Risk Management and Financial Institutions, + Web Site, 3rd Edition

DerivaGem Software

There are a number of new features of DerivaGem. The software has been simplified by eliminating the *.dll files. Source code is included with the functions and functions are now accessible to Mac and Linux users. CDSs and CDOs can now be valued. The software can be downloaded from the author’s website.

GETTING STARTED

The most difficult part of using software is getting started. Here is a step-by-step guide to valuing an option using DerivaGem Version 2.01.

1. Open the Excel file DG201.xls

2. If you are using Office 2007, click on Options at the top of your screen (above the F column) and then click Enable this content. If you are not using Office 2007, make sure that your security for Macros is set at medium or low. (You can do this by clicking Tools, followed by Macros, followed by Security.)

3. Click on the Equity_FX_Index_Futures worksheet tab at the bottom of the page.

4. Choose Currency as the Underlying Type and Binomial American as the Option Type. Click on the Put button. Leave Imply Volatility unchecked.

5. You are now all set to value an American put option on a currency. There are seven inputs: exchange rate, volatility, risk-free rate (domestic), foreign risk-free rate, time to expiration (yrs), exercise price, and time steps. Input these in cells D6, D7, D8, D9, D19, D20, and D21 as 1.61, 12%, 8%, 9%, 1.0, 1.60, and 4, respectively.

6. Hit Enter on your keyboard and click on Calculate. You will see the price of the option in cell D25 as 0.07099 ...