Frequently Asked Questions in Quantitative Finance

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.

Getting agreement between finance theory and finance practice isimportant like never before. In the last decade the derivativesbusiness has grown to a staggering size, such that the outstandingnotional of all contracts is now many multiples of the underlyingworld economy. No longer are derivatives for helping people controland manage their financial risks from other business andindustries, no, it seems that the people are toiling away in thefields to keep the derivatives market afloat! (Apologies for themixed metaphor!) If you work in derivatives, risk, developmenttrading, etc. you'd better know what you are doing, there's now abig responsibility on your shoulders.In this second edition of Frequently Asked Questions inQuantitative Finance I continue in my mission to pull quantfinance up from the dumbed-down depths, and to drag it back down toearth from the super-sophisticated stratosphere. Readers of my workand blogs will know that I think both extremes are dangerous. Quantfinance should inhabit the middle ground, the mathematics sweetspot, where the models are robust and understandable, and easy tomend....And that's what this book is about.This book contains important FAQs and answers that cover boththeory and practice. There are sections on how to deriveBlack-Scholes (a dozen different ways!), the popular modelsequations, formulae and probability distributions, critical essaysbrainteasers, and the commonest quant mistakes. The quant mistakessection alone is worth trillions of dollars!I hope you enjoy this book, and that it shows you howinteresting this important subject can be. And I hope you'll joinme and others in this industry on the discussion forum onwilmott.com. See you there!"FAQQF2...including key models, important formulaepopular contracts, essays and opinions, a history of quantitativefinance, sundry lists, the commonest mistakes in quant financebrainteasers, plenty of straight-talking, the Modellers' Manifestoand lots more.

Preface to the Second Edition xPreface to the First Edition xiii1 The Quantitative Finance Timeline 12 FAQs 213 The Financial Modellers' Manifesto 2534 Essays 2595 The Commonest Mistakes in Quantitative Finance: A Dozen Basic Lessons in Commonsense for Quants and Risk Managers and the Traders Who Rely on Them 3136 The Most Popular Probability Distributions and Their Uses in Finance 3837 Twelve Different Ways to Derive Black-Scholes 4018 Models and Equations 4299 The Black-Scholes Formulæ and the Greeks 45310 Common Contracts 45911 Popular Quant Books 48312 The Most Popular Search Words and Phrases on Wilmott.com 49713 Brainteasers 50714 Paul & Dominic's Guide to Getting a Quant Job 557Index 579