Independent valuation supplier Pricing Partners is offering an optimisation technique in the Price-it Library to enhance calibration power.

Known as Simplex, it allows time dependent Heston Model parameters, a model known for its competitive accuracy and speed. The enhancement also allows calibration procedure and improves its accuracy, according to Pricing Partners.

A calibration procedure is a necessary step when market data (usually implied BS volatility) is used as an input to determine the parameters of a financial model. The optimum research for those parameters enables the model to fit the best the input market data.

However, calibration can be time consuming and depends on the size of the input data, the number of parameters to calibrate and on the calibration algorithm.

Pricing Partners tested several methods before picking the Simplex one. Simplex is a method that optimises calibration procedure and effectiveness. Compared with Levenberg Marquardt, the local and initial value sensitive algorithm, Simplex which is a global algorithm, is a robust and easy method that can be used regardless of initial input value.

A model parameter can be either time dependent or constant. Unlike commonly used calibration methods that provide constant parameters, Simplex produces time dependent parameters.

Virtually any type of underlying derivative can be calibrated precisely claims Pricing Partners.