When Richard Tanenbaum decided in 1989 to leave Bankers Trust New York Corp. to develop an option pricing model for money managers, the money- center was going through fundamental change.
Turf wars about who received credit for deals, combined with concerns over management decisions about derivatives products, led him to take the leap into software development.
"It was the beginning of the big cultural shift that has helped put the company in the papers so much over the past year," said Mr. Tanenbaum, who spent eight years with Bankers Trust.
"I was able to see the changes over time, and from my perspective, they were not changes for the better," he said.
So Mr. Tanenbaum, who began his career in Bankers Trust's money management area and later headed derivative products research, left to develop the Tanenbaum Option Pricing Software, or TOPS.
Savvysoft, a Princeton, N.J., firm in which Mr. Tanenbaum is a partner, has just released the product - one of the first to allow everyone from dealers to end users to value and measure the risk of their derivatives positions.
And for financial institutions involved in this complex and sometimes hazardous market, possessing this kind of vital information can mean the difference between hedging risks successfully and taking a highly publicized loss.
"You can look at something like what happened at Procter & Gamble, Gibson Greetings, or Orange County (Calif.), where they didn't know what they had," he said.
"This system allows the end users of derivatives, the dealers and risk managers, to evaluate all types of exotic derivatives and measure the risk of these products as well."
The product was designed specifically to value some of the more esoteric options available, such as barrier or knock-out options -where the option disappears once a specified event occurs - and Asian options, which are based on the average relative exchange rate between two currencies over a period of time.
The system allows its owner to assess even exotic options that may themselves be imbedded in another security. In doing so, it provides an overview of a variety of different scenarios, ranging from the shape of the yield curve to coupon rates and volatility of interest rates on similar securities.
In total, Mr. Tanenbaum said the product is capable of generating values on about 30 different basic structures. Or as he prefers to put it, "We value the atom so the user can put together the molecule."
Robert Maxant, a partner in the financial instruments and strategies group at Deloitte & Touche in New York, said his consulting group has used the system to value complex options and other highly structured products both for audit purposes and in consulting work. He said the system has worked well for them.
"Like any tool, it's certainly not a turnkey solution," he said. "You still have to understand the instrument before you can use this software."
Some newer entrants to the derivatives business, such as Keycorp affiliate Society National Bank in Cleveland, have used the system to help themselves quickly get up to speed in this complicated financial arena.
"There are certainly some secondary dealers that can't afford to hire the PhDs to develop their own models internally," Mr. Tanenbaum said. "This is a very quick and cheap way of getting into the game."
Like most entrepreneurs, though, he had to tweak his ideas a couple of times before he hit on the marketing and sales strategy that is serving the company best.
"I discovered it was not hard to get people to part with their money one time, but it was a lot harder to get them to part with their money every month or every quarter. People just prefer to own things outright," he said.