Advanced technology is pervasive in today’s financial industry. Quantitative techniques are employed everywhere – to value assets, to assist in investment decisions, to assess risk. The best way to show what “quantitative finance” means is to describe a few examples:
Traditional investment strategies are being automated. More and more stock market trades are generated by “black boxes” – engineered software-based systems designed to select and execute trades according to particular goals and strategies. In some markets, computer-assisted trading now accounts for more than half of the total trading volume. Like any sophisticated technology, these new systems require highly trained people to build, maintain, calibrate and operate them successfully. This is part of what “quantitative finance” means today.
The modern understanding of risk is highly quantitative. Advanced statistical methods are used to probe the exposure of a business or a portfolio to different scenarios, “stress-testing” against potentially extreme outcomes. In the financial sector, this can affect capital reserve requirements, lending strategies, and basic business models. And for many nonfinancial companies, the impact on operating performance can be huge.
Quantifying risk is the first step. Counteracting risk is the real challenge. Today, almost all large corporations enter into sophisticated financial transactions to hedge various risks, including interest rate risks, currency and exchange rate risks, and risks from changing commodity prices (from agriculture to energy).
Constructing & Using New Financial Instruments
This in turn drives the use of financial derivatives to hedge these risks, a market that has grown enormously -- relying heavily on sophisticated quantitative finance techniques to design, price, and execute complex risk mitigation strategies. Modern financial operations at almost any major company depend upon the use of quantitative disciplines to value and trade these new financial instruments.