Desc. of Methods of Financial Mathematics in Risk Management

ANSWER

What is Financial Mathematics?

Financial mathematics describes the application of mathematics and mathematical modeling to solve financial problems. it is sometimes referred to as quantitative finance, financial engineering, and computational finance.

Prominence of Financial Mathematics

The use of mathematics and statistics within the field of finance has been increasing substantially in the past, and such a trend is expected to continue. Various types of organizations and financial service providers utilize financial mathematics as part of their core operations, such as:

• Investment banks
• Retail and commercial banks
• Hedge funds
• Investment management companies
• Corporate treasuries
• Regulatory bodies

Adoption of Quantitative Finance

As the markets seek to become more efficient, quantitative methods will continue to be adopted. Over the long history of financial markets, the concepts of valuation and pricing, as well as optimizing capital allocation, have been important problems to observe within the capital markets.

Quantitative finance was developed as a specialized field within economics to tackle the problems of the valuation of assets and financial instruments, as well as optimizing capital allocation and resources. Over centuries, fundamental theories about the overall economy and valuation of assets have been developed through the mathematical models.

The models describe the relationships between various economic variables, such as prices, market movements, volatility, and interest rates. By using quantitative tools, more accurate conclusions can be drawn from the economic variables.

However, the use of quantitative principles within finance will continue to be prominent. Markets seek to become more efficient over time – just as stock trading once went from the transfer of physical certificates to the transfer of electronic certificates. More quantitative practices and strategies will be developed to make markets more efficient and help investors generate alpha. They include applications such as:

• Algorithmic trading
• High-frequency trading
• Quantitative investing
• Technical analysis
• Quantum finance
• Financial engineering