Friday, August 19, 2011

4 distinct sub-domains of financial math

Even though many real world scenarios involve more than a single topic below, it's still practically useful if you understand one of the topics well.

* bond math
* option
* VAR -- correlation, simulation
* credit risk -- essential to commercial banks, consumers, corporate borrowers

Every single topic is important to risk management; Half the topics are important to pre-trade pricing. For example, a lot of bond math (duration, OAS, term structure) is not that critical to pre-trade quote pricing.

All derivatives always involve more math than the underlying instrument, partly because of the expiration built into every derivative instrument. Among derivatives, option math complexity far exceeds swaps, futures, and forwards.

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin