A calibration procedure is a necessary step during which market data (usually implied BS volatility) is used as input to determine the parameters of a financial model. The optimum research for those parameters enables the model to fit the best the input market data. However, calibration can be time consuming and depends on the size of the input data, on the number of parameters to calibrate and also on the calibration algorithm itself. Therefore, Pricing Partners tested several methods before picking this Simplex one. Simplex is a powerful method that optimizes calibration procedure and effectiveness. Compared with Levenberg Marquardt, the local and initial value sensitive algorithm, Simplex, a global algorithm, is the only robust and easy method which is irrelevant to initial input value. On the other hand, a model parameter can be either time dependent or constant. Unlike commonly used calibration methods on the market today, which only provide constant parameters, Simplex produces time dependent parameters. Simplex is suitable for the time dependent Heston Model, a model known for its competitive accuracy and speed. With this outstanding market fit algorithm, virtually any type of underlying derivative can be calibrated precisely by Pricing Partners.
Mr. Zaizhi Wang, financial engineer at Pricing Partners comments, âAs a great advantage in Price-it solution, one can use either constant or time dependent parameters for a Heston model. Our newly implemented Simplex enables us to calibrate the time dependent parameters for a stochastic volatility models with a good fit on the entire volatility surface. Users can even choose constant or time dependent parameters. They can also easily retrieve calibration error and quickly measure the overall fitting error for the entire smile surface. I consider the Simplex algorithm robust and reliable in calibration.â
Pricing Partners CEO, Mr. Eric Benhamou adds, âCalibration is key to valuation. Improving the calibration enables us to provide more accurate models and provide unmatched precision in our valuation. Time dependent stochastic volatility models are currently the latest cutting edge models and generate smile and forward smile very consistent to the market. Proving powerful calibration sets therefore gives us a clear advantage to our competitors and positions us as a leading independent valuation and analytics providerâ
Founded by former professionals of the trading floor, working in investment banks like Goldman Sachs, SociÃ©tÃ© GÃ©nÃ©rale, Natixis or HSBC, in the past two years Pricing Partners has become over a major player in the financial field. In October 2008, Pricing Partners launched its Internet independent valuation platform, Price-itÂ® Online, which affirms its leading place in financial modeling as well as an independent valuations provider. Designed for all major assets like Interest Rates, Equity, Inflation, Credit, Foreign Exchange, Commodities, and Life Insurance to Hybrid products, Price-itÂ® comes either as a software tools or an Internet Platform, providing all the tools for the transparent valuation on structured products. Price-itÂ® online uses cutting edge mathematical models together with a new language to describe the complexity of any structured products.