Principles of Quantitative Development

3.5 LIFE-CYCLE EVENTS

Monitoring processes include more than risk management. Each trade has to be monitored for events such as option exercises, triggering or barrier conditions. In addition to these unpredictable events, there are regular fixings and cash flows to be processed as well. Managing and monitoring such events is a complex process because of its impact on the P/L. Besides, it calls for persistence in a database, audit trails and integration with specialized user interface elements facilitating the related MO operations. Take an interest rate swap (IRS) as an example. Its floating leg may call for fixings on its interest rate index every three months. The rate fixings happen in the middle office. One rate fixing may affect multiple IRS (and potentially other) trades because the interest rate index (and the associated fixing source) may be shared among them. Once the rate is fixed, a part of the value of the associated trades becomes the ‘realized’ P/L in the form of past cash, and the stochastic part gets restricted to the future. In order for the pricing models to handle this change in pricing, they need to access the fixings in a consistent way, which implies a database back-end specific to their storage.

Although we design a trading platform primarily for exotics trading, there are instances when we may consider using it for flow business as well. The reason for this inclusion of flow trades involving exchange-traded derivatives (ETD) is not hard to understand. One ...