Frequently Asked Questions In Quantitative Finance

102 Frequently Asked Questions In Quantitative Finance We can understand this (if not entirely legitimately derive it) via Taylo ...

Chapter 2: FAQs 103 Why Does Risk-Neutral Valuation Work? Short Answer Risk-neutral valuation means that you can value options i ...

104 Frequently Asked Questions In Quantitative Finance Example A stock whose value is currently $44.75 is growing on average by ...

Chapter 2: FAQs 105 Delta is constantly changing so you must always be buying or selling stock to maintain a risk-free position. ...

106 Frequently Asked Questions In Quantitative Finance are martingales after discounting, and then define the option price to be ...

Chapter 2: FAQs 107 What is Girsanov’s Theorem, and Why is it Important in Finance? Short Answer Girsanov’s theorem is the forma ...

108 Frequently Asked Questions In Quantitative Finance (Probability) Measure: In layman’s terms, the measure gives the probabili ...

Chapter 2: FAQs 109 wheredX 1 anddX 2 are correlated Brownian motions with correlationρ(S,σ,t). Using Girsanov you can get the g ...

110 Frequently Asked Questions In Quantitative Finance What are the Greeks? Short Answer The ‘greeks’ are the sensitivities of d ...

Chapter 2: FAQs 111 lying, or another option, so that the portfolio delta is zero. By doing this they eliminate market risk. Typ ...

112 Frequently Asked Questions In Quantitative Finance neutralstrategy. This means buying or selling more options, not just the ...

Chapter 2: FAQs 113 parameter and may, for example, have been assumed to be constant. That would be internally inconsistent. As ...

114 Frequently Asked Questions In Quantitative Finance This is useful for seeing how your hedge position will change with time, ...

Chapter 2: FAQs 115 price might be accompanied by an increase in volatility. So one can measure sensitivity as both the underlyi ...

116 Frequently Asked Questions In Quantitative Finance Why Do Quants Like Closed-Form Solutions? Short Answer Because they are f ...

Chapter 2: FAQs 117 the scientist the question of calibration becomes one concerning the existence of arbitrage. If you are a he ...

118 Frequently Asked Questions In Quantitative Finance wrong than other assumptions you are making, such as what future volatili ...

Chapter 2: FAQs 119 What are the Forward and Backward Equations? Short Answer Forward and backward equations usually refer to th ...

120 Frequently Asked Questions In Quantitative Finance This simply means the probability that the random variableylies betweenaa ...

Chapter 2: FAQs 121 Figure 2-6:The probability density function for the lognormal ran- dom walk evolving through time. The backw ...