Mathematica v8 – Linux 32-bit – FinancialDerivative issues

– fixed in Mathematica 9 –

Some problems with FinancialDerivative in Mathematica 8? Wait for v9 (should be released in a couple of months) or try the the Finance Platform.

While testing my app European Options, I used as a cross-check the excellent FinancialDerivative function of Mathematica 8. FinancialDerivative gives price and greeks for a wide choice of financial products, European and American style. Nevertheless at some point I came across some problems:

    • For the “Out” BarrierOptions the “Rebate” term is not implemented. So you get the following wrong result by typing
      In[2]:= FinancialDerivative[{"BarrierUpOut", "European",
        "Call"}, {"StrikePrice" -> 110.00, "Expiration" -> 0.5,
        "Barrier" -> 105, "Rebate" -> 3}, {"InterestRate" -> 0.08,
        "Volatility" -> 0.25, "CurrentPrice" -> 100,
        "Dividend" -> 0.04}, {"Value", "Greeks"}]
      Out[2]= {0., {"Delta" -> 0., "Gamma" -> 0., "Rho" -> 0.,
        "Theta" -> 0., "Vega" -> 0.}}

      Which is correct with a zero rebate, while in this case the correct result should be

    • The “Gamma” (the sensitivity of Delta with respect the spot price) for all the financial products I tested so far is surprisingly inaccurate. As an example I show here what we get for simple vanilla call and put for which it easily derived by call-put paritythat the Gamma should be the same.
      In[3]:= FinancialDerivative[{"Vanilla", "European",
        "Put"}, {"StrikePrice" -> 110.00,
        "Expiration" -> 0.5}, {"InterestRate" -> 0.08, "Volatility" -> 0.25,
         "CurrentPrice" -> 100, "Dividend" -> 0.04}, {"Value", "Greeks"}]
      Out[3]= {11.6465, {"Delta" -> -0.619661, "Gamma" -> 0.020876,
        "Rho" -> -36.8063, "Theta" -> -3.11937, "Vega" -> 26.1189}}
      In[4]:= FinancialDerivative[{"Vanilla", "European",
        "Call"}, {"StrikePrice" -> 110.00,
        "Expiration" -> 0.5}, {"InterestRate" -> 0.08, "Volatility" -> 0.25,
         "CurrentPrice" -> 100, "Dividend" -> 0.04}, {"Value", "Greeks"}]
      Out[4]= {3.97952, {"Delta" -> 0.360538, "Gamma" -> 0.0208805,
        "Rho" -> 16.0371, "Theta" -> -7.65352, "Vega" -> 26.1189}}

      The two Gamma are different from each other and different from the correct result which is in this case Gamma = 0.0208952.

I reported the bug to the Wolphram Support and after few days I received a first answer. The guy at support was very kind, but told me that the problem was not showing up on his version (Windows and Finance Platform). After a few try the final answer has been the following:
Hi Stefano

I have carried out the same evaluations as you mentioned for FinancialDerivative for BarrierDownOut and BarrierUpOut options under Linux and have been able to replicate your problems. Thank you for bringing this to our attention. It has now been fixed for version 9 of Mathematica which will be released in a couple of months. Also the problems with the inaccuracy of Gamma were not showing up in my version because I was running it on the Finance Platform, which had fixed that bug. All these errors have been resolved in version 9 of Mathematica. Thanks again for sending in your emails about this as they help to improve our product.

So… keep waiting for v9.

– fixed in Mathematica 9 –


European Options on Google Play

Just uploaded to the market European Options:

Easily compute price and greeks of european-style option derivatives. European Options is an handy app to compute price and greeks of Vanilla, Digital and Barrier european-style options (for definitions we refer to the standard book “Hull – Options, futures and other derivatives”). It is planned to add more exotic options. Price and greeks are computed via analytical formulas.

The source code is available at my GitHub repo.

Get it on Google Play