Pricing and hedging with the potential approach

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The financial services industry contributes strongly to the UK economy, but us genuinely a world-wide industry. Its business is to buy and sell financial instruments of various kinds, usually on behalf of clients. Some of these instruments are quite simple (for example, shares), or are traded publicly in vast amounts across exchanges, so it us not hard to price them. But others are much harder to price accurately; they may be derivative assets, whose prices can depend in complicated ways on how other assets have moved, or they may be assets made to order for a large client who requires a specific payment structure. For such products, finding a price means building and calibrating a mathematical model. Commonly, this is done by building models for individual components of the problem, but it is then hard (or impossible) to combine these components consistently, and consistently with other pricing calculations being done elsewhere. What the proposal aims to do us to calibrate a universal pricing model to a wide range of assets simultaneously to see whether it is possible to include essentially all assets in one framework.