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The Money Formula

Book Description

Explore the deadly elegance of finance's hidden powerhouse

The Money Formula takes you inside the engine room of the global economy to explore the little-understood world of quantitative finance, and show how the future of our economy rests on the backs of this all-but-impenetrable industry. Written not from a post-crisis perspective – but from a preventative point of view – this book traces the development of financial derivatives from bonds to credit default swaps, and shows how mathematical formulas went beyond pricing to expand their use to the point where they dwarfed the real economy. You'll learn how the deadly allure of their ice-cold beauty has misled generations of economists and investors, and how continued reliance on these formulas can either assist future economic development, or send the global economy into the financial equivalent of a cardiac arrest.

Rather than rehash tales of post-crisis fallout, this book focuses on preventing the next one. By exploring the heart of the shadow economy, you'll be better prepared to ride the rough waves of finance into the turbulent future.

  • Delve into one of the world's least-understood but highest-impact industries
  • Understand the key principles of quantitative finance and the evolution of the field
  • Learn what quantitative finance has become, and how it affects us all
  • Discover how the industry's next steps dictate the economy's future

How do you create a quadrillion dollars out of nothing, blow it away and leave a hole so large that even years of "quantitative easing" can't fill it – and then go back to doing the same thing? Even amidst global recovery, the financial system still has the potential to seize up at any moment. The Money Formula explores the how and why of financial disaster, what must happen to prevent the next one.

Table of Contents

  1. Acknowledgements
  2. About the Authors
  3. Introduction
    1. Notes
  4. Chapter 1 Early Models
    1. Monetary Alchemy
    2. Gold Standard
    3. The Systems of Nature
    4. Rational Mechanics
    5. Finding Equilibrium
    6. Intrinsic Value
    7. Notes
  5. Chapter 2 Going Random
    1. Theory of Speculation
    2. Efficient Markets
    3. Irrational Markets
    4. Not Normal
    5. Mental Virus
    6. Notes
  6. Chapter 3 Risk Management
    1. Fundamentals
    2. Beauty Contest
    3. Technical Analysis
    4. Quant Analysis
    5. Correlation
    6. Well…
    7. Efficiency Squared
    8. Value at Risk
    9. The Edge of Chaos
    10. Notes
  7. Chapter 4 Market Makers
    1. Options
    2. What are Options for?
    3. Bachelier's Return
    4. The Ultimate Machine
    5. Beat the Market
    6. Hedging your Bets
    7. Mathematical Dynamite
    8. No Risk
    9. Positive Feedback
    10. Notes
  8. Chapter 5 Deriving Derivatives
    1. Time to Exercise
    2. Decision Cost
    3. New Flavors
    4. You can't Always Delta Hedge
    5. Market Price of Risk Again
    6. Getting Carried Away
    7. From the Sublime to the Ridiculous
    8. Hold it Together
    9. Model Abuse
    10. Pass the Parcel
    11. Money Crunch
    12. Notes
  9. Chapter 6 What Quants Do
    1. What do Quants Make – and are They Adequately Paid?
    2. Quants vs. Regulators
    3. Writer-nomics
    4. Blinding us with Science
    5. Bots
    6. Global Brain
    7. Creative Finance
    8. Notes
  10. Chapter 7 The Rewrite
    1. Blowing Smoke
    2. Calibrating the Crystal Ball
    3. Sources of Confusion
    4. Model Risk
    5. Flying Blind
    6. Notes
  11. Chapter 8 No Laws, Only Toys
    1. A Clue
    2. Back to Basics
    3. A Model for Interest Rates?
    4. A Role Model
    5. Reasons to be Mathematical
    6. Quantum Finance
    7. Order and Chaos
    8. Notes
  12. Chapter 9 How to Abuse the System
    1. Exercise 1: The Newbie Trader
    2. Exercise 2: The Hedge Fund Manager
    3. Exercise 3: The Risk Manager
    4. Triple-A
    5. Defeat Device
    6. Notes
  13. Chapter 10 Systemic Threat
    1. Foresight
    2. The MacGuffin
    3. But High-Speed Trading Provides Liquidity!
    4. A Million Billion Dollars
    5. The Bionic Hand
    6. The System (John Law feat. Isaac Newton)
    7. Notes
  14. Epilogue: Keep it Simple
    1. Quants: The Math Sweet Spot
    2. Regulators: Go Full Iceland
    3. Economists: Wake Up
    4. Banks: Learn to Fail
    5. Traders: Why Does My Bonus Have a Minus Sign in Front?
    6. Journalists: Watch Out for Saboteurs
    7. Educators: Quantity and Quality
    8. Politicians: Create an FAA for the Financial System
    9. I Solemnly Swear…
    10. The Nuclear Option
    11. Notes
  15. Bibliography
  16. Index
  17. EULA