FRONT ARENA

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

FRONT ARENA – The Company

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 Fixed Income, Repos & Convertibles Interest Rate Derivatives Credit Derivatives FX, Money Markets, FX Options Sales & Distribution Market Making & Proprietary Trading Risk Management Back Office Market & Price Connectivity Hedge Fund Operational Integration Equities Fixed Income, Repos & Convertibles Interest Rate Derivatives Credit Derivatives FX, Money Markets, FX Options

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

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

FRONT ARENA - Vision Web Links : http://www.sungard.com/frontarena http://www.frontarena.com “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

Instrument Coverage and Valuation Models in FRONT ARENA

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 Pricing Quoting Risk Management

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 Low Calculation performance

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 Low Calculation performance

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

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