Introduction

December 29, 2011

There are so so many books on finance and financial mathematics, but not one that gives you a real sense of the terminology, techniques and general knowledge you will need to learn to become successful in fixed-income financial mathematics and trading.

This blog aims to cover topics of direct interest and directly applicable to anyone working on or alongside a fixed-income trading floor.

And for the generally inquisitive mind there are also scatterings from other topics of interest like mathematics, probability theory, computing, languages, economics, education, art & design.

As a starting suggestion, have a look at:

How to calculate option prices in your head

How to understand fixed-income trader jargon

A fast-moving introduction to probability theory

Everything you need to know about swap spreads

A non-technical description of the risk-neutral measure

Ito product and quotient rules in trader speak

Why does the yield curve slope upwards?

Intuition for the forward-FX equation

Please feel free to ask questions or post suggestions via the comments feature at the bottom of each post.

Or if that sounds too scary, just give me a Like with the button.

A walkthrough guide to building yourself a Linux system for coding

November 24, 2012

In any technical role it is important to strike the balance between getting-things-done-quickly and knowing-all-the-details, and this is especially true when it comes to building computer systems.

You can find lots of different Linux distributions to download, and most have a relatively easy system for adding components or software via some kind of package manager.

However, anyone who is fiddling with Linux is probably doing so because they want to learn more about how their computer works. Dragging-and-dropping packages leaves you with a feeling that you haven’t really learned much.

The balance is wrong: we are getting things done but we really wanted to know more.

Of course, the way to know more is to roll up your sleeves and start building software from source code.

But experience has taught me that it is often much more difficult to build/compile than anyone will admit. Typically the problems come because you have some slightly different settings, or there is some minor file missing which everyone assumes is always there, or any one of a collection of ‘little problems’. An experienced user can circumnavigate these issues easily, but a beginner needs a much straighter path to the destination.

In this post I give a walkthrough of how to set up a Linux system (called Puppy Linux) and how to compile a few important packages (SDL, Tcl/Tk and Python) from source that you can use to write interesting pieces of software (eg games, eg applications with windows and buttons etc.).

The important difference with other ‘setup guides’ is that I have put a lot of effort into thinking how we can be sure that your machine is set up identically to mine, so that your walkthrough experience will be exactly the same as mine when I wrote it.

Read the rest of this entry »

Poker: become an ‘informed’ beginner

October 13, 2012

Introductory poker texts generally aim to take you from beginner- to intermediate-level.

Instead, this post aims to spell out a few key messages that will take you from absolute beginner to informed beginner.

It is a quick way to help you appreciate what poker is really about. If you dabble with online playing it should improve your profits too.

Read the rest of this entry »

What do normal subgroups look like?

September 26, 2012

I am in the process of writing a longer post on Galois Theory (see here), and one of the central concepts is that of a normal subgroup.

We all know the definition (and their equivalents) from classes/books, but anyone who likes to ‘see their mathematics’ is left with the question:

… but what do they look like?

In this post I give a few different interpretations of the standard definitions, and go some way to explaining why it is difficult to answer this question in concrete terms.

Spoiling the punchline a bit, it seems to me that problem is actually the other way round: most of the groups that you have an intuition about are normal, so the question is really when is a group not normal? Read the rest of this entry »

You are not a programmer!

September 26, 2012

Want to read an excellent article on how programmers should market themselves to the World of Business?

Click here to view.

The site is built by Patrick McKenzie and has lots (really lots) of other great content.

This video here of a presentation he gave on selling to underserved markets is a personal favourite.

Writing Latex articles with Vim

July 28, 2012

Vim is a text editor, part of the standard suite on a UNIX system.

This is a short post which is a store of some Vim keystrokes that I am progressively discovering, and which are worth sharing for anyone interested.

The main point is that with Vim you learn a new method of moving around a text file, so it is a bit like learning new paradigms for a foreign language if you like.

  1. Don’t move with the arrows, move by words or by searching.
    This means that for scanning through text you might do:

    1. Move forwards and back quickly with W, B and E (move by words, without recognizing punctuation),
    2. Get closer by releasing the shift and using w, b or e in the final stages to home in.

    And to move through larger distances use a quick search:

    1. hit / and type a bit of text to search forward, with n and N to move forward and back along those points,
    2. hit ? and type text to search backward, then use n and N likewise.
  2. Copy text you just typed for a paste later:
    1. Enter the text, then ESC and v to enter VISUAL mode,
    2. use ‘[ (moves to the point of where text was last changed),
    3. yank it with y.

For example, if I need to add something like ‘_{\text{N}}’ to a few ‘\sigma’ in my article I do this:

  1. find a ‘\sigma’ with /\\sigma,
  2. move to the end with e, and then append with a,
  3. type ‘_{\text{N}}’,
  4. ESC out and v into VISUAL mode,
  5. ‘[ and y to copy that text,
  6. now an n will take me to the next instance of ‘\sigma’
  7. and a quick e then p will paste the text where I want it.

Nice! In short, Vim seems to be a good fit for all of the usual text manipulations I do in a Latex article.

Interesting quant blog

June 17, 2012

A quick post to show a link to the blog of Tim Johnson at Heriot-Watt Unviersity.

Lots of writing on derivatives topics, from models to regulations, plus plenty on markets and the crisis.

Worth a look. Click here to visit.

Are our models too complex?

June 17, 2012

Gillian Tett is a well-respected writer for the Financial Times and frequently picks up the topic of complexity in financial markets.

In a recent article (see here) she makes a case that the era of number crunching is over, and that the world of investments is back again firmly in the domain of human relationships and evaluations.

Once upon a time we would measure credit risk with a numbers like survival probability stripped from CDS market prices. Once upon a time we were all happy to value a transaction with models that almost no-one other than the quants understood.

Her view is that these times are gone.

The efficient frontier for financial modelling

June 17, 2012

There is a trade off between the explanatory powers of a model and its complexity: the more a model explains, the more complex it will be.

Would you disagree with that?

Before you answer, let me make a claim:

Mathematics is about revealing patterns that simplify.

The mathematician’s work is actually based on producing simplicity, showing how complex problems can be reduced to component pieces that are simpler.

Think about all the beautiful proofs you’ve known. They are beautiful because they have shown how a simple and harmonious vision can achieve a target better than alternatives that will seem like a hack in comparison. Wikipedia explains it well, here.

Read the rest of this entry »

Understanding the credit crisis

June 17, 2012

In an earlier post (see here) I put a link to an online book that explains all the main concepts of economics in terms of the classic ‘Island Economy’.

If you think about it in theoretical terms, this book is a ‘proof’ that the Island Economy is a sufficiently rich model into which many important elements of economic life can be incorporated.

And like all good models, it is light and understandable.

Very importantly, this means that everyone can get involved in a healthy debate about its assumptions & simplifications, and any policy implications coming from it.

This is something that undermines the quality of our mathematical models of financial or economic processes: they require a very large amount of technical ability before you can even start to understand the terms of the model (for derivatives pricing this means stochastic calculus & arbitrage-free pricing theory; for systematic trading this means advanced statistical analysis; for economics this means advanced calculus and plenty of background reading of fragmented economic theories).

Experience tells me that the more technically ‘perfect’ we make our models, the less able the users become of giving an informed critique of the theory’s assumptions and main features.

The lesson I draw from this is that it is the responsibility of the model builders to work even harder to make our theories and models accessible to an averagely intelligent user.

What does this hard work look like?

Well here are four examples:

  1. Irwin Schiff’s book on economics (see my post here).
  2. Ray Dalio’s paper on why economies rise and fall (see my post here).
  3. A series of articles by Isabella Kaminski from FTAlphaville that present the credit crisis in terms of a felt cartoon story about water gathering and storing (see here).
  4. My work on understanding the Black-Scholes formula for out-of-the-money options (see my post here).

Economics book with cartoons, online for free!

May 23, 2012

I’m on a roll with Economics, getting through books and articles at a tremendous rate.

But this one is a gem.

Written by Irwin Schiff (read about him on Wikipedia do), it’s available here as a free-to-download pdf.

His sons Peter & Andrew have published their own version of the story which reflects historical events more carefully. You have to buy that one; I did, it’s good too.


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