New South African finance formula could be used in every market around the world

Two South African academics are making waves internationally for pioneering a new numerical method, that could help ensure greater efficiency and accuracy when pricing financial instruments in markets worldwide.

UCT Professor, Tom McWalter, and his PhD student Ralph Rudd – who are based at UCT’s African Institute of Financial Markets and Risk Management (AIFMRM) – will be presenting their new numerical method at the Global Derivatives Trading & Risk Management Conference, one of the world’s leading finance conferences, later this week.

“It’s one of the leading conferences on quantitative finance in the world, and more than 500 practitioners and academics in the field will be there. This is the first time that a South African has been invited to speak at the event,” said Professor David Taylor, Director of AIFMRM.

What is it?

Quantitative finance is a field of applied mathematics pertaining to financial markets. Mathematical equations are used on a daily basis by bankers, traders, analysts, and other professionals when trading and managing the risk of sophisticated financial products, such as derivative contracts.

A derivative is a security with a value that is dependent upon or derived from one or more underlying assets, for example, stocks, bonds, interest rates, or commodities. They serve two main purposes: speculation on, or hedging of, investments. Financial mathematicians are often tasked with pricing such products.

“What we have been doing is to look at new numerical methods for computing solutions to complex equations, which, in this case, describe derivative contracts,” McWalter said.

“It is a very general approach and there may be wider applications for it in physics, engineering or biology. One could even use it to solve the equations that govern the behaviour of a nuclear reactor.”

The method they have developed is an improvement on previous methods and is currently under review for publication.

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