344 Frequently Asked Questions In Quantitative Finance
underlying or parameters increases the derivative’s value,
a negative convexity decreases value. In equity derivatives
convexity is known as gamma.
Copula A function used to combine many univariate distri-
butions to make a single multivariate distribution. Often used
to model relationships between many underlying in credit
derivatives. See page 212.
Correlation Covariance between two random variables divided
by both of their standard deviations. It is a number between
(and including) minus one and plus one that measures the
amount of linear relationship between the two variables. Cor-
relation is a parameter in most option-pricing models in which
there are two or more random factors. However, the parame-
ter is often highly unstable.
CQF Certificate in Quantitative Finance, a part-time qualifi-
cation offered by Wilmott and 7city Learning which teaches
the more practical aspects of quantitative finance, including
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crucially, focuses on which models are good and which aren’t.
Default probability The probability of an entity defaulting
or going bankrupt. A concept commonly used in credit risk
modelling where it is assumed that default is a probabilistic
concept, rather than a business decision. Pricing credit instru-
ments then becomes an exercise in modelling probability of
default, and recovery rates. See page 295.
Delta The sensitivity of an option to the underlying asset.
See page 110.
Digital An option with a discontinuous payoff. See page 312.
Dispersion The amount by which asset, typically equity,
returns are independent. A dispersion trade involves a bas-
ket of options on single stocks versus the opposite position in
an option on a basket of stocks (an index).
Duration The sensitivity of a bond to an interest rate or yield.
It can be related to the average life of the bond.