Accelerated Convergence Expert™

Monte Carlo simulation is the method of choice for pricing MBS (passthroughs, CMOs and REMICS) and other complex derivative products in fixed income, equity, commodity, and other capital markets. It is easy to implement for European-type path dependent derivatives, including Asians, lookbacks, barriers, rainbows, quantos, IAS, etc. and yet flexible enough to be modified for American-type options. It is also a fundamental tool for risk management.

Despite its versatility, the key drawback of Monte Carlo simulation is that it can be agonizingly slow in convergence. This can become a bottleneck if the user wants more accuracy for a large book of complex instruments. Mark to market quickly and accurately can be a daunting task. In a rapidly changing global market, a trader could lose many deals to competitors because of either the long delay in trying to obtain more accurate pricing, or quick but noncompetitive price quotes due to insufficient accuracy and confidence. The problem becomes especially acute for the more sophisticated users who need to calibrate models, measure sensitivities and convexities, and hedge portfolios of derivatives. To evaluate the exposure of a large portfolios with thousands of instruments, risk managers also feel the time constrain when they need to run simulation of thousands of scenarios.

An alternative to Monte Carlo simulation has been investigated in the last three decades, which replaces pseudo-random sequences by low discrepancy sequences (LDS) for simulation. Because of the significant bias of the currently known LDS, so far Monte Carlo simulation with various variance reduction techniques is still used for production, with mixed results.

Today mathematicians at AAI have finally broken the long standing barrier. Its proprietary LDS and its proprietary methodology has completely resolved the Monte Carlo simulation problem in financial applications. The tests of ACE on a broad range of derivatives in equity, commodity, and fixed income, including CMOs with market data and production models have shown a increasing of convergence speed up to tens of thousands times faster than the Monte Carlo simulation with usual variance reduction techniques, as well as the currently known LDS.

The discovery is the culmination of intense and focused world class research efforts by AAI mathematicians. AAI has made its discovery available to the financial industry, as the core of Accelerated Convergence Expert™ (ACE™). ACE can provide you a decisive competitive edge in today's fast moving market.

ACE for Risk Management

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