A Workout in Computational Finance

1 Introduction and Reading Guide

PROLOGUE

We wrote this book with the aim of giving practitioners in computational finance a sound overview of relevant numerical methods. Some of the methods presented in this book are widely used today, while others should, in our opinion, gain more importance in the future. By, “computational finance” we loosely refer to all tasks related to the valuation of financial instruments, risk analysis and some aspects of risk management. Together with our colleagues at MathConsult GmbH, we have been working on a wide range of computational finance projects since 1997. During that time, we have observed that the numerical quality of software used in financial institutions widely varies.

Particular attention is thus given to working out the strengths and weaknesses of the different methods, and to reveal possible traps in their application. We have used real-world examples of valuation, risk analysis and calibration of specific financial instruments and models to introduce each method. A strong emphasis is laid on stable and robust schemes for the numerical treatment.

We have named the book “A Workout in Computational Finance” because due to our experience in training finance professionals, it is our strong belief that computational methods are best studied in a practical, hands-on approach, requiring the student to write at least part of the program code herself. To facilitate this style of learning, the book comes with accompanying software distilled ...