The previously-implemented semi-automated business-used prototype of the daily fund transfer price (FTP) for the mortgage domain was moved to production from business to IT departments of a large Dutch bank and became an IT system under FAM responsibility.
The resulting fully-automated application was built on a consistent technology stack, which includes .NET, Visual Studio, C#, SQL-Server, SSIS package, QRM. The tool is accompanied by the corresponding graphical user interface (GUI) which was developed in ASP.NET.
This project turned out to be very challenging, especially because of: i) the interactions among various bank departments, including IT, FAM, FTP Centre and Mortgage Group; ii) the large technology stack involved. In all these cases we were in the lead.
Black, Scholes and Merton’s famous option price formula wasn’t a new discovery, as shown in the next section. The formula was well know at the time and widely used in the option market. Often it is noted that option trading took off after the publication of the Black-Scholes formula, but this simply is not true... however, the reverse is. In 1973 the Chicago Board Options Exchange (CBOE) opened for business as the first option exchange in the world, making options widely available. This and the introduction of handheld calculators, to do the necessary computations for Black and Scholes, made the formula a success. The formula may not have been a break through, but the way it was derived certainly was. Using the risk free portfolio was the step that made the known formula acceptable to academia. The derivation of the formula is the topic of this note based on research I did for a class on derivatives. Continue reading →
The course I am teaching considers option valuation methodologies, in particular the Black Scholes and binomial tree. There are many steps needed to derive these models. In preparation for teaching the next class on the binomial tree model, I thought it would be useful to share my notes. Continue reading →