Chapter 9: Popular Search Words 347
Quantlib Definition taken fromwww.quantlib.org: ‘‘QuantLib
is a free/open-source library for modeling, trading, and risk
management in real-life.’’
Quanto Any contract in which cashflows are calculated from
an underlying in one currency and then converted to payment
in another currency. See page 323.
Regression Relating a dependent and one or more independent
variables by a relatively simple function.
Risk The possibility of a monetary loss associated with
investments. See page 36.
Risk neutral Indifferent to risk in the sense that a return in
excess of the risk-free rate is not required by a risk-neutral
investor who takes risks. To price derivatives one can imagine
oneself in a world in which investors are risk neutral. Options
are then priced to be consistent with the market prices of
the underlying and future states of the world. This is because
the risk premium on the stock is already incorporated into
its current price, and the price of risk for the option and its
underlying should be the same. Working in a risk-neutral world
is a shortcut to that result. See page 103.
SABR An interest rate model, by Pat Hagan, Deep Kumar,
Andrew Lesniewski and Diane Woodward, that exploits asymp-
totic analysis to make an otherwise intractable problem
relatively easy to manage. See page 292.
Skew The slope of the graph of implied volatility versus
strike. A negative skew, that is a downward slope going from
left to right, is common in equity options.
Smile The upward curving shape of the graph of implied
volatility versus strike. A downward curving profile would be
afrown.
Sobol’ A Russian mathematician responsible for much of the
important breakthroughs in low-discrepancy sequences, now
commonly used for simulations in finance. See page 225 and
http://www.broda.co.uk.