The principle of pricing in the risk-neutral measure is the foundation of quantitative analysis. I have already written a post which gives an intuitive description of the concept of a risk premium and which discusses some aspects of the risk-neutral approach (see here). In this post I want to look again at risk-neutral pricing. It … Continue reading The easy route to risk-neutral measure pricing

# Category: Finance

# Project finance funding: a simple Excel model

Financing of infrastructure projects is a hot topic at the moment. Penny Lynch has kindly made a simple cashflow Excel model available which shows the key components (equity vs debt) of project finance funding. It's called Simple IRR and DCF Calculations, you'll find it on this page here (along with lots of other helpful spreadsheets).

# What does ‘reduce the balance sheet’ mean?

This post is a LeanPost: it will be developed further depending on feedback from my readers. See my note here on what a LeanPost is. Many companies are these days talking about reducing the balance sheet. Another term used is de-leveraging. In the simplest terms, this just means that a company is reducing the number of … Continue reading What does ‘reduce the balance sheet’ mean?

# Calculating option prices in your head

We all know that option prices are calculated with the Black-Scholes formula, using a volatility, time-to-maturity, strike and forward. Typically you just chuck them all into your computer and let it spit out the number. Trouble with this is how do you get an intuition for prices, especially when you are looking at options trades … Continue reading Calculating option prices in your head

# Fixed-income investment strategies in the age of the New Normal

I came across an interesting presentation given by one of the senior members of PIMCO UK, a chap called Mike Amey. Click here to see it (a PDF). What I especially like about this presentation is that it covers a lot of the main topics that I hear investors discussing at the moment, ranging from … Continue reading Fixed-income investment strategies in the age of the New Normal

# Why does the yield curve slope upwards?

In this post I give a short, but I think rather usefully direct reason for why the yield curve should slope upwards. All it requires is for you to put yourself in the shoes of an investor that has to lock up their money in a bond for a fixed amount of time (and a … Continue reading Why does the yield curve slope upwards?

# What is the risk-neutral measure?

Here is a short list of the most common 'big-concept' questions that I was asked throughout my years as a quant (whether coming from people on the trading floor, in control functions, or from newcomers to the team), in no particular order: What is the risk-neutral measure? What is arbitrage-free pricing? What is a change … Continue reading What is the risk-neutral measure?