A Russian-emigre mathematician who until recently spent his career in this country as a scientist in electronics has developed a computer program that allows investors without any understanding of the underlying mathematics to structure complex equity derivative strategies.
Lev A. Markov, principal of Stellar Financial Systems Inc., Wayland, Mass., plans to target pension funds, investment banks, money managers and even regulators as potential users of his new software.
"The software allows users to build complex derivatives without knowing the underlying complex mathematics, in other words, to do financial engineering without being a financial engineer," Mr. Markov said.
The software, called Mercury Derivative Optimization System, takes any complex pattern of payoffs and constraints and provides the optimal combination of equity-based derivatives, whether exchange-traded or over the counter.
The software goes beyond simple pricing models to create the best optimal structuring for complex equity derivative strategies in terms of risk and return.
Mr. Markov said the key to the new software is its significantly different and faster approach to price complex structured derivatives, although his software itself isn't a pricing model.
Typically, he said, investors or issuers use Monte Carlo simulations to price the entire structured complex derivatives product, which takes a lot of time trying to simulate every conceivable market condition and is subject to wide ranges of estimates.
But he said once his new software composes the optimum structure for a complex derivative, an investor or issuer can use existing price models to price each component of the structured derivative to arrive at a price for the entire complex structure.
The software also shows how the optimal derivatives strategies fit into an investor's overall portfolio in terms of risk, return and cost effectiveness.
In addition, Mr. Markov said, the software makes it easy for issuers or users to explore alternative investment strategies.
He considers his non-traditional background an advantage on Wall Street. The appetite of investment banks and other financial firms, first wetted a decade or so ago for "rocket scientists," continues to attract engineers and other experts in sciences like himself to apply non-traditional methods outside finance and economics to analyze complex issues.
Mr. Markov, who emigrated from Russia 15 years ago, has both a master's degree and doctorate in applied mathematics from Leningrad Polytechnical Institute in St. Petersburg. Most recently before founding Stellar and moving to the field of finance, he was director of Silc Technologies Inc., Burlington, Mass., a company he founded that produced so-called logic synthesis software for electronic computer chips. In 1992, a unit of Racal Electronics PLC, Berkshire, England, bought Silc. Prior to that, he said he was chief scientist at GTE Laboratories Inc. in Waltham, Mass., a unit of GTE Corp. Before GTE Labs, he was a senior member of the technical staff at Wang Laboratories in Lowell, Mass.
The software now analyzes only equity derivative structures, although Mr. Markov plans to introduce software to analyze currency- and interest-rate-based derivatives in the next few months, depending on demand.
He said a leading Wall Street investment banker will be the first purchaser of the software. The price starts at a $20,000 licensing fee per user per year.
