Derivatives VI --- Models

Finance’s become quantitative. So models are needed. That is also what Quant is called for financial engineers. Quants analyze and develop new products and trading ideas. Quants drifted to trading rooms to model financial instruments.

Other than their work nature, i.e., research and analytical skills, quants are quite different to traders. Quants are useful particularly in derivatives markets. But they are still serving traders and rely on traders’ recognition. Emmanuel Derman’s book “My Life as A Quant” described what a quant’s life is. Quants would love to become traders.

Financial models are not as secretive as it sounds. Many universities provide financial engineering courses. For example, buying forwards is the same as buying now and holding the asset until the maturity date. Adjustment has to make to reflect what the borrowing cost is. This is the carry cost model. Another frequently used case is the yield curve. Interpolation and extrapolation have to be used to know where the curve is likely heading. One case almost everyone has to face is options pricing model.