Towards the balancing real-time computational model: Example of pricing and risk management of exotic derivatives

Abstract

Instant pricing and risk calculation of exotic financial derivative instruments is essential in the process of risk management and trading performed by financial institutions. Due to the lack of analytical solutions for pricing of such instruments, systems require the use of computationally intensive Monte-Carlo methods. Despite using extensive computational power of clusters or grids, these calculations are usually difficult to complete in real-time, as the rate of the incoming market data is too high to handle.The objective of this paper is to present a certain phenomenon existing in the pricing and risk management systems. The phenomenon is based on an interplay of intense computational requirements for single calculation, with frequent change in the environment state. A suggested abstraction leads to a definition of a Balancing Real-time Computational Model.An implementation of the solution to the problem is presented as an optimalisation task. It is based on a distance function quantifying the degree of the imbalance of the system.