20 Frequently Asked Questions In Quantitative Finance
What are the Different Types of
Mathematics Found in Quantitative
Finance?
Short Answer
The fields of mathematics most used in quantitative
finance are those of probability theory and differen-
tial equations. And, of course, numerical methods are
usually needed for producing numbers.
Example
The classical model for option pricing can be writ-
ten as a partial differential equation. But the same
model also has a probabilistic interpretation in terms
of expectations.
Long Answer
The real-world subject of quantitative finance uses tools
from many branches of mathematics. And financial
modelling can be approached in a variety of different
ways. For some strange reason the advocates of differ-
ent branches of mathematics get quite emotional when
discussing the merits and demerits of their method-
ologies and those of their ‘opponents.’ Is this a terri-
torial thing, what are the pros and cons of martingales
and differential equations, what is all this fuss and will
it end in tears before bedtime?
Here’s a list of the various approaches to modelling
and a selection of useful tools. The distinction between a
‘modelling approach’ and a ‘tool’ will start to become clear.
Modelling approaches:
