Frequently Asked Questions In Quantitative Finance

x FREQUENTLY ASKED QUESTIONS

18. What are the most useful performance
    measures? 87


19. What is a utility function and how is it used? 90


20. What is Brownian Motion and what are its
    uses in finance? 94


21. What is Jensen’s Inequality and what is its
    role in finance? 97


22. What is Itˆo’s lemma? 100


23. Why does risk-neutral valuation work? 103


24. What is Girsanov’s theorem and why is it
    important in finance? 107


25. What are the ‘greeks’? 110


26. Why do quants like closed-form solutions? 116


27. What are the forward and backward
    equations? 119


28. Which numerical method should I use and
    when? 123


29. What is Monte Carlo Simulation? 132


30. What is the finite-difference method? 136


31. What is a jump-diffusion model and how does
    it affect option values? 142


32. What is meant by ‘complete’ and ‘incomplete’
    markets? 146


33. What is volatility? 151


34. What is the volatility smile? 157


35. What is GARCH? 164


36. How do I dynamically hedge? 170


37. What is dispersion trading? 176