A new model being developed by an Australian National University mathematician could boost profits while limiting exposure in the trade of options, among the most lucrative but also the riskiest financial securities.

Postgraduate student Priya Dev is developing a model for pricing options - deals giving the investor the right to buy or sell a stock, bond or other underlying security at a set price within a set time.

Trade in these derivatives can turn big profits but it can also exact heavy losses. Buyers often use options to hedge positions in the underlying securities in case prices plummet. And the option sellers, or writers, must also hedge their positions.

"Derivatives traders often hold a basket of securities to cover their exposure to risk," says Dev. "Whatever the goal - to cover risk or optimise their portfolios - they rely on mathematical models."

Mathematicians and economists have for decades been working on options pricing models, the most famous being the Black-Scholes model, the brainchild of the American economists Fischer Black and Myron Scholes. However, the models have had mixed results.

Dev is using her knowledge of probability theory to develop an options pricing model formulated by ANU mathematician, the late Chris Heyde, her former supervisor.

She says there will never be a "perfect model". "But if our model is efficient, it will be highly valuable to industry."

Dev is one of the many mathematicians who have worked in the highly charged environment of trading rooms, where they are known as "the rocket scientists". Before returning to the ANU to further her studies in mathematics and statistics, she worked for an energy company that traded in energy derivatives.

"Traders need mathematicians to help them work out optimal ways to trade with limited exposure to risk," she says. "Without the tools of a mathematician, a financial institution can unknowingly expose itself to the grave risk of ruin."

"I decided to come back to the ANU. I wanted to do maths, and the ANU has top class probability theorists."

She sees mathematics as a game as well as a path to the truth. "Within the game, you find a truth. It's all about logical reasoning and constructing proofs by applying that reasoning."