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Innovation 27 May 2021

A BBVA and Zapata Computing study shows the potential of quantum computing for derivative calculations

BBVA and U.S. based startup Zapata Computing have just released the results of a research project into the use of quantum algorithms applied to the Monte Carlo method, which allows predicting the evolution of different variables under random conditions.  Despite its potential, the use of this technology for achieving a more efficient way of calculating prices of derivative products and making valuation adjustments will still require further developments in the available hardware.

Monte Carlo simulations are widely used in the financial industry in everything, from policy making and risk assessment processes to financial product pricing calculations. "We wanted to understand whether quantum computing could help us improve how we approached these calculations, starting with a very specific problem that can be solved using Monte Carlo, such as the calculation of credit valuation adjustments”, said Andrea Cadarso. This project - led by Cadarso, head of Quantitative & Business Solutions, BBVA Mexico - is one of the research initiatives launched by the Research & Patents area of BBVA in 2019 to explore the potential applications of quantum computing in the financial sector.

As of today, establishing the valuation and pricing of certain derivative products remains a daunting task: “Finding the right price of derivatives can prove difficult. On certain occasions, it requires taking into account additional costs in this price, such as the other party’s default probability. Since the financial crisis of 2007 there has been a growing interest and a new regulatory push to take these types of credit risks into consideration in financial agreements,” explained Andrea Cadarso. The joint research project with Zapata emerged as a result of BBVA’s realization of the quantum computing’s potential for this type of complex calculations.

BBVA is fully committed to its work in the quantum area

The key finding of the project is that, as of today, due to the limitations of currently available hardware, this method does not offer significant advantages over the classic Monte Carlo method.  However, according to Andrea Cadarso “improvements start being noticeable from high accuracy levels”. These findings are in line with those from other recent studies on the same issue. However, the BBVA and Zapata article proposes innovative techniques for building the circuits that allow obtaining more optimistic estimates.

Andrea Cadarso does not rule out that, in the future, applying quantum computing techniques to determine the price of derivative products and making valuation adjustments may be a feasible alternative: “as the technology for building and optimizing quantum circuits and error correction techniques evolve, this could change”. As next steps, the team hopes it will be able to expand these approaches to take on other practical problems and applications in finance, comparing results with existing classical algorithms to detect potential advantages.

BBVA and the search for quantum advantage

The BBVA-Zapata Computing joint publication is the result of one in a series of research initiatives that BBVA Research & Patents launched in 2019 to explore potential advantages of applying quantum computing in the financial sector in partnership with leading institutions and companies, such as Spanish National Research Council, startup Multiverse, technology company Fujitsu and consulting firm Accenture.

Escolástico Sánchez, leader of the Research & Patents discipline at BBVA, insisted on BBVA's intention to continue exploring the opportunities offered by this cutting-edge technology: “BBVA is fully committed to its work in the quantum area. The bank has assembled a quantum team and is getting professionals from different areas involved in the development of a set of quantum solutions that meet the bank's needs.”