Steve Bell DPhil - Quantitative Finance For Dummies

Quantitative Finance For Dummies

Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester,www.wiley.com

2016 by John Wiley & Sons, Ltd., Chichester, West Sussex

Media and software compilation copyright 2016 by John Wiley & Sons, Ltd. All rights reserved.

Registered Office

John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book, please see our website at www.wiley.com .

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the permission of this publisher.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY : WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IT IS SOLD ON THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING PROFESSIONAL SERVICES AND NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. IF PROFESSIONAL ADVICE OR OTHER EXPERT ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT.

For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport .

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com . For more information about Wiley products, visit www.wiley.com .

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2016939606

ISBN: 978-1-118-76946-1

ISBN 978-1-118-76946-1 (pbk); ISBN 978-1-118-76942-3 (ebk); ISBN 978-1-118-76943-0 (ebk)

1. Table of Contents

Quantitative finance is about applying mathematics and statistics to finance. For maths lovers thats exciting, but for the rest of us it may sound scary and off-putting. But I guide you step by step, so no need to worry. Quantitative finance helps you to price contracts such as options, manage the risk of investment portfolios and improve trade management.

I show you how banks price derivatives contracts based on the statistics of stock and bond price movements and some simple rules of probability. Similar maths help you understand how to manage the risk of investment portfolios. Quantitative tools help you understand and manage these systems, and this book introduces you to many of the most important ones.

This book should be helpful for professionals working in the financial sector especially in banking. It wont take you to the level of doing the maths for pricing the latest derivative contract, but it can help you to contribute, perhaps as a programmer, data scientist or accountant. It should also be helpful for those taking a masters course in finance or financial analysis and who want help in a module on quantitative finance. Enough detail is included to really help in understanding key topics such as the Black-Scholes equation. The book also has breadth so you can discover a range of key financial instruments and how theyre used as well as techniques used by traders and hedge fund managers. Whether you plan a career as a corporate treasurer, risk analyst, investment manager or master of the universe at an investment bank, this book should give you a boost.

This book isnt a traditional textbook and isnt a traditional book on quantitative finance. It is significantly different from either in the following ways:

• The book is designed as a reference so that you can dive into the section of most importance to you. I include lots of cross references to clearly point you to other sections and chapters that may have additional or complementary information.
• The maths is at the minimum level required to explain the subjects. I made no attempt to impress with fancy mathematical jargon, lengthy proofs or references to obscure theorems.
• Its about applying mathematics and probability to finance. That includes derivatives but also includes tools to help you with trading and risk management. Finance is a subject centred on numbers, so maths is a natural way to help you get to grips with it.
• It includes real-world examples so you can relate quantitative finance to your day-to-day job.

If you havent done any algebra for a while, remember that mathematicians like to write products without multiplication signs. So P(H)P(H) is shorthand for the probability of heads multiplied by the probability of heads. For maths with actual numbers, I use the symbol * to indicate multiplication. This avoids any confusion with the variable x, which is a favourite of mathematicians to signify an unknown quantity.

Within this book, web addresses may break across two lines of text. If youre reading this book in print and want to visit one of these web pages, simply key in the web address exactly as noted in the text, pretending the line break doesnt exist. If youre reading this as an e-book, youve got it easy just click the web address to be taken directly to the website.

I dont assume that you have any previous experience of quantitative finance. I dont even assume that youre familiar with the world of finance except for the apocalyptic stories you read in the press about crises, greed, bonuses and debt. However, Im assuming that youre reading this book because youre working in a financial institution such as a bank or a hedge fund and want to know what those clever quants (quantitative finance professionals) are doing. Alternatively, you may be studying for a Masters in Finance and looking for help with those quantitative modules.

I assume that youre familiar with mathematics such as logarithms, exponentials and basic algebra. In some parts of the book, I also assume some knowledge of calculus both differentiation and integration. The online Cheat Sheet at www.dummies.com/cheatsheet/quantitativefinance