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A-Team Insight Blogs

Pricing Partners Introduces Hagan Adjuster in the Interest Rates Module

Pricing Partners announced today that it has introduced Hagan Adjuster, a new class of models, for its interest rates module to enhance its valuation capacity. The Hagan Adjuster model thoroughly combines the versatility of dynamic models (Libor Market Model, short rate model like Hull White or Gaussian Quadratic models) and the accuracy of static models (SABR, Black Scholes, Bi-SABR). With Hagan Adjuster, Pricing Partners now remarkably improves its valuation power on interest rates derivatives and on vanilla like products. This model is available on Price-it Excel and soon on Price-it Online.

Pricing and managing derivatives often involves very challenging issues. Models could have complementary advantages, whereas, models suitable for vanilla derivatives cannot always fit complex instruments, and this is particularly true for the underlying interest rates. Nevertheless, changing market trends urge Pricing Partners to provide ever more precise valuations from vanilla instruments to complex ones. Pricing Partners was inspired by the Hagan Adjuster methodology, which combines merits of different models so as to retain the excellent performance of one while improving the capacity of others. And thus, Pricing Partners has gone one step further by making the Hagan Adjuster available to virtually any interest rates payoff thanks to the formalism of the Price-it language.

Hagan’s adjusters are automatic control variate tools that aim at reducing the error of dynamic models on simple derivatives by associating a static model. Thus, both simple and complex derivatives can be accurately priced. When the method was initially published, Hagan entitled his articles “turning good prices into great prices”. Leveraging on the original work of Hagan, Pricing Partners has extended this method to virtually any interest rates payoff. Resulting Pricing are more accurate and offer a systematic way to price interest rates payoff.

Pierre Gauthier, financial engineer at Pricing Partners, comments: “Static and dynamic models have complementary advantages. While the former possess virtually a full knowledge of the current interest rates market, the latter propose approximated dynamics for the yield term structure. By correcting dynamic models on complex underlying factors, Hagan Adjuster provides a simple framework for getting improved prices. Yet, it is important to bear in mind that calibration remains a crucial step in fixed income derivatives pricing, eased in Price-it through the calibration portfolio description.”

Eric Benhamou, CEO at Pricing Partners, declares: “The market is evolving towards more vanilla products and in return is asking for greater accuracy for prices and Greeks. Pricing Partners has a strong tradition to be at the forefront of the research and to offer its clients the most accurate valuations. The Hagan adjuster model turns effectively good prices into great prices. In addition, we innovate in creating a very generic Hagan adjuster methodology that goes even beyond the original and smart idea of Pat Hagan, that was developed and spread in leading investment banks like BNP Paribas, Goldman, and many more. With this new methodology, we are getting even closer to similar models as the leading investment banks.”

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