5. (Which Category Does an Application Belong to?)

In this book we discuss a number of applications in computational finance. In this exercise we wish to gain deep insights into understanding problems even before we write a single line of code. Consider the following applications:

 A1: Using the binomial method to price one-factor options.

 A2: Creating an interpolation library.

 A3: Affine pricing models for interest-rate derivatives.

 A4: Optimisation algorithms.

 A5: Parameter estimation algorithms.

 A6: One-factor and two-factor Monte Carlo option pricers.

 A7: Computing the mean error of a finite difference approximation of an SDE (see Kloeden, Platen and Schurz, 1997, p. 118).

 A8: Option pricing using PDE models.

 A9: Postprocessing routines to test the accuracy of a numerical scheme by comparison with a method that produces reference and exact values.

 A10: Creating data and modules to be used by other systems.

 A11: Configuring a complete application.

Answer the following questions:

a) Determine the category (or categories) that these applications are instances of. In general, the most important categories are MAN, RAT and MIS.

b) Create a basic system context diagram for these applications by identifying the systems and their responsibilities (use Figure 9.4 as reference model).

c) Identify the similarities and differences between the system context diagrams in the case of PDE, binomial and Monte Carlo option pricers.

d) Can you identify reusable artefacts such as code, libraries, data types and containers that can be used in multiple applications, for example the applications in part c)?