significant amount of programming using a vendorâs API toolkits to define the new instrument, implement a trade-specific pricing model, and link the new instrument to other trade maintenance processes. MUST drastically cuts the time delay between trade design and active trading by eliminating the need for programming.
Using a single application screen, traders can quickly assemble a complex deal structure, assign customizable trade attributes, model the new trade typeâs behavior, then store it as a reusable trade type template for subsequent use at the trading desk. Summit automatically takes care of everything else, like cashflow generation, analytics support, STP back office processing, and other trade maintenance processes.
What gives MUST its flexibility and power is its integral, extended BGM pricing model. BGM is unique in its ability to represent a yield curve with directly observable forward Libor rates and incorporate as many factors as required to price a trade. Implemented in Summit via Monte Carlo simulation, this extended variant is more powerful than the industry-standard BGM model because it includes market variables such as FX rates, equity prices and foreign yield curves. Main factors are calculated using Principal Component Analysis (PCA) with correlation matrices. Sophisticated calibration tools are an integral part of the model.
"If you know you can accurately price virtually anything, and your trade creations are completely supported front-to-back, you have a real competitive edge," Aubert concluded. MUST is one of the key innovations included in the impending V3.5 release of Summitâs flagship integrated software platform. V3.5 is the cornerstone of a major product announcement scheduled for summer 2003.