By Alex Kleiner & Michael Kang

Despite the proliferation of high-end, million-dollar derivative software systems that run on high octane platforms, the humble spreadsheet remains the ubiquitous tool of the trade-to be found in corporate treasuries, university finance departments, even the largest broker-dealers.

Dozens of hungry vendors have come in to this market, promising to help users construct, model, value and price complex instruments. Known as "spreadsheet add-ins," these programs include sophisticated modeling tools, graphics enhancements, templates, and other features designed to simplify the care and feeding of complex derivatives. Add-ins come in many shapes, colors, levels of sophistication and price points.

The sheer number and variety of the spreadsheet add-ins on the market, however, also create buyer confusion. The newcomer to these add-ins will very likely end up with a severe case of anxiety about price-performance relationships, ease of use, online support, and other parameters.

The complexities of a purchase can be formidable. And the risk of a bad purchase decision is very real. To prevent this, Derivatives Strategy offers a guided tour of the industry's top seven add-in packages. Following the reviews, we offer a cluster of comparative charts that compare the characteristics of the eight packages side by side.

Much of the research for this story was provided by Alex Kleiner and Michael Kang. Kleiner works as an assistant vice president of global technology at Banker's Trust, and Kang works in technical support at CS First Boston. The two are participants in a course on derivatives systems technology at New York University's Stern School of Business.

The opinions expressed are their own, and are based on more than a hundred hours of research. But the accuracy of the pricing models-perhaps the most important element-can only be decided by active participants in the derivatives market.

The Quick Pick Checklist

When you buy any kind of modeling software, remember to ask these basic questions:

• Does the package already contain an adequate selection of models and instrument types? Be sure to differentiate between models that are already incorporated into the system and those that are vaporware, i.e., that may or may not materialize in a future release.
• Are the models used by the package clearly labeled and easy to understand?
• Can you verify their models with your own in-house system?
• How flexible is the system? Can you mix and match models and instruments?
• Can you custom design your own structures from discrete building blocks?
• Will the vendor let you talk to other clients?
• Do staff people working for the vendor have financial experience? Do they seem to understand the models they have selected-or do you suspect they copied the models out of a textbook?
• Does the system come with online help functions and a hardcover manual?
• Does the system include sample form-based worksheets that contain actual examples of the function?
• Does the vendor offer a "free trial period" during which you can test the system and decide whether or not you want to buy?

Financial Systems Software: Barebones Basics

The London-based subsidiary of Philadelphia software giant FNX, Financial Systems Software (FSS), has a solid base of European clients and a smaller but growing number of American users. The firm offers a wide variety of spreadsheet add-ins, including UNIVEXOT (for exotics), UNIVZERO (zero curves), UNIVYLD (fixed-income instruments), UNIVOPT (options) and UNIVSWAP (swaps).

Compatible with Windows, Windows95 and Windows NT, each add-in incorporates a considerable range of complex instruments. For example, UNIVSWAP includes amortizing swaps, dual currency swaps and compounding swaps.

The software includes just what is needed to handle these instruments, and no more. Online help for this program is nonexistent and the functions appear as raw Excel formulas. This would not be a drawback, except that FSS's paper manuals are thin, spotty and among the least helpful we have seen. To get the most out of this software, users must have an existing base of knowledge, both of Excel and of the financial instruments they are grappling with.

One trader who works in the structured note area of a large Frankfurt-based bank found that the FSS system was an excellent alternative to starting a costly internal development effort. He was initially attracted to add-ins because his three- person department lacked the budget for a large workstation system: "We purchased FSS after about two or three months of review. It was certainly more cost-effective than hiring a programmer!" He has found the add-ins very flexible and an ideal vehicle for many one-off transactions handled at his desk. "Everything we sell is different. These deals cannot be inputted into standard systems. But we can build these custom instruments and price them quickly in FSS," he says, adding, "It does everything we want it to do, and it's a good value."

The Pros

1. Exotics coverage. FSS offers a solid range of products with comprehensive coverage of most derivatives products.

2. Reasonable price. The firm's add-ins sell separately and at a very competitive price. (See chart.)

The Cons

1. Lack of clear documentation, lack of online help functions and a spotty manual.

The Bottom Line

FSS offers a solid, high-value package. For end-users with prior Excel experience and an in-depth knowledge of derivatives, it could be a great purchase.

Glassco Park: Inexpensive and Easy-to-Use

Glassco Park has built a system that offers end-users an inexpensive way to build models of complex instruments without any programming. It's likely that more of this product is out in the world than any of its rivals in this survey. Glassco Park is also the cheapest of the bunch, and appears to be particularly popular with the corporate treasury set.

Though not as powerful as the other packages reviewed here, Glassco Park boasts the most user-friendly features. The company offers users training sessions in financial engineering theory, and feedback from these training sessions has proved to be a strong influence on the product's features and refinements.

The Perfect Hedge is Glassco Park's flagship product. With it users build deals and packages by "pulling down" any of 248 functions from the math library, which the company calls MicroTool. "The power of this analytical engine," says a company spokesperson, "lies in its wide range of functions that allows you to value and measure the risk of most of the world's securities."

The Perfect Hedge includes an extensive online help system-including a glossary, financial primers and detailed explanations of models. It also includes useful reference information on the types of MicroTool functions available, a definition of function components, a list of MicroTool switches and tables and an extensive glossary of terms. The printed manual, however, is less than comprehensive; users inexperienced with Excel may find it difficult to get around.

According to Sean Udall, a senior capital finance analyst for Visa International, "If you do not have extensive experience using Excel, it will take a while to figure out The Perfect Hedge, particularly the custom instrument design." One former Perfect Hedge user adds that she felt relieved when her bank switched to another add-in, saying: "I'm a trader, not a techie. I found The Perfect Hedge tough going because its manual was quite incomplete."

There are two ways of working with this software: 1) using pre built workbooks, with The Perfect Hedge silently performing the calculations, or 2) developing one's own models by pasting the appropriate MicroTool functions into custom spreadsheets and connecting the function arguments to data and controls. Such user-constructed models can be added to the Perfect Hedge menu and made available to other Perfect Hedge users in the company.

"We use The Perfect Hedge to price swaptions and similar instruments," says Visa International's Udall. "Because it is an open system, we can import market data and price instruments in real time, as required. And the product is a fraction of the cost of the other alternatives we considered." Udall also feels that the product's online documentation and Finder feature-allowing quick access and links of different models and instruments-are excellent. Udall warns, however, that The Perfect Hedge does not include a Monte Carlo pricing model, which could make life difficult for someone given the job of pricing a stack of path-dependent options.

Glassco Park expects to ship a next-generation derivatives system complete with extensive new documentation this month. Potential purchasers should stay tuned.

The Pros

1. The price. The Perfect Hedge is the least expensive of all the programs appearing in this issue. (See chart.) For corporate treasurers, pension funds, boutiques and other users who must handle sophisticated securities on a shoestring budget, this program is ideal.

2. The Finder. The Perfect Hedge gets very high marks for its visual Finder that helps locate the desired function and then pastes the function into an active worksheet. The Finder can also open and display a working example for every function in the library. These examples appear on sheets within workbooks. Many of these workbooks contain an extensive discussion of the math upon which the functions are based, and how the functions can be used to solve real-world problems.

3. The online help function. Much of The Perfect Hedge's documentation is online, meaning that you can "learn as you go" as opposed to poring through a dense technical manual.

The Cons

1. Limited instrument coverage. Though The Perfect Hedge's library is more than big enough for most users' purposes, its coverage is not as extensive as that of some of the other packages profiled in this guide.

2. Insufficient paper documentation. Techno-dummies could find The Perfect Hedge's online documentation intimidating. Alas, it is not backed up by a strong text.

The Bottom line

Although it lacks the extensive instrument coverage of other add-ins in our survey, this is an intuitive, usable piece of software that sets a high standard for rivals to match. It gets especially high marks for its online help function, product support, glossary, software design and formula Finder.

Monis: Exotic and Powerful

Monis began as a joint venture between computer specialists and financial academics at the London Business School. Their collective mission was to create a user-friendly program that was nonetheless high powered enough to handle the most complex of derivatives instruments. Currently, Monis offers five Optimum product lines: Optimum Equity Convertibles, Optimum Exotics, Optimum Options Wizard, Optimum Advanced Options and Optimum Fixed Income.

The Optimum Equity Convertibles series consists of three spreadsheet add-ins, including convertibles, warrants and options. Both the convertibles and the warrants programs allow the valuation and modeling of any exercise type. The options program values European or American options and may be used with a spreadsheet to structure cylinders and zero-cost collars.

The Optimum Exotics program offers an impressive range of structures and instrument types. For example, the exotics module supports sixteen types of barrier options including down-and-outs, up-and-outs, down-and-ins, etc. In addition, average rate options can be valued using either Monte Carlo or analytical methods. Finally, for lookbacks and other path-dependent options, the software can use specific date samplings to enhance accuracy.

Optimum Fixed Income, the latest release, is designed to let users rapidly price treasury instruments, such as caps, floors, swaps, FRAs, IRGs, etc. The package also allows users to re-value entire portfolios.

The consensus among users interviewed is that Monis add-ins are user friendly. "The thing I like best about the convertibles package is that it is very easy to use and to adapt to spreadsheets," says a trader at UBS in London.

Some users actually deploy Optimum packages for active trading. One London-based user reports that the modules' ability to incorporate live data feeds is particularly helpful. He also praises the system's line-by-line display of trades within each book.

The Pros

1. Trade book organization. Unlike the other packages we looked at, Monis allows you to view a whole book of securities at a glance. Each deal is laid out across one row, making it very easy to compare one deal to another.

2. User-friendly. Monis provides clear dialog boxes into which users can input their exotic deals. Even the spreadsheet literate will find this interface largely self-explanatory.

3. Sensitivity analysis. Two- and three-dimensional sensitivity graphs are easy to generate for all instruments Optimum supports.

4. Affiliation with the London Business School. The relationship between Monis and LSB is a perceived benefit. Users expect that the cross-fertilization between nerds and quants should mean that instrument and model coverage will remain up to date.

The Cons

1. Paper documentation could be better. Although the online help feature on all the modules is more than adequate, the manuals could use additional discussion, regarding some of the exotic instruments, of exactly how they work as well as the models used to value them.

The Bottom line

Monis delivers a great deal of instrument coverage in an extremely user-friendly package. It is robust enough to perform real-time pricing in the heat of trading and it is also appropriate for derivatives users who may have only the most basic knowledge of Excel.

Savvysoft: Sophisticated and Pricey

Princeton, New Jersey-based Savvysoft offers the Tanenbaum Options Pricing Model (TOPS) in a graphic interface framework that seamlessly integrates up to 29 different models. These models can either be purchased individually, to be mixed and matched as needed, or as a complete set. The models themselves are very sophisticated-and very pricey. (See chart, p.28) For those who require support above and beyond the manual and online help function, an optional annual maintenance contract is available for 15 percent of the initial purchase price.

So what do end-users get for their money? Plenty. Developed by Rich Tanenbaum, the former head of quantitative analysis at Bankers Trust and co-founder of Savvysoft, TOPS is capable of valuing literally thousands of exotic derivatives structures. The software lets you input data ranges (as opposed to single data items), which allows an unlimited number of variations for each parameter of the main derivatives structure.

Users can value structures based on a full yield curve, a full volatility curve and a full forward price curve with any valuation. TOPS's Yield Curve Generator takes market cash, futures and swap rates, and uses them to calculate discount factors for use with any TOPS model. The product also features an Interest Rate Quote Converter that takes a yield curve and computes spot and forward rates as of any date in the future. Integrated into all of the models is a curve Interpolator, which accepts data ranges and interpolates them via straight-line, log or cubic spline. This function is particularly impressive because it lets users focus on any point on a curve and then configure their own interpolation methods.

All TOPS models handle American, European and Hybrid/Bermuda options, as well as options on a cash instrument, a futures contract or a forward contract. The models can also value options on interest rates, foreign exchange, equities and commodities, as well as assets with dividends or earned interest. A full range of sensitivity measures include delta, gamma, theta, vega, foreign rho and implied volatility, in addition to theoretical option values.

Models are provided for valuing the following exotic structures: barriers, look-backs, better and worse of two assets, digitals, quantos, options on options, exchange options, swaptions, Asians/average, installment options, indexed amortizing swaps/ indexed principal swaps, accrual swaps/range notes, commodity swaps, standard strips, digital quantos, standard options, caps and floors, choosers, cash flow valuation, spread options, interest rate swaps and more.

TOPS also comes with an excellent online help function that includes a tutorial for new users and clear, easy-to-understand diagnostic messages for 150 common user errors.

Cathy Willis, a vice president at Sociète Gènèrale, has found TOPS very useful for pricing exotic transactions. "We can analyze exotics in TOPS and then export the data to our main trading system by Renaissance," she says. "The system's layout is intuitive, and the functions are clearly labeled and largely self-explanatory." In her experience, moreover, Savvysoft's support personnel and management have been eager to please.

Joel Finard, a senior manager at Deloitte & Touche, often uses TOPS to model one-off exotic structures when performing a portfolio valuation for Deloitte & Touche clients. "We use TOPS for structures that don't fit into our other, in-house systems," he says. Finard warns, however, that TOPS would not make sense as a portfolio management system for a large derivatives dealer. "But then, that's not what the system is meant to do anyway," he adds. "However, TOPS can be functionally integrated into large dealer systems."

The Pros

1. Dialog boxes. TOPS is the only product in this study that offers dialog boxes for every model-a superb feat that should set an example for its peers. These easy entry boxes contain context-sensitive help for each parameter.

2. Compatibility. TOPS can easily be linked to other OTC software packages, including Renaissance, CATS and Infinity. In addition, every TOPS model is set up to accept real-time data feeds from outside data providers such as Reuters and Telerate.

3. Sophistication. TOPS offers a wide array of models to choose from in addition to the latest exotic instruments. The company is also willing to customize TOPS for users with highly individual needs.

4. Overall design. Very impressive. Most everyone we interviewed noted that TOPS's screen format is very "intuitive" and that it is laid out in such a way that the system's various functions-and means of access-are surprisingly clear.

The Cons

1. Black Box models. TOPS shields a lot of the model selection process from the user, which makes things easier but also results in a "closed" environment where the user must trust the model to make the best decision.

2. Slowness. Due to the program's data files, TOPS requires extra time to complete calculations. This is a system best run on a Pentium PC with memory and disk space to spare.

3. Cost. This is one of the most expensive packages we have reviewed.

The Bottom line

TOPS has lots of fun toys, and the system combines power with user-friendliness. For the quant, trader, analyst or end-user who absolutely must have the ability to value highly exotic derivatives instruments-and is willing to pay up for it-TOPS may be the package to buy. Those who only rarely deal in exotics or are operating on a budget may wish to look elsewhere.

Tech Hackers: Popular and Easy-to-Learn

Founded in 1986 by two MIT graduates, Atul Jain and Michael How, Tech Hackers builds strategic trading and portfolio management systems for securities industry clients, including dealers, banks, brokers and information service providers. This is a rich experience base on which to build a spreadsheet add-in. In this category Tech Hackers has chosen the generic approach. Its @nalyst includes a set of function add-in libraries for Lotus, Excel, Applix and Quattro Pro-all with standard analytical tools for valuing bonds, bills, CDs, options, exotic options and mortgage-backed securities. Some of the package's other libraries contain functions for generalized cash flow analysis and date calculations.

Tech Hacker's product certainly enjoys a formidable marketshare; the @nalyst libraries are used by over 60,000 financial professionals worldwide. Part of the product's appeal lies in the firm's "open" approach to development: they have licensed the C-coded subroutine engine that forms the "backbone" of @nalyst to a number of securities firms. By doing this, Tech Hackers expects to speed the system's future pace of development.

Tech Hackers includes the @nalyst add-ins into packages called Marketbooks. There are five calculator books-Bond, Bond Swap, Options, Mortgage Backed Securities and Foreign Exchange. Each one is chock full of models and a full range of instrument types. Users almost unanimously give the firm high marks for its 500-page softcover reference manual that contains copious practical examples and explicit explanations of each single model.

The @nalyst's functions are extremely powerful and flexible. Many contain optional parameters that are not optional in other packages. For example, business holidays can be either included or ignored for the same function; in most other add-ins the user is required to explicitly indicate holidays to be subtracted.

No other provider in this survey has such good paper documentation. It is so good that it seems to compensate for the fact that there is minimum online help available. "Even if you are not a hard core techie, it is very easy to learn how to use @nalyst," says one Canadian broker. "I wish all the spreadsheet add-ins we use were this easy." Ease of use makes this system particularly appropriate for traders who need to perform quick analyses and cannot afford to invest time learning arcane system conventions and hidden short codes.

The Pros

1. Powerful and precise. @nalyst allows users a great deal of flexibility in terms of specifying models, dates, methodologies, etc. In addition, the system is very comprehensive and-because it is very spare in its design, including only the bare essentials-it performs calculations very quickly, using the recommended hardware.

2. Excellent manual. As users commented, Tech Hackers' manual should serve as a model for others in the field.

3. High marks for customer support. One user reported a minor bug and received a fix via Federal Express within two days.

The Cons

1. Minimal online help. Beginners may lament the lack of sample spreadsheets and function dialog boxes.

The Bottom line

A product with strong appeal to financial engineers and teams of programmers. It is powerful, sophisticated and no-nonsense. It has no awkward dialog boxes, sample applications or online help forms to get in the way. It should have special appeal to those who are still tied to paper-text media. Here's a system that can be learned-a system with an old-fashioned paper manual.

Financial Engineering Associates: State-of-the-Art Modeling

A pioneer in the industry, Financial Engineering Associates (FEA) has supplied precision analytical tools for the valuation and measurement of derivatives products since 1989-when the gold rush began. The company was founded by Walter Haas, a University of California, Berkeley professor, and Dr. Mark B. Garman-half of the team that created the famous Garman-Kohlhagen currency option evaluation model.

The first product offered by FEA was a 1989 ModelSet package of linkable C subroutines for calculating the theoretical values and risk measures of a variety of options. In addition to library software, FEA also provides financial application software, consulting services related to derivatives securities, contract programming, seminars, training and model audits to its clients. The firm's product range includes the following:

• Global: Spreadsheet add-ins for first- and second-generation options, including access to theoretical values and Greeks.
• Interest: For interest rate derivatives it has a full range of one-factor models to support bond options, swaptions, Caribbean options and amortizing swaps.
• Equity: For equity options and equity swaps, including discrete dividends. @Equity supports cross-asset cases that permit the treatment of equity swaps and options to exchange equities. Both absolute and proportional dividend models may be selected.

FEA also sells these two notable stand-alone packages for PCs and workstations:

• DerivaTool: An integrated environment for Monte Carlo simulations for new financial products and evaluations of complex embedded options. It performs structured finance research, benchmarks theoretical models and helps to manage risk.
• Outlook, VaRworks: FEA worked with JP Morgan's RiskMetrics product to create this risk management package.

According to the users we surveyed, FEA packages are comprehensive-including a wide variety of exotic derivatives products-and are relatively easy for experienced spreadsheet users to operate. One user at a midwestern utility dubbed the packages "utilitarian"-meaning they are functional without a whole lot of bells and whistles. The FEA modules offer very little in the way of online help but, on the whole, users contend that FEA offers good value for the money. And indeed, according to our chart, FEA's price structure is extremely competitive.

All FEA packages come with very comprehensive manuals. Says one user who works in the corporate treasury department of a midsized multinational, "I was able to figure out the software just by reading through their book and following the examples." Their paper documentation, however, does not measure up to the standard set by Tech Hackers; it tends to be longer than it needs to be and is sometimes repetitive.

Most users give FEA's customer service and support areas very high marks. Says one: "When I first purchased @Global I was having trouble mastering their discount rate function. I called the company and they cleared up my question right away." He also says that firm is very conscientious about sending system updates.

The Pros

1. Extensive coverage of exotics. Given Garman's impressive background, it is no surprise that the firm has managed to keep abreast of the latest models and instrument types.

2. Comprehensive documentation. The manual adequately details all the systems' functions and includes decent examples.

3. Reasonable price. For what you get in terms of coverage, the system is a very good value.

The Cons

1. Lack of online help. The modules' bare-bones appearance may intimidate those without a firm command of Excel.

2. More-than-comprehensive documentation. The manual can be dense and repetitive in places, once again daunting for novices.

The Bottom line

This firm is clearly a powerhouse in the add-in field. It deserves high marks for its historical contributions and consulting services. And it deserves special praise for being the only company in our study to have crafted a "RiskMetrics ready" module. This package is appropriate for both buy-side and sell-side users who want superior exotic coverage with few frills at a reasonable price.

Montgomery Investment Technology: Functional But Dated

Montgomery Investment Technology seems to be a one-time A student that now earns respectable B grades. Though company founder George Montgomery is one of the fathers of the add-in movement, his modular suite of FinTools add-ins is outclassed by many of the products in this survey. From a presentation standpoint both the models themselves and the reference materials provided with the software appear thorough, sufficient, dry and relatively uninteresting. This product is certainly not as polished as the others. The range of instrument coverage is very deep, and the three-ring documentation binder contains both a glossary and a detailed description of the analytic models used in the software.

One bright spot: The company also provides consulting services, as well as some of the most sophisticated spreadsheet models available, both Monte Carlo and Neural Network.

"The spreadsheet add-ins offered by Montgomery include the most up-to-date models and very efficient mathematical calculations," says Don Fishback, a proprietary trader and investment advisor who is also a long-time user of Montgomery's products. He also praises the package's flexibility and, for the experienced Excel user, its user-friendliness. Fishback, however, does add one caveat: "Users who do not have a basic understanding of options or of Excel are not a good match with this product."

The Pros

1. Depth of coverage. Montgomery offers a substantial range of instruments and functions.

2. Thorough manuals. Although they do not make exciting reading, Montgomery's manuals are very thorough, providing useful glossaries and detailed explanation of the models used in the software.

The Cons

1. Minimal online help. You must have prior knowledge of Excel to use this product.

2. Clunky design. Relative to other products on the market, these add-ins look their age and could be more intuitive in their presentation.

The Bottom line

Good for the sophisticated user on a budget who doesn't feel like being pampered.