Option Valuation

Abstract

Although financial computation is often viewed as an exercise in number crunching, the emergence of a new breed of financial “rocket scientists” has expanded the role of computers in finance to include not only numerical manipulations, but also structural manipulations. Investment houses now routinely “slice and dice” securities such as mortgages, government bonds, and even the infamous “junk bonds,” to engineer their cash flows to meet particular risk/return criteria. While spreadsheet programs and traditional programming languages (e.g., FORTRAN and C) continue to play an important role in financial computation, symbolic programming languages, i.e., languages that manipulate both the numbers and the symbols with which financial structures are represented, are taking hold as a way of dealing with the increasing complexity of the financial world. Indeed, some of the more innovative investment houses around the world have been using LISP and Smalltalk since the mid-1980’s to handle a variety of difficult valuation and design problems.