Dan Galai
Dan Galai

BSM Model, VIX and the Evolution of Risk Management

BSM Model, VIX and the Evolution of Risk Management

27/08/2025

11:30

-

12:00

Academics and practitioners of finance have focused their work on understanding risk and uncertainty. In the process they have neither recognized nor given attention to the existence of certainty. Certainty exists in finance in the form of the core building blocks of finance – individual financial contracts. Such contracts represent the explicit agreements between counterparties to exchange specific payments (which we refer to as “Cash Flows”). In fact, the consequences of financial risk and uncertainty are only quantifiable to the extent that they alter the promised cash flows defined by a financial contract. This paper: 1) develops the logic behind an explicit recognition of certainty in finance; 2) provides the vehicle for capturing and preserving certainty in finance in the form of an algorithmic financial contract standard, such as the ACTUS Financial Contract Standard; 3) explains how to operationalize the algorithmic financial contract standard in the form of a software implementation that preserves certainty in all operational and analytical activities of a financial institution; and 4) explores the potential benefits in analytical insight, quality, and internal operational efficiency that a financial institution can achieve by acknowledging certainty and leveraging a widely adopted algorithmic financial contract standard; 5) increases the accuracy and reliability of interbank transactions and data sharing. Significant additional benefits can ensue by both reducing the cost and burden of regulatory reporting and enhancing the value of the data and analytics the regulators receive from and provide to the banks.

Academics and practitioners of finance have focused their work on understanding risk and uncertainty. In the process they have neither recognized nor given attention to the existence of certainty. Certainty exists in finance in the form of the core building blocks of finance – individual financial contracts. Such contracts represent the explicit agreements between counterparties to exchange specific payments (which we refer to as “Cash Flows”). In fact, the consequences of financial risk and uncertainty are only quantifiable to the extent that they alter the promised cash flows defined by a financial contract. This paper: 1) develops the logic behind an explicit recognition of certainty in finance; 2) provides the vehicle for capturing and preserving certainty in finance in the form of an algorithmic financial contract standard, such as the ACTUS Financial Contract Standard; 3) explains how to operationalize the algorithmic financial contract standard in the form of a software implementation that preserves certainty in all operational and analytical activities of a financial institution; and 4) explores the potential benefits in analytical insight, quality, and internal operational efficiency that a financial institution can achieve by acknowledging certainty and leveraging a widely adopted algorithmic financial contract standard; 5) increases the accuracy and reliability of interbank transactions and data sharing. Significant additional benefits can ensue by both reducing the cost and burden of regulatory reporting and enhancing the value of the data and analytics the regulators receive from and provide to the banks.

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