FRONT ARENA Integrated cross asset front to back

FRONT ARENA Integrated cross asset front to back trading solutions www. sungard. com/frontarena

From Theory to Practice - PDE & Finance, 2007 Håkan Norekrans, Product Manager Agenda: § Sun. Gard FRONT ARENA – The Company § Instrument Coverage and Valuation Models § The Finite Difference Solver in FRONT ARENA § Pricing § Quoting § Risk Management

FRONT ARENA – The Company Integrated cross asset front to back trading solutions www. sungard. com/frontarena

Founded 1987 § Asset Class: OM Stockholm equity options § Workflow: Risk management § Customers: Swedish banks and brokers § Employees:

FRONT ARENA’s Business 2007 Asset Classes Workflows § Equities § Sales & Distribution § Fixed Income, Repos & Convertibles § Market Making & Proprietary Trading § Interest Rate Derivatives § Risk Management § Credit Derivatives § Back Office § FX, Money Markets, FX Options § Market & Price Connectivity § Hedge Fund Operational Integration

150 Customers with 350 Installed Sites Holland Canada Norway Finland UK Japan China Germany Sweden Austria Switzerland Typical customers § Investment Banks § Private Banks § Hedge Funds . Taiwan Thailand US Singapore South Africa Hong Kong

Global Coverage - Local Focus 378 Employees 198 Product operation 166 Global services 14 Shared services New York Stockholm London Frankfurt Zurich Tokyo Los Angeles Hong Kong Singapore Johannesburg

FRONT ARENA - Vision “With FRONT ARENA’s integrated solutions, we use the same system across our Fixed Income, Interest Rate Derivatives and Equities desks. The openness and flexibility of FRONT ARENA enables us to react in a timely fashion to business requirements” Hans-Ulrich Hasse, Senior Vice President Landesbank Rheinland-Pfalz Web Links : http: //www. sungard. com/frontarena http: //www. frontarena. com

Instrument Coverage and Valuation Models in FRONT ARENA Integrated cross asset front to back trading solutions www. sungard. com/frontarena

Valuation Methods in FRONT ARENA § Analytical models § Default choice + Fast and accurate greeks - Often not available § Tree models (Binomial – Trinomial) § Traditional choice in finance + Relatively fast - Limited robustness and flexibility § Finite Difference § Increasing usage + Relatively fast and stable greeks - More complex implementation § Monte Carlo § Needed for complex pricing + Flexible payoff functions (including user defined) - Slow and unstable greeks

Finite Difference Solver in FRONT ARENA Integrated cross asset front to back trading solutions Pricing Quoting Risk Management www. sungard. com/frontarena

Pricing § Barrier option priced using local volatility

Requirements on the Finite Difference Solver Pricing Numerical accuracy High Reliable greeks Medium Calculation performance Low

Quoting to Electronic Market § Calculate theoretical bid and ask prices and send to electronic exchanges

Requirements on the Finite Difference Solver Quoting Pricing Electronic Quoting Numerical accuracy High Medium Reliable greeks Medium Low Calculation performance Low High

Risk Management - Portfolio Sheet § Portfolio with positions and greeks § Hedge suggestions

Risk Management – Risk Matrixes § Vega Matrix showing volatility risk § Underlying price vs Volatility shifts

Requirements on the Finite Difference Solver – Risk Management Pricing Electronic Quoting Risk Management Numerical accuracy High Medium Reliable greeks Medium Low High Calculation performance Low High

Conclusion: Selection of Valuation Methods Instrument Type Valuation Parameters Simple Complex Simple Analytical Finite difference Complex Finite difference Monte Carlo

Conclusion: Requirements on the Finite Difference Solver Pricing Electronic Quoting Risk Management Numerical accuracy High Medium Reliable greeks Medium Low High Calculation performance Low High