Development of an option price computation framework using the change management mechanism

Abstract

A financial derivative is a security that is derived from some other underlying financial instrument such as a bond or a stock. The value of a derivative is thus dependent on the value of its underlying instrument. As the financial market environment changes constantly with increasing complexity, determining of fair market values and predicting their values at various future times become more important. To minimize the risk of losing money, financial traders want to evaluate the derivative values accurately all the time and request derivative evaluation systems to keep reflecting the change of the values by providing the consistent updated prices. And thus, modern derivative systems need a robust mechanism that can evaluate the value immediately after the values of the underlying instruments change. This paper proposes a derivative price computation model using a change management framework that is developed in a collaborative computing system. The change management framework is an object-oriented database model to manage dependency relationships between the supporters (shared objects) and the dependents (dependent user views of the shared objects) and to coordinate changes and propagation activities between the two. This paper specifically describes how the value of a stock-index option as a simplistic representative of the financial derivative can be consistently updated on the basis of the change management framework. In developing our model, we first identify the change management requirements in the option pricing system and explore the issues involved in the design of consistent value evaluation. Second, we investigate the dependency relationship between the components constituting the stock-index option and the user views that display the option price and its associated parameters, and map them onto the supporters and the dependents respectively. With this model, the user views can instantly update the option prices whenever the supporter (stock index) ...