Derivatives Models on Models

Emanuel Derman the Wall Street Quant

Emanuel Derman was one of the first on Wall Street to leave theoretical physics and become a successful quant. He started out with a PhD in theoretical particle physics from Columbia University. He worked for several years as a post doctorate doing research in theoretical physics. He then worked for several years for Bell Laboratories before he moved to Wall Street and Goldman Sachs. Here he came into contact with Fischer Black and together with Bill Toy they came up with the Black-Derman-Toy one factor interest rate model. After spending a short period in Salomon Brothers he again returned to Goldman Sachs where Fischer Black had just moved to a different position, so Derman took over running the Quantitative Strategies group. This group did some very interesting research on convertible bonds, exotic options, implied tree models, variance swaps and much more. Some years ago Emanuel Derman returned to academia and is now a Professor at Columbia University, but still with a foot in Wall Street, being involved in a hedge fund.

Between 1991 and 1996 I was working with trading and market making of fixed income options for Den norske Bank and Chemical Bank (now J.P. Morgan Chase). The Black-Derman-Toy model had been one of the option models I was most interested in, the entire bond option market was talking about the BDT model at that time. While writing my book “Option Pricing Formulas” I was looking into implementation of implied tree models. Here ...