Finance and mathematics
Finance analysis is a big consumer of math
We can distinguish mostly two areas of maths that apply:
- Analysis - In order to compute theoretical prices of instruments we take some assumptions, like the comparison to similar traded products described in another article, and turn these assumptions into formulas applied to compute the prices based on observed variables from the market and intrinsic characteristics of the instrument. Then we derive these formulas against the market variables to determine how risky they are, i.e. how strongly their value change when the market evolves.
- Statistics - In order to predict future events, potential losses, expected gains and so on we usually assume that there is a higher probability for past events to reoccur in the future than any other different event. These past events are taken into account through statistical analysis based on past observations.
This is also what makes financial engineering very interesting: it is strongly connected to reality of everyday through investments, pension funds, company's lives and so on but also very theoretically challenging.
posted by Walter @ 10:44 AM
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