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Quantitative Finance Reading List – Theoretical Foundations

Aug 25

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Not everybody wants to become a theoretical physicist. Some consider the academic environment too relaxed, others are not keen on the politics or the necessity to continually hunt for funding early in their career. A job in Quantitative Finance offers an attractive alternative.

Financial engineering has both strong theoretical and applied components, is immensely intellectually stimulating and fast-paced. A significant degree of background knowledge and an exceptional academic record are required even to achieve an interview. If you have recently decided that academia is not where your career path lies and you possess strong technical skills then the reading list outlined below will get you started towards becoming a quant.

This is the first part in a multi-part series on textbooks suitable for becoming a quantitative analyst. The remaining parts will focus on implementation, further mathematical excursions, interview skills and numerical methods. This article will concentrate on the theory of financial engineering for those who have not had an exposure to finance before.

Mathematical Finance

A great place to start learning about the world of derivatives is with the classic text Options, Futures and Other Derivatives by John Hull. It is light on the mathematics, but covers a lot of ground. Specifically, it is a good introduction to derivative markets for those who haven’t had prior exposure to finance.

Once you’re comfortable with the concepts used in the financial markets the next step is to begin learning about arbitrage and the Black-Scholes model in a more mathematical manner. Dan Stefanica’s A Primer for the Mathematics of Financial Engineering will provide all of the calculus (differentiation, integration, taylor expansion etc) needed to tackle the Black-Scholes equation. It will also cover “the Greeks” and basic risk neutral pricing. This is a great book for somebody who doesn’t have the required undergraduate mathematical background needed for later texts.

At this stage you will be ready to tackle the intermediate works such as Mark Joshi’s Concepts and Practice of Mathematical Finance (an excellent book, highly recommended), Paul Wilmott on Quantitative Finance (extremely comprehensive and humourous explanations!), Baxter and Rennie’s Financial Calculus and Salih Neftci’s Introduction to the Mathematics of Financial Derivatives. A good working knowledge of the contents of these books is sufficient theory for any front office desk quant interviews.

If you wish to delve deeper into the mathematical theory underpinning derivatives pricing then Bernt Oksendal’s Stochastic Differential Equations is a great start, as it has plenty of SDE exercises to work through.

A rather heavy going text for desk work, but an essential book for researching financial engineering, is the two volume masterpiece by Steven Shreve – Stochastic Calculus for Finance (Vol I and Vol II). Vol I concentrates on the discrete pricing models while Vol II focuses on continuous models. Be warned that for the Vol II, a strong background in undergraduate mathematics is required – particularly in Real Analysis, Probability Theory and Measure Theory.

Summary and Suggested Reading Chronology
Options, Futures and Other Derivatives – John Hull A Primer for the Mathematics of Financial Engineering – Dan Stefanica The Concepts and Practice of Mathematical Finance – Mark Joshi Financial Calculus: An Introduction to Derivative Pricing – Martin Baxter, Andrew Rennie Stochastic Calculus for Finance II: Continuous-Time Models – Steven Shreve In the next article, texts on implementation will be presented which will give you the knowledge you need to begin creating your own quant models.

By: Michael Halls-Moore

About the Author:
QuantStart is a leading quant finance resource with quant jobs, quant articles, financial engineering tutorials and the latest quant events.

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Finance Explained

Aug 25

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Finance is a general term for moving money from one company to another (or individual) to pay for goods or services, and repaid with interest. It can also be an expression used by specialists on the ground when they see how money is managed. This is also mentioned as a system of money management used by private and commercial sectors. Large companies whose portfolios are even more important will employ a CFO to help manage their assets.

In short, these fund managers should be paid to companies or individuals to use money already available from company accounts or foreign lenders. The way it works is that managers work to keep the cost of their loans, from the low cost with an additional percentage to the client that allows to make a profit. The lives of all people on earth depends on finance movements and , the effects when poor management occurs are seen globally with reductions in production and sales, of course, global markets. The work of the finance manager is to maximize profits while keeping risk to a minimum so that you can understand why there is a high level of stress associated with this work.

A management guru Iacocca the most famous Lee referred to finance managers as Bean-Counters who almost look at the expenditure side in a point of view rather pessimistic. These managers are the opposite of the sales managers who are the people in an investment perspective, while a financial manager not recognizing the fact that investment requires an approach that is to see in the future to search for yield. Many small business owners forget that the business loan that is not organized for private purposes, a distinction becomes blurred regularly. In general, donors are investing in a business situation to know exactly what your money is used.

The goal is to educate businesses to act more responsibly when it comes to managing these issues and following your business. The problem is that many small businesses do not always provide the best source of funding that their bank or seek alternatives, such as family or relationships. CFOs can help improve your business profits by using external sources, which also lowers the risk of them simultaneously. Banks have long been recognized as institutions prefer to lend to those who need it least if you’re already rich and need a loan is often arranged at a preferential interest rate.

By: George Sandler

About the Author:
George Sandler is a freelance writer, you can read more of his jobs about 55 gallon aquarium and 55 gallon fish tank



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Nine Ways To Finance Your Business

Aug 25

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THE CHALLENGE
In the midst of an era of rising taxes and cutbacks it’s no wonder new businesses are struggling to make ends meet. Whilst there are signs of a recovery, the challenge for new businesses is raising the finance to help their business grow.

BUSINESS PAYMENT SUPPORT SERVICE (BPSS)
On 24th March 2010, the Chancellor announced that the BPSS or Time to Pay (TTP) arrangements would be extended although for large arrears of £1m or more an Independent Business Review will be required. The TTP arrangements is an offering of assistance to businesses to pay their tax bills and includes VAT, PAYE, NIC, Corporation Tax and Income tax (for the self employed). Each repayment plan is tailored to meet the circumstances of the business.

WORKING CAPITAL
We should continue to look at internal liquidity to source finance.
1. Delay investment until absolutely necessary
2. Crank up credit control
3. Pay on time but never early
4. Bring revenue forward
Whilst we are now technically out of the recession, debts will continue to go bad with some sectors bearing the brunt more than others. This could be further exacerbated if banks start to take a closer look at their smaller business loan books.

Bringing revenue forward is often the hardest obstacle to overcome but it can be carefully built into the business model by insisting on up front billing or stage payments. Of course some justification may be required but monthly billing is much easier now with cost effective software like Kashflow and upfront payment has become increasingly the norm with the rise of ecommerce. You have to ask do you really want clients who can’t afford to even put a deposit down.

ENTERPRISE FINANCE GUARANTEE SCHEME (EFGS)
The EFGS has been extended until 31 March 2011. The scheme has been created to support up to £1.3bn of new lending by banks, is open to businesses with a turnover of up to £25m, is designed to enable businesses to secure loans of between £1,000 and £1m, repayable over 10 years. The government guarantees 75% of the loan, with the banks covering the remaining 25%. Most businesses in most sectors are eligible for the scheme and the guarantees are available through the main high street lenders.

SECURED LOAN
Under normal circumstances you would expect a bank loan to be the cheapest source of finance. However, banks are demanding overcautious levels of security coupled with high lending rates. This is principally because banks still evaluate most loans as high risk and have a high degree of uncertainty regarding the underlying business cash flows. Interest rates on Small business loans vary dramatically and currently range from 5.5% to 11%AIR for loans of between £1,000 and £25,000 (as at 22/4/2010). Despite the current drawbacks of this type of funding it still remains one of the most accessible where large sums are required and security is available.

OVERDRAFT
Overdrafts are generally expensive so not normally advised as a long term source of finance. Rates can vary from 7.5% to 11% for a facility between £1,000-£25,000 and there are often hidden and repetitive arrangement fees coupled with the risk that the facility may be withdrawn at short notice. However for those that struggle to get other finance you may have little choice. Useful as a short-term solution to unexpected situations but long-term finance opportunities should be revised at the earliest opportunity.

EQUIPMENT FINANCE
Equipment finance is most commonly provided on purchase and can be raised against anything from a truck to a computer mouse. This is cheaper than the overdraft facilities as the lender is provided with some security and the level of risk is simple to assess. However equipment finance remains relatively expensive owing to a high administrative cost and the added security risks of theft, damage and fall in market value.

INVOICE FINANCE
Income factoring can be offered in several forms and factoring need not include all your clients. The highest service level would include credit control and total default risk whereas the simplest form would be an offering of finance against your debtors listing. Fees start at 1.5% above base rate and should generally only be considered for businesses turning over in excess of £100,000 and the costs should be carefully considered against the cost of employing the services of an accountant or credit controller.

LONG-TERM BUSINESS ANGELS
This form of funding is typically suited to a new company with a big idea or a successful small company looking to expand. Business angels typically see tens of investment opportunities a week which means they get to take their pick. They will often seek to obtain a controlling stake to guarantee their input into the decision making process. This will help reduce their risk exposure but in return will provide access to their extensive knowledge base to help maximise returns. Securing funding can be a project in its own right but solid proposals will attract interest.

FRIENDS, FAMILY & ASSOCIATES
The old adage is not to mix business with pleasure but in the good old days people were successful by doing just that. Many clients have started a business from a loan from a friend but the golden rule applies which is to establish what is expected of each other. It is certainly of value to draw up a loan agreement or in the least set out an agreement of terms.

Longer term investors may require an equity stake which will mean surrendering a portion of your profits. The advantage is that they will also take an active interest in your business and potentially help you on your way.

By: Chris Neophytou

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