Imagine the following situation: you arrive in a foreign country and you have no idea of the price of the sublime sandwich that all the natives seem to devour wherever you turn your head.
You haven’t eaten for hours (when you were served your meal on the plane, you couldn’t tell the difference between the cellophane and what was underneath…) and you have only one desire: to imitate those around you!
But strangely enough, you don’t see any store, restaurant or grocery store that could solve this awful problem. The only solution: ask the first passer-by who crosses your path to give you his feast for a fee.
You’re lucky, this famous “first passer-by” hasn’t taken a bite out of it yet and seems open to any proposal… And that’s where the problem lies: what proposal should you make? You’ve just arrived, it’s the case to say it, you’re starving and you simply have no idea of the price… You are, in short, totally destitute, and the only thing you can count on is the kindness towards you of this stranger. You had cleverly thought of ” to make the competition play “, but the street is suddenly deserted, except for the wife of your interlocutor, who also seems to be sensitive to your interest in them, both of them…
Of course, this incredible situation is unlikely to arise. Besides, it’s the vacations and it’s only a sandwich, so to hell with greed!
But this is the situation that most risk managers face when it comes to dealing with new cover with their usual partners: they want to cover, they even need it, and they have at most two or even three partners to deal with, but their interests are perfectly aligned… and the opposite of yours! And the stakes here are high!
Yet these managers are in the same situation as our hungry holidaymaker: they have no idea how much they want to deal with. It is therefore simply impossible for them to evaluate the quality of the quotations provided by their partners: they take the cheapest obviously, but is the cheapest offer necessarily a good offer? Nothing is less certain.
Being able to evaluate the quality of quotations thus makes it easier to negotiate better prices but also to consolidate a relationship of equals with one’s partners.
It is very difficult to opt for a “home” solution. This is because, while the models are both freely available and relatively simple to understand and set up, it is the data that is used in the calculations, and not the calculations themselves, that makes the value of a pricer.
The financial markets are now incredibly complex and market data (spot prices, interest rates, volatility bands) have become tremendously expensive and difficult to manage. Indeed, and this is particularly the case for options, data processing is vital: it is no longer possible to enter in your Excel spreadsheet two average interest rates and a volatility to the currency on a maturity approaching the maturity of the product you wish to process in order to get the right price. You will have “a” price… But very often, having this price or having nothing at all is the same thing. For the same result, it is therefore better to do without pricing and save on market data: even if you have to navigate in the dark, it is better to do so at a lower cost!
An alternative exists however: outsourcing…
In the end, the offer on the market is quite limited, and often remains expensive. But new players are now offering their customers efficient and economical pricers, thanks to the acquisition of “wholesale” market data, which are sold indirectly to their customers through each pricer.
Once again, and we can’t stress this enough: market data is the sinews of war. The first thing to do when you want to acquire a pricer is therefore to make sure that the market data is provided by a major player in the financial center (Reuters or Bloomberg, to name only the two main ones).
The price is also a very important criterion, because the savings that you will make when processing your transactions thanks to the newly acquired negotiating power with your pricer will be erased if the cost of the latter is too high.