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In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.
Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance.
In finance, a default option, credit default swaption or credit default option is an option to buy protection or sell protection as a credit default swap on a specific reference credit with a specific maturity. The option is usually European, exercisable only at one date in the future at a specific strike price defined as a coupon on the credit default swap.
Monte Carlo methods are used in corporate finance and mathematical finance to value and analyze (complex) instruments, portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining the distribution of their value over the range of resultant outcomes. This is usually done by help of stochastic asset models. The advantage of Monte Carlo methods over other techniques increases as the dimensions of the problem increase.
Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to address them. See Finance § Risk management for an overview.
In finance, a bond option is an option to buy or sell a bond at a certain price on or before the option expiry date. These instruments are typically traded OTC.
Financial modeling is the task of building an abstract representation of a real world financial situation. This is a mathematical model designed to represent the performance of a financial asset or portfolio of a business, project, or any other investment.
In financial mathematics, the Ho-Lee model is a short-rate model widely used in the pricing of bond options, swaptions and other interest rate derivatives, and in modeling future interest rates. It was developed in 1986 by Thomas Ho and Sang Bin Lee.
In finance, a lattice model is a technique applied to the valuation of derivatives, where a discrete time model is required. For equity options, a typical example would be pricing an American option, where a decision as to option exercise is required at "all" times before and including maturity. A continuous model, on the other hand, such as Black–Scholes, would only allow for the valuation of European options, where exercise is on the option's maturity date. For interest rate derivatives lattices are additionally useful in that they address many of the issues encountered with continuous models, such as pull to par. The method is also used for valuing certain exotic options, where because of path dependence in the payoff, Monte Carlo methods for option pricing fail to account for optimal decisions to terminate the derivative by early exercise, though methods now exist for solving this problem.
Robert Alan Jarrow is the Ronald P. and Susan E. Lynch Professor of Investment Management at the Johnson Graduate School of Management, Cornell University. Professor Jarrow is a co-creator of the Heath–Jarrow–Morton framework for pricing interest rate derivatives, a co-creator of the reduced form Jarrow–Turnbull credit risk models employed for pricing credit derivatives, and the creator of the forward price martingale measure. These tools and models are now the standards utilized for pricing and hedging in major investment and commercial banks.
The following outline is provided as an overview of and topical guide to finance:
Single-tranche CDO or bespoke CDO is an extension of full capital structure synthetic CDO deals, which are a form of collateralized debt obligation. These are bespoke transactions where the bank and the investor work closely to achieve a specific target.
A master's degree in quantitative finance concerns the application of mathematical methods to the solution of problems in financial economics. There are several like-titled degrees which may further focus on financial engineering, computational finance, mathematical finance, and/or financial risk management.
In finance, model risk is the risk of loss resulting from using insufficiently accurate models to make decisions, originally and frequently in the context of valuing financial securities. However, model risk is more and more prevalent in activities other than financial securities valuation, such as assigning consumer credit scores, real-time probability prediction of fraudulent credit card transactions, and computing the probability of air flight passenger being a terrorist. Rebonato in 2002 defines model risk as "the risk of occurrence of a significant difference between the mark-to-model value of a complex and/or illiquid instrument, and the price at which the same instrument is revealed to have traded in the market".
Damiano Brigo is a mathematician known for research in mathematical finance, filtering theory, stochastic analysis with differential geometry, probability theory and statistics, authoring more than 130 research publications and three monographs. From 2012 he serves as full professor with a chair in mathematical finance at the Department of Mathematics of Imperial College London, where he headed the Mathematical Finance group in 2012–2019. He is also a well known quantitative finance researcher, manager and advisor in the industry. His research has been cited and published also in mainstream industry publications, including Risk Magazine, where he has been the most cited author in the twenty years 1998–2017. He is often requested as a plenary or invited speaker both at academic and industry international events. Brigo's research has also been used in court as support for legal proceedings.
Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative structuring or pricing, risk management, investment management and other related finance occupations. The occupation is similar to those in industrial mathematics in other industries. The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns.
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets.
Financial correlations measure the relationship between the changes of two or more financial variables over time. For example, the prices of equity stocks and fixed interest bonds often move in opposite directions: when investors sell stocks, they often use the proceeds to buy bonds and vice versa. In this case, stock and bond prices are negatively correlated.
Alan D. White is a University of Toronto finance professor, a specialist in financial engineering, best known for the Hull-White interest rate model and associated numerical procedures, authored with John Hull.
Kamakura Corporation is a global financial software company headquartered in Honolulu, Hawaii. It specializes in software and data for risk management for banking, insurance and investment businesses.
References
- ↑ "IAFE Events Archive, Awards". Archived from the original on 2007-05-27. Retrieved 2007-06-21.
- ↑ Finnegan, Jim. "IAFE Holds Annual Award Dinner". Financial Engineering News. Retrieved 2007-06-21.
- ↑ "University of Toronto, Rotman School of Management, Faculty Profile Page: John C. Hull". Archived from the original on 2016-03-03. Retrieved 2007-06-21.
- ↑ "Rotman Master of Finance Program Brochure" (PDF). Joseph L. Rotman School of Management, University of Toronto. Retrieved 2007-06-21.
- ↑ "The page cannot be found - Rotman School of Management".
- ↑ "404Handler". Rotman.utoronto.ca. Retrieved 2014-02-01.
{{cite web}}: Cite uses generic title (help) - ↑ "John C. Hull - ToF Books".
