Frequently Asked Questions in Quantitative Finance

Description

Getting agreement between finance theory and finance practice is important like never before. In the last decade the derivatives business has grown to a staggering size, such that the outstanding notional of all contracts is now many multiples of the underlying world economy. No longer are derivatives for helping people control and manage their financial risks from other business and industries, no, it seems that the people are toiling away in the fields to keep the derivatives market afloat! (Apologies for the mixed metaphor!) If you work in derivatives, risk, development, trading, etc. you'd better know what you are doing, there's now a big responsibility on your shoulders. In this second edition of Frequently Asked Questions in Quantitative Finance I continue in my mission to pull quant finance up from the dumbed-down depths, and to drag it back down to earth from the super-sophisticated stratosphere. Readers of my work and blogs will know that I think both extremes are dangerous. Quant finance should inhabit the middle ground, the mathematics sweet spot, where the models are robust and understandable, and easy to mend. …And that's what this book is about. This book contains important FAQs and answers that cover both theory and practice. There are sections on how to derive Black-Scholes (a dozen different ways!), the popular models, equations, formulae and probability distributions, critical essays, brainteasers, and the commonest quant mistakes. The quant mistakes section alone is worth trillions of dollars! I hope you enjoy this book, and that it shows you how interesting this important subject can be. And I hope you'll join me and others in this industry on the discussion forum on wilmott.com. See you there!” FAQQF2 ...including key models, important formulae, popular contracts, essays and opinions, a history of quantitative finance, sundry lists, the commonest mistakes in quant finance, brainteasers, plenty of straight-talking, the Modellers' Manifesto and lots more. Review: FAQ - I believe that this book accomplishes its intention: help students and users to get a quick entry into the subjects of use in finance. One first impression that jumped out was the author's (PW) delightful sense of humor. ("Magicians and mathematicians!") PW has taught and practiced this stuff, and it shows. A big part is mathematical finance, and a big part of this is based on certain stochastic differential equations, the Black-Scholes equation for the computation of the value of options. It uses the geometric Brownian motion which is also explained from a practical viewpoint. The book takes both a narrow and a wide view. Illustration: (i) It offers both short answers and long ones; the latter include mathematical formulae. (ii) For the particular tasks at hand, the author offers an overview of the tools needed, mathematical tools figuring prominently. (iii) List of keywords, with enlightening discussion and answers. Guides to the literature, etc. (vi) There is a list of options and derivatives that are used: Accrual, American, European, Asian, Asset swap, Balloon option, Barrier option, Basket option, Bermuda option, Call and put options, Cap, Cliquet option, and more. The book concludes with a list of tips for folks interviewing in banks and in the financial industry: typical questions! What to say, and what not! Review by Palle Jorgensen, July 2011. Review: Great quant book - This is a great book! It has wide collection of FAQ and much more other materials. I also like author's writing style.