The Mathematics of Financial Models: Solving Real-World Problems with Quantitative Methods

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.

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