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ROAD MAP OF THE BOOK

To reiterate: The objective of this book is to illustrate the use of quantitative methods and techniques in business, finance, and operations management.

Despite the fact that there are numerous practical examples of how these methods are applied to solve real-world problems, due to time constraints I was unfortunately only able to find the time to discuss a few of such examples in this edition of the book.[1]

The book can be intuitively and broadly partitioned into the following four sections:

■ First Section: Comprising Chapter 2, this section focuses on the basic building block of finance that is associated with the present valuing and future valuing of cash flows. More precisely, Chapter 2 discusses examples of market instruments and the use of these instruments to construct a zero (or discount) curve that can be used for present or future value cash flows.

■ Second Section: Comprising Chapters 3,4, and 5, this section focuses on the valuation of financial derivatives. The section starts by discussing the valuation of simple financial options with and without early exercise in Chapter 3. Given the predominant use of simulations in nearly all types of analysis that are carried out today, and the age of cheap computer hardware, it is important for any practitioner to have a good working knowledge of implementing simulations (despite them not being highly efficient!). Chapter 4 introduces the reader to simulations and walks the reader through various issues encountered when using simulations to solve a problem. It concludes with examples of applications of the simulation method in practice. The final chapter of this section uses the ideas discussed in Chapters 3 and 4 to value complex path-dependent options.

■ Third Section: Comprising Chapters 6 and 7, this section focuses on the estimation of parameters in a model and the risks arising from the mis-estimation of these parameters. Chapter 6 kicks off this section by discussing the estimation of the parameters in trading models. As any trader would appreciate, the bulk of trading that is done using models revolves around the view on the correctness of the model parameters. Chapter 7 discusses ways of managing such risks and, more importantly, quantifying the effectiveness of hedging strategies used to manage the risks before implementing them.

■ Fourth Section: The last section of the book discusses further applications of quantitative methods as they relate to specific industry problems – taking into consideration the nuances of appropriate business specifics. Starting with Chapter 8 on the valuation of variable annuities (an investment-based insurance product), the section concludes with the chapter on real options.

As mentioned earlier, the use of quantitative methods in daily business and financial affairs is becoming increasingly prevalent. Thus, the more one gets comfortable with the use and manipulation of the software (e.g., Microsoft Excel, @RISK, Matlab), one's ability to quantify the risks, value decisions, consumer behavior, revenues, profits, and so on using appropriate techniques and models becomes better and easier.

In writing this book, I cannot reiterate enough that these examples are far from exhaustive. As such, I welcome readers to submit suggestions (or examples) they want to be discussed in future editions of the book.

  • [1] It is my desire to add to these examples in subsequent editions of the book so as to eventually end up with a compendium of examples spanning across industries.
 
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