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Farhad
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Joined: April 10th, 2002, 5:18 pm

Buy, Outsource, or Build Internally?

June 16th, 2014, 12:34 pm

My department supports advanced mid-office Excel users pricing optionality embedded in contracts. Historically, options are priced using internally built Xll with a library of dozen well-known formulas. Passing parameters into custom Excel formula like ?=Black_Scholes(price, strike,?) or ?=Black_Sholes_Spread(?? typically does the trick.Among 64-bit Windows migration, need for new functions (like call on call), and a need to pass array formulas to option library (need to embed into Excel cash flow array calls like ?=sum(Black_Scholes(A2:A5, ?)?, I am thinking of upgrading this legacy add-in. I do not work for analytical finance company; hence building such library would require organizational effort and maintaining this library from an organization standpoint (source code, development tools, and analytics-savvy personnel) would be a challenge.Since option formulas and Excel have been around forever, I am hoping maybe there is some reasonably priced external vendor I could buy this Xll from? Second best option, if anyone had experience with external vendor building these dozen or functions Black-Sholes flavored functions in Excel Add-in? There is a price threshold, too: if I could simply charge my corporate card, I would buy such Add-in library. But if I have to pay hundreds of thousands in consulting fees, we?d build this internally. Would appreciate references or experiences.
 
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RiskUser
Posts: 301
Joined: July 19th, 2006, 4:30 pm

Buy, Outsource, or Build Internally?

August 27th, 2014, 9:52 am

BuyIs outsource is just another variant of buy?Issues with build - maintenance / bcp (if relevant) / documentation / staff turn over / coding errorsQuoteOriginally posted by: FarhadMy department supports advanced mid-office Excel users pricing optionality embedded in contracts. Historically, options are priced using internally built Xll with a library of dozen well-known formulas. Passing parameters into custom Excel formula like ?=Black_Scholes(price, strike,?) or ?=Black_Sholes_Spread(?? typically does the trick.Among 64-bit Windows migration, need for new functions (like call on call), and a need to pass array formulas to option library (need to embed into Excel cash flow array calls like ?=sum(Black_Scholes(A2:A5, ?)?, I am thinking of upgrading this legacy add-in. I do not work for analytical finance company; hence building such library would require organizational effort and maintaining this library from an organization standpoint (source code, development tools, and analytics-savvy personnel) would be a challenge.Since option formulas and Excel have been around forever, I am hoping maybe there is some reasonably priced external vendor I could buy this Xll from? Second best option, if anyone had experience with external vendor building these dozen or functions Black-Sholes flavored functions in Excel Add-in? There is a price threshold, too: if I could simply charge my corporate card, I would buy such Add-in library. But if I have to pay hundreds of thousands in consulting fees, we?d build this internally. Would appreciate references or experiences.
 
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pimpel
Posts: 363
Joined: May 12th, 2006, 5:26 pm
Location: Warsaw

Buy, Outsource, or Build Internally?

August 29th, 2014, 9:53 pm

Unless you will go for the best one on the market providing such analytics, in others you will also find some bugs. When I tested a few packages, frequently I was identifying bugs such like:1) European option being more expensive then american with the same parameters2) Asian with daily averaging more expensive than European with similar params.Make sure you run hundreds of test cases before deciding on a package.
 
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tagoma
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Joined: February 21st, 2010, 12:58 pm

Buy, Outsource, or Build Internally?

August 30th, 2014, 11:56 am

QuoteOriginally posted by: pimpelUnless you will go for the best one on the market providing such analytics, in others you will also find some bugs. When I tested a few packages, frequently I was identifying bugs such like:1) European option being more expensive then american with the same parameters2) Asian with daily averaging more expensive than European with similar params.Make sure you run hundreds of test cases before deciding on a package.really?
 
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pimpel
Posts: 363
Joined: May 12th, 2006, 5:26 pm
Location: Warsaw

Buy, Outsource, or Build Internally?

August 31st, 2014, 7:55 pm

QuoteOriginally posted by: tagomaQuoteOriginally posted by: pimpelUnless you will go for the best one on the market providing such analytics, in others you will also find some bugs. When I tested a few packages, frequently I was identifying bugs such like:1) European option being more expensive then american with the same parameters2) Asian with daily averaging more expensive than European with similar params.Make sure you run hundreds of test cases before deciding on a package.really?I feel some sarcasm underlying the question, but the client, who first bought the package, then asked for testing, when received validation report wasn't so happy with the results taking into account his licence expense. Because the package has a huge number of very good functionalities, I will not disclose the name, as one should not judge the package based on some minor issues, however one should bear in mind thorough validation before using such black box, as it may appear, that this minor issue from the vendor perspective unfortunately is related to core issues of the package buyer.
 
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DominicConnor
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Joined: July 14th, 2002, 3:00 am

Buy, Outsource, or Build Internally?

September 7th, 2014, 2:19 pm

There is a proverb:Man who has a watch knows the timeMan with two watches is never quite sureOne factor to include in your decision making is getting the numbers they expect, which is not quite the same as saying they are correct.Some will have clear bugs of the form pimpel shows but that is the good case where the result is clearly wrong and may be proven wrong.That is not always the case and sometimes it is arguable whether the result you get from existing code is "right", or the one in the purchased libary and it is not unknown for them both to be wrong.That means you need a process of checking with stakeholders as to what sort of result they are expecting. A clear risk is that you switch to the new libraries and some P&L or risk report suddenly changes. These days, the set of unhappy people may well include traders, mid office, risk, compliance and regulators.That's not horribly hard to do, but is a cost and time impact and your personal risk in terms of being blamed for things needs to be managed.
 
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DavidJN
Posts: 1728
Joined: July 14th, 2002, 3:00 am

Buy, Outsource, or Build Internally?

September 11th, 2014, 3:27 pm

Speaking about proverbs, there is another one:A broken watch is perfectly accurate twice a day.Not sure how this fits into the discussion, but I do view pimpel's cautionary advice as spot on. I haven't thought much about what Dominic offered but I have some more related advice. Sometimes what the customer expects is actually wrong because they have become accustomed to errors in legacy systems. I have found this to be the case more often with legacy internally-developed software but it can and has also occured with vendor software,A useful thing to check with option software is how it behaves on the expiry day. Can it handle time in units of less than one day? Can you live with it if it doesn't? I couldn't.
 
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Cuchulainn
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Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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Buy, Outsource, or Build Internally?

September 11th, 2014, 6:35 pm

QuoteA broken watch is perfectly accurate twice a day.At least that's deterministic You know where you stand. Worse when it stop at random times for no apparent reasons. Twiddle the knob a bit and off it goes again
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