Version 3.0 (R14) Financial Derivatives Toolbox™ Software :: Financial Derivatives Toolbox™ Release Notes (Financial Derivatives Toolbox™)

Version 3.0 (R14) Financial Derivatives Toolbox™ Software Release Notes

Version 4.0 (R14SP3) Financial Derivatives Toolbox™ Software

Compatibility Summary for Financial Derivatives Toolbox™ Software

Version 3.0 (R14) Financial Derivatives Toolbox™ Software

This table summarizes what's new in Version 3.0 (R14):

New Features and Changes	Version Compatibility Considerations	Fixed Bugs and Known Problems	Related Documentation at Web Site
Yes Details below	No	No bug fixes	No

New features and changes introduced in this version are:

Support for Equity Derivatives

Starting with Version 3.0, Financial Derivatives Toolbox™ software supports two types of recombining tree models to represent the evolution of stock prices: the Cox-Ross-Rubinstein (CRR) model and the Equal Probabilities (EQP) model. The CRR and EQP models are examples of discrete time models. A discrete time model divides time into discrete bits, and prices can be computed at these specific times only.

The CRR model is one of the most common methods used to model the evolution of stock processes. The strength of the CRR model lies in its simplicity. It is a good model when dealing with a large number of tree levels. The CRR model yields the correct expected value for each node of the tree and provides a good approximation for the corresponding local volatility. The approximation becomes better as the number of time steps represented in the tree is increased.

The EQP model is another discrete time model. It has the advantage of building a tree with the exact volatility in each tree node, even with small numbers of time steps. It also provides better results than CRR in some given trading environments, e.g., when stock volatility is low and interest rates are high. However, this additional precision causes increased complexity, which is reflected in the number of calculations required to build a tree.

New Functions in Version 3.0

The following set of functions has been added to the toolbox for Version 3.0.

Price and Sensitivity from Cox-Ross-Rubinstein Trees

Function	Purpose
`crrprice`	Instrument prices from a CRR tree.
`crrsens`	Instrument prices and sensitivities by a CRR tree.
`crrtimespec`	Specify time structure for a CRR tree.
`crrtimespec`	Construct a CRR stock tree.

Cox-Ross-Rubinstein Utilities

Function	Purpose
`asianbycrr`	Price Asian option by a CRR tree.
`barrierbycrr`	Price barrier option by a CRR tree.
`compoundbycrr`	Price compound option by a CRR tree.
`lookbackbycrr`	Price lookback option by a CRR tree.
`optstockbycrr`	Price stock option by a CRR tree.

Price and Sensitivity from Equal Probabilities Binomial Trees

Function	Purpose
`eqpprice`	Instrument prices from an EQP binomial tree.
`eqpsens`	Instrument prices and sensitivities from an EQP binomial tree.
`eqptimespec`	Specify time structure for EQP tree.
`eqptree`	Construct EQP stock tree.

Equal Probabilities Tree Utilities

Function	Purpose
`asianbyeqp`	Price Asian option by an EQP tree.
`barrierbyeqp`	Price barrier option by an EQP tree.
`compoundbyeqp`	Price compound option by an EQP tree.
`lookbackbyeqp`	Price lookback option by an EQP tree.
`optstockbyeqp`	Price stock option by an EQP tree.

Instrument Portfolio Handling

Function	Purpose
`instasian`	Construct Asian option instrument.
`instbarrier`	Construct barrier option instrument.
`instcompound`	Construct compound option instrument.
`instlookback`	Construct lookback instrument.
`instoptstock`	Construct stock option.

Enhancement to the treeviewer Function

The treeviewer function, which provides a graphical display of rates and prices, has been modified to accept Cox-Ross-Rubenstein (CRR) and Equal Probabilities (EQP) equity trees as input.

Version 4.0 (R14SP3) Financial Derivatives Toolbox™ Software

Compatibility Summary for Financial Derivatives Toolbox™ Software