How the Trading Floor Really Works

Pricing Models and What They Do

To understand the role of the quant, we need to understand what these models are doing. To do this, we’ll break down the world of models into pricing models and risk management models. Pricing models are what traders use to price, hedge and value their trades, although note that these models aren’t always necessary for highly liquid products, in particular those which trade on exchanges. Risk management models are used to identify risk and set trading limits in the trading books. These are used for all financial products, whether they are highly liquid or not.

In general we can break down the world of financial products into three types. There is no official term for this breakdown and it is unlikely that this ...