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Friday, December 23, 2011

QuantRec:Math meets the markets in derivatives trading

Math meets the markets in derivatives trading

" Dozens of books with titles such as "Meltdown," "Busted," and Scott Patterson's "The Quants" have chronicled the financial debacle of 2008. ("Quants" are money managers who use computer-driven, quantitative trading strategies.) Patterson's book describes a Sept. 18 meeting between Federal Reserve chairman Ben Bernanke and several U.S. senators. The credit markets were frozen, Bernanke said. "We could have a depression if we don't act quickly and decisively."

Many investors believe the crisis was precipitated by the highly leveraged, rapid-fire trading of Ph.D. quants working in banks and hedge funds. In "Pricing the Future," George Szpiro recounts the history of quantitative investing. The well-told story reveals how quants came to dominate financial markets, and explains why they may endanger your 401K.
The tale centers on derivatives, contracts that give the purchaser the right to buy or sell something at a given price for a given period. Common derivatives such as stock options are not new. Futures contracts were being traded in Paris 200 years ago. Back then, options trading was wildly speculative because nobody could figure out the relationship between the price of a stock and its option."

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