Components: a valuable investment for financial engineering, why derivative contracts should be active documents

• Authors: Markus Reitz;Ulrich Nögel
• Venue: PPPJ '06 Proceedings of the 4th international symposium on Principles and practice of programming in Java
• Year: 2006

Although component-oriented thinking is quite common to software developers, the paradigm's impact beyond its "native" domain is limited. Financial Engineering, a fast-growing discipline that combines finance, applied mathematics and computer science, often uses inflexible straightforward implementations for the underlying mathematical descriptions and models. Missing the benefits of modern software technology, even small variations in the financial products portfolio usually induce huge reimplementation efforts. Instead of concentrating on the creative aspects of contract development, financial engineers have to struggle with hard-to-modify implementations that decrease overall productivity. By providing concepts and techniques that improve and optimise the design and valuation methodology for derivative contracts, ComDeCo1 transfers the principle of thinking in components to this discipline. Using an explorative composition style, problems caused by nearly unbounded flexibility, decreasing time to market periods and shortening product life cycles are tackled effectively. This paper introduces Active Documents as the theoretical background constituting ComDeCo's conceptual foundation. Reasons for the decision to base ComDeCo's domain-specific framework on them and the resulting advantages are discussed. The current state of ComDeCo's Java-based implementation is presented and potential next steps towards the goal of component-oriented financial engineering are sketched. Finally, possible future directions and novel scenarios of application for ComDeCo's results are illustrated.