What are BICs useful for?

In the field of finance, the development of BICs opens an incredible number of opportunities for derivatives pricing, hedging, trading, accounting and risk management in general.

Although our primary focus here is financial derivatives, BICs can also be applied to other fields of engineering.

- For Derivatives pricing

Volume II of BICs 4 Derivatives provides an abundant treatment of the most complex derivatives pricing problems, including the pricing of Passport options, moments based derivatives such as volatility swaps and options, American options, barrier options, mortgage backed securities, and much more (See Vol II book Table of contents).

What sets apart the treatment provided here from previous research is that our algorithms are derived without any model assumption. Hence, a user may simply select the model of their choice as input in a variety of formats and the proposed algorithms would yield the desired derivatives prices.

- For Derivatives calibration

First, BICs help clarify a number of calibration issues. A number of arguments usually made that appear sensible in alternative frameworks no longer do.

Some of the most important calibration problems are reformulated with BICs and solved in extensive generality.

We develop a unique theory of interpolation/extrapolation well suited to derivatives analysis. This represents an important contribution to the field of mathematics in general.

- For Derivatives hedging

The emergence of BICs markets would provide an opportunity for static exact hedging of derivatives. This may reduce derivatives hedging costs by over 10% and would eliminate the liquidity risk premium associated with very complex derivatives contracts

Even in the absence formal BICs markets, we show in our incomplete markets analysis how their implied assumption for pricing purposes would provide an opportunity to hedge a derivatives contract most efficiently with any related set of contracts, not solely the underlying and bonds as is the Case in the Black Scholes Merton analysis.

The methodology proposed would represent a substantial improvement over alternative parametric hedging methods utilizing "Greeks" to achieve the same.

We provide a quantification of hedge effectiveness measurement that should become a standard for compliance with the accounting requirement of FAS 133 or IAS 39.

- For Portfolio Risk Management

In addition to the hedging benefits outlined above, the BICs analysis provides an opportunity for more reliable mark to market of derivatives portfolios.

Further, it provides an opportunity to implement effectively various portfolio optimization strategies under various types of constraints. Vol. II contains a number of unique results in this respect.

- For Derivatives accounting

BICs provide the best tools for derivatives marking to market helping to eliminate the risk insiders' derivatives portfolio value manipulation.

This is a problem of significant importance for companies with derivatives contracts in their balance sheet. It is very difficult for investors to spot such adverse activity by insiders and their occurrence often expose companies to life threatening losses. See the Case of Fannie Mae with a potential restatement that may cause up to $9 Billion loss or Allfirst $691 million losses due to derivatives portfolio mis-valuation.

BICs also provide the best tools for derivatives hedge accounting in compliance with FAS 133,137,138 and subsequent implementation DIGs or IAS 39.