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Preface

The purpose of this book is to give the reader a better appreciation and insight into the use of quantitative tools to solve real-world problems when there is a notion of cost (or money) involved. Examples of such problems exist in abundance in practice (e.g., budgeting, management of financial risks, valuation of financial instruments, optimizing the efficiency of operations, extension or termination of a contract, etc.) where one is interested in either minimizing the cost or maximizing the profit/revenue associated with a business decision. Despite the vast number of examples where quantitative methods are applied to solve practical problems in finance, due to time constraints, I can only discuss a limited number of them. As such, it is imperative for the reader to realize that the examples in this book are by no means exhaustive and it is my sincere desire to discuss more examples spanning across different industries in future editions of the book.

To discuss the application of quantitative methods in this book, I have organized the book into four sections. The first section focuses on problems associated with the construction of zero curves, discounting, and future valuing. The second section discusses problems associated with valuing both vanilla and exotic options. The third section focuses on estimation and the calibration of parameters used in pricing/hedging models, and the last section mentions hedging strategies, real options, and variable annuities.

To discuss these topics, instead of getting into details regarding the use of the underlying models, I provide sufficient background necessary to ensure that the reader is able to philosophically understand the problem that needs to be solved. Once this is done, I apply the relevant quantitative methods and underlying models to solve the problems, while keeping details on the quantitative methods used as supplemental materials on the website.

Though I have assumed that readers will have some general understanding of basic finance, derivatives, first-year calculus, and probability, this book is appropriate for any student, academic, and practitioner (which includes everyone from an end user to a market maker and anyone from a back- office function to a front-office function). More precisely, for readers who are quantitatively biased, this book provides the necessary practical examples and information so that nuances associated with the practicality of the problem can be better understood in order to better appreciate the use of quantitative tools to solve such problems in practice. For a reader who is less quantitatively inclined, the book presents tools that the reader can understand and apply to problems in practice without having to understand the proofs and theorems.

 
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