- Terra Quantum and Cirdan Capital report that they developed a faster algorithmic method for pricing exotic options.
- Exotic options, such as auto-callable multi-asset options, are complex financial instruments that provide investors with alternative strategies for managing risk and maximizing returns.
- Simulation is often used to price exotic options, but is computationally expensive.
PRESS RELEASE — Terra Quantum, a leading quantum technology company, and Cirdan Capital, a London-based investment bank, announced their joint efforts to create real business value using quantum software. They have succeeded in developing a faster algorithmic method for pricing exotic options, such as auto-callable multi-asset options, by leveraging Terra Quantum’s proprietary algorithm.
Exotic options, as mentioned, do not have an analytical solution, and usually require Monte Carlo simulation to determine their price. These simulations are widely used in the Financial Services industry but can be computationally expensive. The Terra Quantum approach, which utilizes specialized quantum software based on Tensor Networks, offers significant advantages in calculating high-dimensional integrals and solving complex partial differential equations involved in option pricing. Importantly, this approach can run on classical computing infrastructures, giving it a competitive advantage over industry-standard Monte Carlo methods. For example, this option pricing achieves a 75% price acceleration compared to the benchmark, leveraging equivalent computing infrastructure for both approaches. As the Terra Quantum approach evolves with large-scale quantum computing hardware, this acceleration is expected to increase even more.
The increased speed provided by the Terra Quantum approach enables traders, risk managers and banks to evaluate structured bookkeeping and product portfolios more efficiently while reducing the time and costs associated with using cloud computing. In addition, the Terra Quantum solution improves computational speed and efficiency in calculating risk parameters, which are commonly referred to as ‘Greek’.
Considering the extraordinary estimated total notional value of exotic options at around $1 trillion and the need for larger trading entities to price multiple types of options on a regular basis, this acceleration is expected to significantly reduce computational costs, potentially saving several million dollars annually.
“Our work with Cirdan Capital provides a glimpse into the power of quantum software for the financial services industry, running on classical hardware today, and on large-scale quantum hardware in the near future,” said Markus Pflitsch, CEO of Terra Quantum. “As quantum hardware matures, leveraging tensor networks for commerce can provide further advantages in terms of speed.”
“Speeding up option pricing can allow trading desks in volatile markets to assess their risk more quickly by assessing their books more frequently during the day, resulting in better identification of daily market imbalances, while helping them reduce their computational costs significantly.” said Antonio de Negri, CEO of Cirdan Capital.
Cirdan Capital and Terra Quantum’s collaboration demonstrates how existing quantum-compatible mathematical models can give financial institutions a market advantage today, while effectively preparing them for future quantum-powered applications.