This research theme is carried out largely under the auspices of the Financial Options Research Centre.  FORC is an active research centre with a research portfolio focused in the derivatives area,  and in closely related topics.  There are currently four main research areas; 

• Pricing behaviour of assets and option products
• Computational methods for derivatives valuation
• Derivative pricing and hedging in practice
• Portfolio management

As new markets and products develop and derivatives themes become apparent,  so FORC’s ongoing research portfolio adjusts to address emergent questions and issues.

Pricing behaviour of assets and option products

This is a principal research strand.  Novel derivative products may require novel approaches to pricing,  and pricing methods have to be adapted to changing assumptions about the nature of their markets in order to fit more closely to observed prices.  There are four main areas of research currently under way: 

• Credit models and modelling
• Interest rate modelling
• Pricing of storable products
• Investigating volatility dynamics

Computational methods for derivatives valuation

Theoretical models may enable prices to be found in principle,  but physically computing prices may pose considerable further problems.  Monte Carlo methods are slow unless used with effective speed-ups;  PDE methods can work well for models with a single state variable but are much harder to use with multiple state variables;  lattice methods can be easier to use in two or three dimensions than PDE methods but can be slow.  This research strand investigates the computational methods used to obtain prices with the target of finding fast robust and practical pricing tools.  The two main research areas are

• Computational methods with Lévy processes
• Methods for use with exotic options

Empirical derivative prices

The three areas of work here involve the explanation of and consequences of the pattern of option prices observed in the market: 

• Hedging in real life, 
• The information content of option prices, 
• Option market making.

Portfolio Management

This area is related to some of the previous topics,  but is further away from pure options research.  Research here is on risk forecasting and on informational issues.