THE WILLIAM MARGRABE GROUP, INC., CONSULTING, PRESENTS
THE DERIVATIVES 'ZINETM     November 2001


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Java for Derivatives  Last revised: March 02, 2002

Do you think that "Java Chips" will soon displace doughnut's from the policeman's diet? If so, then you might benefit from a quick introduction to the new computer language, Java, and some of its applications to derivatives.

A Taste of Java

In Richard Karpinski's concise language, "Java is a simple, object-oriented, distributed, interpreted, secure, architecture-neutral, portable, high-performance, multi-threaded, and dynamic language. (Netguide, February 1997, p. 135.) Let me elaborate in my own words, briefly.

  1. Simple. Simplicity is relative and subjective. If you think C++ is simple, then Java will bore you to death.
  2. Object-Oriented. Although Java allows sequential procedures, it shares with C++ an ability to "morph" abstract general objects into useful special cases.
  3. Distributed. Applets can sit anywhere on the Internet. You grab them when you need them.
  4. Interpreted. This is tricky. In order to put Java source code to work, you must compile it at what we'll call level 1. Your Java-enabled web browser has a Java "Virtual Machine" that can interpret this code. In addition, some CPUs can run what we'll call a level 2, "just in time" compiler that compiles level 1 code, as needed to run the application.
  5. Secure. You don't have to worry so much that an applet will give your computer a virus, because Java's design makes it difficult for the applet to write to the usual vulnerable places on your computer. Of course, an applet could still do a great deal of "nonviral" damage.
  6. Portable. You can port an applet to any computer – Mac, PC, Sun, mainframe, etc. – that has an operating system with a Java "Virtual Machine". Then you can run the applet with a "Java-enabled" browser. For example, Daniel Sigrist wrote a Black-Scholes Option Pricing Calculator on his Mac, and I've run it flawlessly from my Netscape and Microsoft Internet Explorer browsers on Compaq and Dell PCs. I'm waiting word that it runs on a Sun.
  7. Multi-Threaded. Java suits multitasking well. You can run several programs simultaneously along separate "threads of execution". (Java Programming for Dummies, p. 195)
  8. Dynamic. The document you produce with HTML just sits there and sleeps. Java can wake it up and start it singing and dancing. If you've studied bipolar disorders in abnormal psychology, Java is to Mania (note the large M) what HTML is to depression (with a small d).

In addition to Mr. Karpinski's points, let me add:

  1. Memory Management. You can't notice from the application, but Java manages memory better than C++.
  2. Use of Internet. Java lets you use the Internet that the government built for billions as your own international communications network at a fraction of what the big boys now pay.
  3. Novelty. We don't know how well it will work, or if superior approaches will evolve.

If you want to know more about Java, I'm particularly fond of two introductory books – Java for Dummies and Java Programming for Dummies (both, Foster City, CA: IDG Books, 1996). Don't let their condescending names mislead you into thinking that they are too elementary. They contain information that you can understand and bring to life right off the page and attached CD-Rom. You can find much additional information at computer store's newstand.

The Future of Java

We at the William Margrabe Group, Inc. think that systems for pricing derivatives and managing their market and credit risk will make increasing use of portable languages, such as Java and J++, and scripts, such as JavaScript, and ActiveX. Moreover, we await Microsoft's countermoves to incorporate Java's advantages directly into its Office Suite. The battle has just begun, the stakes are enormous, and we users will benefit tremendously.

Currently, C++ is the dominant language of choice for financial calculators and systems, because C-coders can build systems quickly (largely due to C's object orientation and large libraries) and running speed (because it is so close to the machine's language). Today, Java falls noticeably behind in running speed, matches C++ in coding speed, and races ahead in usefulness on the World Wide Web and portability from one combination of hardware and software to another. When "Java chips" on PCs, workstations (Sun's main interest), and mainframes replace "virtual Java machines" Java will dominate today's C++. Will the developers of C++ see their market share shrink, or they will make C++ as portable and "networthy" as Java? Purveyors of office suites, such as Office 97 and Corel Office 7 are already offering better connections with the Internet – mainly with HTML. How long before they wake up and smell the Java? Since I wrote these words, originally, I found the the answer: Corel has a beta version of an all Java office suite almost ready. Will people be using it before you read these words?

Derivative Applets

While we sit comfortably in safe zones and await the outcomes of these battles and the war, let's look at some simple Java applications in the worlds of games and derivatives.

  • Axone Services and Developpement S.A. Option pricing calculators.
  • Interactive Quote. Option calculator: from vol to price and price to vol.
  • J.F.O.X. The home page and E-mail address for the Java (TM) Financial Object Xchange (SM) (J.F.O.X.), which promotes Java and distributed object development in the Financial Services industry.
  • Numa Financial Systems. Derivatives calculators .
  • Random Walk Computing, Inc. Black-Scholes and Binomial calculators.
  • [Daniel] Sigrist. A downloadable, Black-Scholes calculator (for European Put and Call prices and Greeks) that he wrote in Java for the William Margrabe Group, Inc.
  • WebRisk. Black-Scholes on-line calculators (Java applets) for (1) option pricing, Greeks, and graph, (2) day counts for computing (swap, etc.) payments, and (3) yield curve.

Finance Applets and JavaScripts

Fun and Games

 
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