Steve Bell - Quantitative Finance For Dummies

Quantitative Finance For Dummies ®

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

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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)

Quantitative finance is about applying mathematics and statistics to finance. For maths lovers that’s 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 won’t 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 they’re 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 isn’t a traditional textbook and isn’t 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.

❯❯ It’s 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 haven’t 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 you’re 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 doesn’t exist. If you’re reading this as an e-book, you’ve got it easy – just click the web address to be taken directly to the website.

I don’t assume that you have any previous experience of quantitative finance. I don’t even assume that you’re familiar with the world of finance except for the apocalyptic stories you read in the press about crises, greed, bonuses and debt. However, I’m assuming that you’re reading this book because you’re 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 you’re 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/quantitativefinanceis a good place to visit if you need to brush up on some of this maths. Some of the sections with the heaviest maths have Technical Stuff icons, which means that you can skip them if you wish.

Where I use algebra, I try to take you through it step by step and introduce all the symbols before the equations so that you know what they’re about. I also include a few example calculations to help you become familiar with them and see how to use the equations in practice.