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Financial Theory
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On this page: Other pages:
- Misc. links and info
- magazines
- Securities IDs
- Some good sites aand people
- Books
- Formula Editors
- Equities (shares)
- Fixed income (bonds, etc.)
- Derivatives (futures, options, etc.)
- Swaps
- Interest rates
- Asset allocation
- Risk management
- Programming for Quants
- PnL Explained (Attribution) Report


- Financial_applications
- Online trading
- Personal finance

misc. links home - top of the page - email - good site - Financial Terms - Forbs Financial Glossary - Yahoo Financial Glossary - Master Glossary Index - Bloomberg Financial Glossary -

EDGAR Database of Corporate Information  - All the current government filings for America's public companies and mutual funds.
National Association of Investors Corporation  - provides information on how to invest better.
The American Association of Individual Investors - purpose is to arm investors with the tools and knowledge to manage finances effectively and profitably.
The Investment FAQ - An excellent introduction to investing compiled from newsgroups.
Wall Street Research Net  - An extensive page of links to Web-based information about companies and their finances. - - Financial Products Markup Language (FpML) - from JPMorgan, derivatives, etc. - ousourced services - over 1,000 pages of information on financial risk management. Topics include: value at risk, derivative instruments, credit risk and financial engineering. - resources for international investors (includes online book store)
Financial Calculators
Investment analysis calculator
How can I save a million dollars?
Investment yield calculator
Present value calculator
Future value calculator
Simple savings goal calculator
How much money could I save?
What interest rate would I need?
How much would I need to save each month?

Trading Systems
Order Entry Systems
Back-office processing
Reporting - Summit Systems  - integrated Trading, Operations, and Enterprise Risk Management software products for banks, financial institutions, and capital markets participants. - 128 of top financial blogs

- - pricing, risk, etc.

Periodicals (journals / magazines) home - top of the page - email

- - Risk ($985/year)
- - Wilmott ($476/year)
- - Journal of Financial Markets (pay $30 per article download).

CFA home - top of the page - email

CFA stands for Chartered Financial Analyst - CFA FAQ - - study guides - - CFP - Certified Financial Planner

Security Identification Systems home - top of the page - email - see list of codes.
CUSIP - Committee on Uniform Security Identification Procedures - 9-digit code, for US and Canada.
CINS - The CUSIP International Numbering System -
EPIC - UK stock market
ISID - International Securities Identification Directory - cross reference
ISIN - International Security Identification Number - for example " IE0000197834 " -
RIC - Reuters Identification Code
SEDOL - Stock Exchange Daily Official List - for example " 0-019-783 " - the only true unique international ID assigned to all foreign stocks by the International Stock Exchange of London.   The code is made up of a 7 digit numeric code. This code is the basis of the ISIN code for UK securities.

Some good sites and people home - top of the page - email

Bill Margrabe: (Westchester County, NY,  (914) 738-3309) - - - - - - - - 
John Hull: (Canada) author of "Options, Futures, and Other Derivatives" - Rotman School of Management (Toronto, Ontario, Canada), Rotman Finance.  Professor of Finance, Director, Bonham Centre for Finance and Maple Financial Group Chair in Derivatives and Risk Management - 

Robert Merton:  Winner of the 1997 Nobel Prize in Economics
Harvard Business School, Harvard University, Cambridge, USA


Myron Scholes:  Winner of the 1997 Nobel Prize in Economics
Stanford University, Stanford, USA - 

Myron Scholes co-developed an option pricing model
with Fischer Black in 1973 . 
(Black worked at MIT, then at Goldman Sachs, died before he could get the Noble Prize)

Search for "Black-Scholes Option Pricing Model" - there are many sites with applets to do the calculations



Paul Wilmott
Paul Wilmott - the Group Leader 
of the Mathematical Finance Group
at Oxford, UK - - consulting & training firm

Books home - top of the page - email


- Dictionary of Finance and Investment Terms (Barron's Financial Guides)
- Options, Futures, and Other Derivatives (with Disk) - John C. Hull
- Solutions Manual: Options, Futures and Other Derivatives 4e - John C. Hull
- Dynamic Asset Pricing Theory, Third Edition. - by Darrell Duffie, J. Darrell Duffie (2001)
- Fixed Income Securities: Tools for Today's Markets, University Edition - Bruce Tuckman
- Fixed Income Mathematics : Analytical & Statistical Techniques - Frank J. Fabozzi
- Series 7 : Stockbroker NASD Exam (with CD-ROM) - Philip Meyers, et al
- Investment Science - David G. Luenberger
- Barron's Finance & Investment Handbook (5th Ed)
- Introduction to the Mathematics of Financial Derivatives - Salih N. Neftci
- The Mathematics of Financial Derivatives : A Student Introduction - Paul Wilmott, et al
- The Handbook of Fixed Income Securities - Frank Fabozzi(Editor)
- Bond Markets: Analysis and Strategies - Frank J. Fabozzi(Preface)
- - INSTRUMENTS OF THE MONEY MARKET ed. by Timothy Cook & Robert Laroche

- Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life - by Nassim Nicholas Taleb (2001)
- Dynamic Hedging : Managing Vanilla and Exotic Options - by Nassim Nicholas Taleb (2003)

- Continuous-Time Finance - Robert C. Merton (1992)
- Exploring General Equilibrium - Fischer Black (1995)
- Taxes and Business Strategy: A Planning Approach - Myron Scholes, Mark A. Wolfson, Merle M. Erickson, edwar Maydew, Terry Shevlin, Edward Maydew (2nd ed., 2001)
- Option Pricing - Mathematical Models and Computations - P. Wilmott, J. Dewynne and S.  Howison (1997)
- Pricing and Hedging of Derivative Securities - Lars Tyge Nielsen (1999)

- Fundamentals of Investments w/student CD + Stock-Trak + Powerweb - by Charles J. Corrado, Bradford Jordan (2002)
- The Financial Times Guide to Global Investing: The Secrets of the World's Leading Investment Gurus - by James Morton (Editor) (1995)
- The Money Market - by Marcia Stigum (1989)
- Essentials of Stochastic Finance: Facts, Models, Theory - by Albert N. Shiriaev, Albert N. Shiryaev, Al'bert Nikolaevich Shiriaev (1999) ???

- Brownian Motion and Stochastic Calculus (Graduate Texts in Mathematics, Vol 113) - by Ioannis Karatzas, Steven E. Shreve (Editor), Steven E. Shreve (1997)
- Methods of Mathematical Finance - by Ioannis Karatzas, Steven E. Shreve (1998)
- Stochastic Differential Equations - by Bernt K. Oksendal (2002)
- An Introduction to Stochastic Modeling - by Howard M. Taylor, Samuel Karlin (1998)
- A First Course in Stochastic Processes - by Samuel, Karlin (1997)
- Introduction to Time Series and Forecasting - by Peter J. Brockwell, Richard A. Davis, P. J. Rockwell (2002)
- Time Series: Theory and Methods (Springer Series in Statistics) - by Peter J. Brockwell, R. A. Davis (1991)

- Option Pricing: Mathematical Models and Computation - by Paul Wilmott, Jeff Dewynne, Sam Howison (2000)
- Financial Calculus : An Introduction to Derivative Pricing - by Martin Baxter, Andrew Rennie (1996)
- Options, Futures and Exotic Derivatives - by Eric Briys, Huu Minh Mai, Mondher Bellalah, François de Varenne (1998)
- Martingale Methods in Financial Modelling - by Marek Musiela, Marek Rutkowski (1997)
- Interest Rate Modelling: Financial Engineering - by Jessica James, Nick Webber (2000)
- Option Pricing - by Robert Jarrow, Andrew Rudd (1983)
- Interest-Rate Option Models : Understanding, Analysing and Using Models for Exotic Interest-Rate Options - by Riccardo Rebonato (1998)
- Volatility and Correlation : In the Pricing of Equity, FX and Interest-Rate Options - by Riccardo Rebonato (2000)
- Market Models: A Guide to Financial Data Analysis - by Carol Alexander (2001)

Monte Carlo in Finance:
- Monte Carlo Methods in Finance - by Peter Jaeckel (2002)
- A Guide to Simulation - by Paul Bratley, Bennett L. Fox, Linus E. E. Schrage (1996)

Finite Difference Methods of PDE Solution:
- Difference Methods for Initial-Value Problems - by Robert D. Richtmyer, K. W. Morton (1994)
- Numerical Solution of Partial Differential Equations: Finite Difference Methods - by Gordon D. Smith (1986)
- Numerical solution of partial differential equations, with exercises and worked solutions - by G. D. Smith ()
- Numerical Methods that Work - by Forman S. Acton (1990)
- The Finite Difference Method in Partial Differential Equations - by Andrew R. Mitchell, David Griffiths (1980)

C++ programming:
- "The Beginner's Guide to C++" by Oleg Yaroshenko, Wrox Press.
- "The C++ Programming Language" by Bjarne Stroustrup; 3rd ed.
- "Effective C++: 50 Specific Ways to Improve Your Programs and Design (Addison-Wesley Professional Computing Series)" by Scott Meyers.
- "More Effective C++: 35 New Ways to Improve Your Programs and Designs (Addison-Wesley Professional Computing Series)" by Scott Meyers.


Business Side:
- Understanding Swaps - by John F. Marshall, Kenneth R. Kapner (1993)

Very good "Mastering ..." series from "Financial Times Prentice Hall":
- Mastering Financial Calculations: A Step-By-Step Guide to the Mathematics of Financial Market Instruments - by Bob Steiner (1997)
- Mastering Foreign Exchange and Currency Options: A Practitioner's Guide to the Mechanics of the Markets - by Francesca Taylor (1997)
- Mastering Exchange Traded Equity Derivatives: A Step-By-Step Guide to the Markets, Applications & Risks - by David Ford (1996)
- Mastering Financial Modelling: A Practitioner's Guide to Applied Corporate Finance - by Alastair L. Day (2001)
- Mastering Government Securities: A Step-By-Step Guide to the Products, Applications and Markets (Financial Times Market Editions Series) - by Stephen Mahony, Stephan Mahony (1996)
- Mastering Commodity Futures and Options: The Secrets of Successful Trading - by George Kleinman (1998)
- Mastering the ISDA Master Agreement: A Practical Guide for Negotiation - by Paul C. Harding (2002)
- Mastering Value at Risk: A Step-By-Step Guide to Understanding and Applying Var (Market Editions) - by Cormac Butler (1998)
- Mastering Repos Markets: A Step-By-Step Guide to the Products, Applications, and Risks - by Bob Steiner (1997)
- Mastering Swaps Markets: A Step-by-Step Guide to the Products, Applications and Risks - by Alan McDougal (1999)
- Mastering Derivatives Markets: A Step-by-Step Guide to the Products, Applications and Risks (2nd Edition) - by Francesca Taylor (2001)

Corporate Finance (issuer side):
- Financial Accounting: An Introduction to Concepts, Methods, and Uses - by Clyde P. Stickney, Roman L. Weil (2002)
- Principles of Corporate Finance: with S&P, Powerweb, Career ED Coupon, & Student CD-Rom (The Complete Package) - by Richard A. Brealey, Stewart C. Myers (2000)
- Solutions Manual to accompany Principles of Corporate Finance - by Richard A. Brealey, Stewart C. Myers (2002)
- Study Guide to Accompany Principles of Corporate Finance - by Richard A. Brealey, Stewart C. Myers, Stewart D. Hodges, Charles A. Dambrosio (1996)
- Financial Accounting: Principles and Issues - by Michael H. Granof, Philip W. Bell (1991)

Some good original papers to look at:
  -- Fischer Black and Myron Scholes:  The Pricing of Options and Corporate Liabilities, Journal of Political Economy 1973
  -- John Cox, Jonathan Ingersoll and Stephen Ross: An Intertemporal General Equilibrium Model of Asset Prices, Econometrica, March 1985
  -- Cox, Ingersoll and Ross: A Theory of Term Structure of Interest Rates, Econometrica, March 1985
  -- William Sharpe:  Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, 1964.

- F.I.A.S.C.O.: The Inside Story of a Wall Street Trader - by Frank Partnoy (1999)
- Infectious Greed: How Deceit and Risk Corrupted the Financial Markets - by Frank Partnoy (2003)
- Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications, 2nd Edition - by Janet M. Tavakoli (2001)

- Heard on the Street: Quantitative Questions from Wall Street Job Interviews - by Timothy Falcon Crack (2000)
- Vault Career Guide to Investment Banking - by Chris Prior, Tom Lott, Staff at Vault (2002)
- Vault Guide to the Case Interview - by Mark Asher, Eric Chung (2002)
- Case Interview: The Guide to the Case Interview - by Mark Asher, Marcy Lerner, Vault Com Inc, Vault, (1998)
- Vault Guide to the Top Finance Firms - by Chris Prior, Tyya N. Turner, Hans H. Chen, Vault.Com, Vault Com Inc (2001)
- Vault Guide to Finance Interviews - by D. Bhatawedekhar, Vault.Com Staff (Editor), Vault Com Inc (2001)

- Numerical Methods for Scientists and Engineers - by Richard Hamming (1987)
- Partial Differential Equations for Scientists and Engineers (Dover Books on Advanced Mathematics) - by Stanley J. Farlow (1993)
- Analysis of Numerical Methods - by Eugene Isaacson, Herbert Bishop Keller, Bishop (1994)

Series 7 exam:
- - order manuals, video, aduio (tapes or CD), CD-ROM with tests
- -
- -

Some good books in Russian:
- - publishing house "Phasis"
Phone in Moscow:  (7-095)253-0820
                              (7-095)137-3137 (redakciya, bus.days bus hours(11-17), Leninskiy Prospect).
- Arnold V.I. Lektsii ob uravneniyakh s chastnymi proizvodnymi. 2-e izd.
- Frisch U. Turbulentnost'. Nasledie A.N. Kolmogorova
- Kolmogorov A.N. Osnovnye ponyatiya teorii veroyatnostei. 3-e izd.
- Shiryaev A.N. Osnovy stokhasticheskoi finansovoi matematiki. Tom 1. Fakty. Modeli
- Shiryaev A.N. Osnovy stokhasticheskoi finansovoi matematiki. Tom 2. Teoriya
    in English: Essentials of Stochastic Finance: Facts, Models, Theory - by Albert Nikolaevich Shiriaev (1999)
- Yavlenie chrezvychainoe. Kniga o Kolmogorove.

D.F. Kuznetsov  Chislennoe Integrirovanie stohasticheskih differentsialnih uravneniy - Isdatelstvo Sanct-Peterburgskogo Universiteta, 2001

More books:
- Dynamic Programming - by Richard Ernest Bellman
- Quantitative Methods in Derivatives Pricing: An Introduction to Computational Finance - by Domingo Tavella (Author)
- Numerical Methods in Finance: A MATLAB-Based Introduction - by Paolo Brandimarte (Author)
- Econometric Analysis - by William H. Greene (5th edition)
- Time Series Analysis - by James D. Hamilton
- Microeconomic Theory - by Andreu Mas-Colell, Michael D. Whinston, Jerry R. Green
- Macroeconomics in the Global Economy - by Jeffrey D. Sachs, Felipe Larrain B., B. Larrain

Formula Editors:

If you work as a quant - you will need to enter math formulas into your documents. Depending on the task you may choose different software.

Prety standard is LaTeX ( ).

But there are many other choices:

Microsoft Word has its own free built-in editor (go to menu Insert > Object, and select "Microsoft Equation").
You can upgrade it to a commercial product "MathType" -

Here is the another full-featured program:

equities home - top of the page - email

Shares - partial ownership, asset

fixed income home - top of the page - email

Bonds - Corporate, Municipal, Treasury, Savings, emerging markets (junk bonds), etc. - faq

     FV = PV*(1+i)**N, where FV = Future Value, PV = Present Value, i - interest per cycle, N - number of cycles
     PV = FV*d, where d = discount factor = 1/(1+i)**N

Payments: (re)investing payments: (1+i)**(N-1) + ... + (1+i)**1 + 1 - a sum of a geometrical progression: S=((1+i)**N - 1)/i

Bond gives regular cash flow (coupon payments which are usually reinvested) - and finally returns the principal.

Yield = interest rate such that if we use it to discount all future coupon payments to present time - and sum them - we will get the present price (PV).

     PV = C/(1+y) + C/(1+y)**2 + ...+ C/(1+y)**N , where C = Coupon payment (constant in the simpliest case)

To calculate the yield "y" from the above formula, we have to do iterations (numerically) - there is no analytical formula. - models in Excel, some references

derivatives home - top of the page - email

Derivatives - futures, options, warrants, convertible bonds, etc. - instruments derived from securities or physical markets. In many cases derivatives are contracts rather than assets. - very good intro - (also ) - Numa Financial Systems  -References on derivatives - - ( ) - - - several tutorials - is the brainchild of Imagine Software Inc. I- real-time derivatives trading and portfolio risk management software.

- - very good article explaining the basics of Futures contracts.The main idea illustration:
  The farmer and bread maker get into a contract at $4 for a unit of wheat - which both believe is a fair price.
  They deposit some amount (up to 10%, called initial margin).
  Price changes from day to day, - so the settlement is made every day.
  If price grew to $5 - then $1 will be transferred from account of farmer to account of bread maker.
  After final settlement and closing of the account, the farmer and bread maker still need to sell/buy the goods.
   The bread maker will go on cash market to buy wheat at current cash price of $5. But as he received $1 from futures contract  - he effectively pays only $4.
   Similar with the farmer - he will get $5 for his product on cash market, but as he already gave $1 - he effectively receives $4.
  So futures contract helped them to get the price of $4 which they originally believed is a good price.

- - Listed options are traded on the nation's option exchanges chief among these is the Chicago Board Options Exchange. Listed options come in two forms:

For a great location to learn about listed options visit:

Barrier option - can be exercised only when certain barrier is reached. There are put and call, as well as European and American varieties.

  • "In" options - start worthless, need to reach barrier to get value
  • "Out" options - start active, and become void if some barrier is reached

If the option expires inactive, there may be some rebate payment (or nothing - depends on the option).

The four main types of barrier options are:

  • Up-and-out: spot price starts below the barrier level and has to move up for the option to be knocked out.
  • Down-and-out: spot price starts above the barrier level and has to move down for the option to become null and void.
  • Up-and-in: spot price starts below the barrier level and has to move up for the option to become activated.
  • Down-and-in: spot price starts above the barrier level and has to move down for the option to become activated.

swaps home - top of the page - email

Big banks swap all kinds of promises all the time, like interest rate swaps, forward currency swaps, options on futures, etc. They try to balance all these promises (hedging), but there is the big danger that one big player will go bankrupt and leave lots of people holding worthless promises. Such a collapse could cascade, as more and more speculators (banks) cannot meet their obligations because they were counting on the defaulted contract to protect them from losses.

interest rate swaps - exchange floating bond to fixed bond
   LIBOR - London Inter-Bank Offering Rate

tax swaps

interest rates home - top of the page - email

repos - secure loan (usually overnight)
repo-rate of bonds (bonds have different value/rate as a collateral)

asset_allocation home - top of the page - email

Asset Allocation - (AA) - allocate your assets (parts of your portfolio) into different types of securities, thus decreasing your risk and maximimizing returns over period of time.
AA approach is based on proven theory that the type or class of security you own is much more important than the particular security itself. AA should not be confused with simple diversification.  Diversification means putting your money into several securities which could be of similar type - and thus may react to market in a similar way (correlation).

AA not only reduces risk, but also maximizes returns over a period of time. This is because the proper blend of six or seven asset classes will allow you to benefit from the returns in all of those classes. -

risk management home - top of the page - email

Risk Management - ways to understand and control portfolio risks.
Here is a formal definition:
" Risk management is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk management may be as uncomplicated as asking and answering three basic questions:
  - What can go wrong?
  - What will we do (both to prevent the harm from occurring and in the aftermath of an "incident")?
  - If something happens, how will we pay for it? " - - Risk Waters Group - - interest rate risk management - read about Risk Management here

Famous story about Hedge Fund "Long-Term Capital Management" (LTCM) was a U.S. hedge fund located in Greenwich, Connecticut. It was founded in 1993 - and was very successful - until it failed in Agust-September of 1998. Lost $4.6 billion in ~ 4 months following Russian crisis. The total borrowed assets of the fund were estimated at $125 billion, and the notional principal amount of over $1 trillion. The Federal government had stepped in to facilitate the bailout. The firm closed in 2000. This story is interesting, because this fund was a very elite group of world's top experts. The founders included two Nobel Prize-winning economists, Myron Scholes and Robert C. Merton. There were also some top people from Solomon Brothers. Fund used trading strategies such as fixed income arbitrage, statistical arbitrage, and pairs trading, combined with very high leverage (~50). The disaster is mostly attributed to poor risk management:

PnL Explained (PnL Attribution) Report

PnL Explained report (aka PnL Attribution Report) is a Profit and Loss report, where the causes of PnL are subdivided into some categories (buckets). Those categories may be subdivided into sub-categories. Selection of categories/subcategories depends on the market and product. And in the same market one can generate different report using different set of categories.

Here is an example for Fixed Income: - process of measuring returns generated by various sources of risk in a fixed income portfolio.

Here is another example of categories:

Programming for Quants - C++, C# forum for Financial Engineers, including a book C++ for
Financial Engineers.

tax swaps home - top of the page - email - A tax swap is an investment strategy usually designed for municipal bond portfolios. It is designed to allow you to take a tax loss in your portfolio while at the same time adjusting factors such as credit quality, maturity, etc. to better meet your current needs and the outlook of the market. A tax swap can create a capital loss for tax purposes, can maintain or enhance the overall credit quality of your portfolio, and can increase current income.

mathematics of derivatives home - top of the page - email

stochastic calculus: - Steven Shreve's Lectures on Stochastic Calculus and Finance - Alan Bain Stochastic Calculus Notes - Risk Training

volatility surfaces: - Risk Magazine
The debate over stochastic volatility versus implied volatility surfaces to model and price derivatives ...

term structure models:
term structure modelling:
 - modelling the spot rate,
 - modelling the term structure of forward rates
Each method has advantages and disadvantages: For spot rate modelling the
question of model choice is unclear, while for most HJM models computations
are difficult. We present a new class of term structure models essentially
as general as either of the above and for which differences between models
are easy to understand and, for a class of interesting models, computations
are easy. - David Heath - titles and links

Arbitrage Pricing Theory (APT)

A model of financial instrument and portfolio behavior based on the
proposition that if the returns of a portfolio of assets can be described by
a factor structure or model, the expected return of each asset in the
portfolio can be described by a linear combination of the factors with the
returns of the asset.

The factors can be statistical artifacts; they can be market or industry
related; or they can be macroeconomic variables such as interest rates,
inflation, industrial production, etc. The resulting factor model can be
used to create portfolios that track a market index, to estimate and monitor
the risk of an asset allocation strategy, or to estimate the likely response
of a portfolio to economic developments. Starting from an initial model
proposed by Stephen Ross, APT models have been created for applications in
most cash and derivatives markets. See Multi- Factor Model.

binomial trees:


Types of software:

- trading systems
- online trading systems
- information and sharts
- analytics
- reporting
Fixed Income
Security Analysis & Portfolio Management
Derivatives & Risk Management
Financial Engineering