The book aims to prioritise what needs mastering and presents
the content in the most understandable, concise and pedagogical way
illustrated by real market examples. Given the variety and the
complexity of the materials the book covers, the author sorts
through a vast array of topics in a subjective way, relying upon
more than twenty years of experience as a market practitioner. The
book only requires the reader to be knowledgeable in the basics of
algebra and statistics.
The Mathematical formulae are only fully proven when the proof
brings some useful insight. These formulae are translated from
algebra into plain English to aid understanding as the vast
majority of practitioners involved in the financial markets are not
required to compute or calculate prices or sensitivities themselves
as they have access to data providers. Thus, the intention of this
book is for the practitioner to gain a deeper understanding of
these calculations, both for a safety reason - it is better to
understand what is behind the data we manipulate - and secondly
being able to appreciate the magnitude of the prices we are
confronted with and being able to draft a rough calculation, aside
of the market data.
The author has avoided excessive formalism where possible.
Formalism is securing the outputs of research, but may, in other
circumstances, burden the understanding by non-mathematicians; an
example of this case is in the chapter dedicated to the basis of
stochastic calculus.
The book is divided into two parts:
- First, the deterministic world, starting from the yield curve
building and related calculations (spot rates, forward rates,
discrete versus continuous compounding, etc.), and continuing with
spot instruments valuation (short term rates, bonds, currencies and
stocks) and forward instruments valuation (forward forex, FRAs and
variants, swaps & futures);
- Second, the probabilistic world, starting with the basis of
stochastic calculus and the alternative approach of ARMA to GARCH,
and continuing with derivative pricing: options, second generation
options, volatility, credit derivatives;
- This second part is completed by a chapter dedicated to market
performance & risk measures, and a chapter widening the scope
of quantitative models beyond the Gaussian hypothesis and
evidencing the potential troubles linked to derivative pricing
models.
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