Reditus: A Manufacture

1
Reditus A Manufacture Trade Tool for
New Financial Instruments

• Mathematical Information Sciences

2
OverviewCSIRO Investment in the Finance
Industry

• In the past CSIRO has allocated less than 0.1 of
  its Research and Development investment effort in
  the finance industry, despite it being the second
  largest industry sector in Australia.
• CSIRO strategy is to increase investment through
  R D in bringing new innovations into the
  market.
• Expertise is allocated in statistics,
  mathematical modelling, data mining, risk
  analysis, IT, e-commerce and software
  engineering.
• Ability to leverage off large pools of expertise
  with cross fertilisation of new developments and
  innovations. For example Fastflo.

3
OverviewReditus Origin of This New Innovation

• The Reditus product is based on Fastflo
  engineering software originally developed by
  CSIRO for modelling fluid dynamics. The
  similarity of computational fluid dynamics (CFD)
  and the price behaviour of traded assets leads to
  the use of the continuum model involving partial
  differential equations (pde's).
• With the growing sophistication of the market,
  special and quite complex boundary conditions may
  be prescribed. There is a recognition not only
  that the pde approach is an efficient general
  purpose method, but the finite-element platform
  may be the best in terms of accuracy and
  versatility in calculating these boundaries.
• Given the relationship between CFD and options
  pricing, CSIRO identify that the existing Fastflo
  technology could be linked to Options pricing and
  be leveraged to develop Reditus.

4
Overview Reditus Competitive Advantage Through
Innovation

• An ingenious use of technology for generic
  partial differential equations for
  options-pricing
• Using unstructured mesh for representation of
  price sensitive details for option prices. The
  more clustered the mesh the more accurate the
  pricing and Greeks.
• Colour visualisation easily identifies trading
  opportunities with price movement.

5
Overview Why Reditus Will Be a Success in the
Finance Markets

• Reditus is a flexible tool for efficiently
  developing new options products. It allows
  products to be customized for specific needs.
• Reditus is a new tool with a new approach to
  options pricing. Reditus allows dealers and
  quantitative analysts to structure new exotic
  option types that cannot be readily or quickly
  solved by conventional methods.
• The use of the finite element method giving
  Reditus versatility and interactivity that is
  unique among options pricing packages.
• Reditus graphics further enhances the binomial
  and finite-element methods in developing and
  pricing exotic options.
• The graphical display provides 3D representation
  of the option price sensitivity. This is
  displayed by the intensity of the mesh and colour
  shading to provide more accurate pricing of
  exotic options.

6
Reditus OverviewApplication of Reditus in the
Financial Markets

• Market making activities of trading banks
• Fast development of innovative products
• Easy trading of exotic derivatives
• Accurate assessment of risk parameters of exotic
  deals utilising graphical representation.
• Reditus can price the most complex options,
  handling special boundary conditions such as
  irregular barrier structures

7
Reditus Overview Numerical Platform for the
future

• An interactive platform for quants dealers
• New innovative numerical techniques
• Finite-Element engine
• Monte-Carlo engine
• Finite-Difference engine (beta testing)

8
Reditus Overview Current Status of Reditus
Product Development

• The Reditus product has been developed in 7
  person years by CSIRO, utilizing Finite-Element
  Mathematics. This is in addition to 40 person
  years development for Fastflo.
• CSIRO is continuing to work within the finance
  industry to further develop Reditus and extend
  its capabilities and product range.
• Features currently include
• A choice of one and two factor models
• An Excel Spreadsheet interface for traders
• Graphical display for quantitative analysts
  for price sensitivity
• Data input can include all market data in
  term structure not just average constants
• Stand-alone package can be linked to existing
  trading systems
• Interface to other applications are under
  development e.g. Fenics

9
Reditus Overview Product Strategy and Direction

• A stand-alone powerful research tool for
  developing innovative products
• Market making tool for financialinstitutions
• A pricing module of trading systems for exotic
  derivatives
• As a plug-in to proprietary trading systems

10
Reditus -Business BenefitsCurrent Problems
Facing Clients in Pricing

• Slow response to clients pricing request for new
  deals
• Long lead-time to push out new products
• Uncertain if the price is right every time a new
  product is introduced
• Market making pricing tools are black-boxes to
  dealers and thus restricts innovative
  deal-makings

11
Reditus - Business BenefitsShort Comings of
Current Products

• Off-the-shelf pricing software is difficult to
  customise
• Software packages are designed around the same
  product range offered in the market restricting
  flexibility of new innovative products
• Difficult and time-consuming to introduce new
  products models
• Require flexibility in creating new models within
  an acceptable time-frame
• Require greater level of accuracy in pricing
  models

12
Reditus - Business Benefits Benefits of Reditus

• Profit advantage in bring to market new
  instruments quickly
• Maximise returns on new product potential through
  identifying imbalance in pricing structures.
• Banks can develop their own unique products not
  available to competitors
• Innovative products can be designed and tested
  without delay
• New products emerge from design stage to trading
  desk.
• A new alternative tool to validate existing
  pricing software.

13
Reditus - Business ImpactImpact of Reditus on
Your Business

• 1st market advantage. Profit advantage of market
  conditions for market makers.
• Decision support for trading allowing
  anticipation of profit opportunities.
• Fast response to business needs
• Enhanced reputation of innovation in products
• Efficient use of quantitative analysts talent for
  developing new products
• Easy maintenance of different pricing models

14
Reditus - Business BenefitsRevenue Impact

• More clients deal enquiry due to enhanced
  reputation for innovation
• Revenue increase from large deal flow due to fast
  pricing capability
• Increase in profits due to high margin in exotic
  deals
• Greater accuracy in pricing exotic deals
• An alternative tool to check the pricing of new
  products
• Open and transparent coding environment for easy
  trouble-shooting

15
The Next StepFree Half-Day Workshop

• The free half-day workshop for Reditus is at the
  clients discretion
• A Senior Consultant can work with yourself and
  provide assistance in
• getting to know new emerging pricing technologies
• for quantitative analysts to evaluate Reditus
• Bank staff can use this opportunity to develop a
  new product of interest to the bank as an
  exercise
• Sample modelling of existing new instruments that
  have been created for quantitative analysis
• Should further consulting be required, CSIRO
  offer educational courses tailored to customer
  requirements.