Quantitative Finance For Dummies

Steve Bell

• Publisher: For Dummies
• Year: 2016
• ISBN:
  9781118769430
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

An accessible introduction to quantitative finance by the numbers--for students, professionals, and personal investors

The world of quantitative finance is complex, and sometimes even high-level financial experts have difficulty grasping it. Quantitative Finance For Dummies offers plain-English guidance on making sense of applying mathematics to investing decisions. With this complete guide, you'll gain a solid understanding of futures, options and risk, and become familiar with the most popular equations, methods, formulas, and models (such as the Black-Scholes model) that are applied in quantitative finance.

Also known as mathematical finance, quantitative finance is about applying mathematics and probability to financial markets, and involves using mathematical models to help make investing decisions. It's a highly technical discipline--but almost all investment companies and hedge funds use quantitative methods.

The book breaks down the subject of quantitative finance into easily digestible parts, making it approachable for personal investors, finance students, and professionals working in the financial sector--especially in banking or hedge funds who are interested in what their quant (quantitative finance professional) colleagues are up to. This user-friendly guide will help you even if you have no previous experience of quantitative finance or even of the world of finance itself.

With the help of Quantitative Finance For Dummies, you'll learn the mathematical skills necessary for success with quantitative finance and tips for enhancing your career in quantitative finance.

Get your own copy of this handy reference guide and discover:

• An easy-to-follow introduction to the complex world of quantitative finance
• The core models, formulas, and methods used in quantitative finance
• Exercises to help augment your understanding of QF
• How QF methods are used to define the current market value of a derivative security
• Real-world examples that relate quantitative finance to your day-to-day job
• Mathematics necessary for success in investment and quantitative finance
• Portfolio and risk management applications
• Basic derivatives pricing

Whether you're an aspiring quant, a top-tier personal investor, or a student, Quantitative Finance For Dummies is your go-to guide for coming to grips with QF/risk management.

Part 1

Getting Started with Quantitative Finance

IN THIS PART …

Realise that the chart of a stock price can look jumpy and rather random because market prices are indeed very close to being random.

Get to grips with the mathematics of random numbers and brush up on probability and statistics.

Enter the strange and fascinating world of random walks. Find out how you can use them as models for the price movement of financial assets such as stocks.

Use calculus to analyse random walks so that you can get going on the classic maths for option pricing.

Chapter 1

Quantitative Finance Unveiled

IN THIS CHAPTER

Using probability and statistics in finance

Finding alternatives for cash

Looking at efficient (and not-so-efficient) markets

Tackling options, futures and derivatives

Managing risk

Doing the maths (and the machines that can help)

Quantitative finance is the application of probability and statistics to finance. You can use it to work out the price of financial contracts. You can use it to manage the risk of trading and investing in these contracts. It helps you develop the skill to protect yourself against the turbulence of financial markets. Quantitative finance is important for all these reasons.

If you’ve ever looked at charts of exchange rates, stock prices or interest rates, you know that they can look a bit like the zigzag motion of a spider crossing the page. However, major decisions have to be made based on the information in these charts. If your bank account is in dollars but your business costs are in euros, you want to make sure that, despite fluctuations in the exchange rate, you can still pay your bills. If you’re managing a portfolio of stocks for investors and you want to achieve the best return for them at minimum risk, then you need to learn how to balance risk with reward. Quantitative finance is for banks, businesses and investors who want better control over their finances despite the random movement of the assets they trade or manage. It involves understanding the statistics of asset price movements and working out what the consequences of these fluctuations are.

However, finance, even quantitative finance, isn’t just about maths and statistics. Finance is about the behaviour of the participants and the financial instruments they use. You need to know what they’re up to and the techniques they use. This is heady stuff, but this book guides you through.

Defining Quantitative Finance

My guess is that if you’ve picked up a book with a title like this one, you want to know what you’re going to get for your money. Definitions can be a bit dry and rob a subject of its richness but I’m going to give it a go.

Quantitative finance is the application of mathematics – especially probability theory – to financial markets. It’s used most effectively to focus on the most frequently traded contracts. What this definition means is that quantitative finance is much more about stocks and bonds (both heavily traded) than real estate or life insurance policies. The basis of quantitative finance is an empirical observation of prices, exchange rates and interest rates rather than economic theory.

Quantitative finance gets straight to the point by answering key questions such as, ‘How much is a contract worth?’ It gets to the point by using many ideas from probability theory, which are laid out in Chapters 2 and 3. In addition, sometimes quantitative finance uses a lot of mathematics. Maths is really unavoidable because the subject is about answering questions about price and quantity. You need numbers for that. However, if you use too much mathematics, you can lose sight of the context of borrowing and lending money, the motivation of traders and making secure investments. Chapter 13 covers subjects such as attitudes to risk and prospect theory while Chapter 18 looks in more detail at the way markets function and dysfunction.

Just to avoid confusion, quantitative finance isn’t about quantitative easing. Quantitative easing is a process carried out by central banks in which they effectively print money and use it to buy assets such as government bonds or other more risky bonds. It was used following the credit crisis of 2008 to stimulate the economies of countries affected by the crisis.

Summarising the mathematics

I’m not going to pretend that quantitative finance is an easy subject. You may have to brush up on some maths. In fact, exploring quantitative finance inevitably involves some mathematics. Most of what you need is included in Chapter 2 on probability and statistics. In a few parts of the book, I assume that you remember some calculus – both integration and differentiation. If calculus is too much for you, just skip the section or check out Calculus For Dummies by Mark Ryan (Wiley). I’ve tried to keep the algebra to a minimum but in a few places you’ll find lots of it so that you know exactly where some really important results come from. If you don’t need to know this detail, just skip to the final equation.

Time and again in this book, I talk about the Gaussian (normal) distribution. Chapter 2 has a definition and explanation and a picture of the famous bell curve.

Please don’t get alarmed by the maths. I tried to follow the advice of the physicist Albert Einstein that ‘Everything should be made as simple as possible, but not simpler.’

Pricing, mana...

Table of contents

• Cover
• Title Page
• Table of Contents
• Introduction
• Part 1: Getting Started with Quantitative Finance
• Part 2: Tackling Financial Instruments
• Part 3: Investigating and Describing Market Behaviour
• Part 4: Option Pricing
• Part 5: Risk and Portfolio Management
• Part 6: Market Trading and Strategy
• Part 7: The Part of Tens
• Glossary
• About the Author
• Advertisement Page
• Connect with Dummies
• End User License Agreement