An Introduction to Quantitative Finance

A Three-Principle Approach

This concise textbook provides a unique framework to introduce Quantitative Finance to advanced undergraduate and beginning postgraduate students. Inspired by Newton's three laws of motion, three principles of Quantitative Finance are proposed to help practitioners also to understand the pricing of plain vanilla derivatives and fixed income securities.

The book provides a refreshing perspective on Box's thesis that "all models are wrong, but some are useful." Being practice- and market-oriented, the author focuses on financial derivatives that matter most to practitioners.

The three principles of Quantitative Finance serve as buoys for navigating the treacherous waters of hypotheses, models, and gaps between theory and practice. The author shows that a risk-based parsimonious model for modeling the shape of the yield curve, the arbitrage-free properties of options, the Black-Scholes and binomial pricing models, even the capital asset pricing model and the Modigliani-Miller propositions can be obtained systematically by applying the normative principles of Quantitative Finance.

Contents:

• Introduction
• Brief Introduction to Four Major Asset Classes
• Principles of Quantitative Finance
• Interest Rates
• Derivatives with Linear Payoffs
• Derivatives with Nonlinear Payoffs
• Binomial Models
• The Black–Scholes Model

Readership: Advanced undergraduates and graduate students in quantitative trading; practitioners who are interested to find out how models are derived ab initio.
Key Features:

• Physics-inspired three-principle approach to "unify" many important and useful models of Finance and Quantitative Finance
• Bridge over the gap between theory and practice
• Interesting quotes and real-life stories to keep the readers enthralled