Financial Modelling in Python

P1: JYS

c06 JWBK378-Fletcher May 12, 2009 18:55 Printer: Yet to come

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Data Model

As noted in Chapter 1, writing programs for financial modelling involves more than numerical

analysis alone. Designing a trade representation is a case in point and the focus of this chapter.

From experience, if we get the design of the trade description correct, then the rest of the

analytical framework falls naturally into place.

In finance a financial contract is commonly called a trade. Trades are built from legs and

exercise schedules. A leg is a collection of cash flows, simply referred to as flows, and each

cash flow can depend upon an arbitrary number of market observables. An exercise schedule

is a collection of exercise decisions, simply referred to as exercises. Each exercise decision

represents the right to either call or cancel the trade on a particular date. In the following

sections we will go through each of these building blocks in turn, starting with observables.

6.1 OBSERVABLES

As mentioned already, the cash flows of a financial instrument depend upon the values of

market observables. Examples of market observables are (i) the spot price of an asset (e.g.

stock, index or commodity), (ii) the fixing of an interest rate (e.g. LIBOR)

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or (iii) the measured

rainfall over a certain period in a given location. Associated with an observable is its time of

observation, normally called its reset date. Before the