The Complete Guide to Capital Markets for Quantitative Professionals (Mcgraw-hill Library Investment And Finance) - Hardcover

Kuznetsov, Alex

Hardcover

ISBN 10: 0071468293 ISBN 13: 9780071468299

Verlag: McGraw-Hill Education Ltd, 2006

Inhaltsangabe

The Complete Guide to Capital Markets for Quantitative Professionals is a comprehensive resource for readers with a background in science and technology who want to transfer their skills to the financial industry.

It is written in a clear, conversational style and requires no prior knowledge of either finance or financial analytics. The book begins by discussing the operation of the financial industry and the business models of different types of Wall Street firms, as well as the job roles those with technical backgrounds can fill in those firms. Then it describes the mechanics of how these firms make money trading the main financial markets (focusing on fixed income, but also covering equity, options and derivatives markets), and highlights the ways in which quantitative professionals can participate in this money-making process. The second half focuses on the main areas of Wall Street technology and explains how financial models and systems are created, implemented, and used in real life. This is one of the few books that offers a review of relevant literature and Internet resources.

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THE COMPLETE GUIDE TO CAPITAL MARKETS FOR QUANTITATIVE PROFESSIONALS

By ALEX KUZNETSOV

McGraw-Hill

Copyright © 2007 The McGraw-Hill Companies
All right reserved.
ISBN: 978-0-07-146829-9

Contents

Chapter One

Financial Markets

Over the last few years, I have had the opportunity to interview many bright young people who were applying for quantitative Wall Street positions. Overall, I have been very impressed with their intelligence, drive, and technical skills, but all of them had one glaring gap in their knowledge: they had no idea of how the financial industry works. The pattern was repeated with such predictability that I stopped asking them whether they knew anything about how Wall Street works and instead started asking them to explain why they—a very smart group if I ever saw one—were going to interviews on Wall Street without bothering to find out what it was that they were getting into. According to what they told me, it is very difficult to get a clear idea of what the financial industry does and how it is put together just by reading books and going to economics classes—these sources left them with the vague notion that Wall Street is the place where lots of money is being made, plus perhaps a couple of canned definitions, but no real understanding of the issues. One of my interviewees asked me if I could answer the questions I was asking him when I started working on Wall Street, and I had to admit that I could not. I felt guilty about this at first, but then I realized that I am still right to ask the questions about industry organization because life itself will ask them once they start working on Wall Street in almost any role—and if they know the answers, much of what is going on around them at work will begin to make sense. I am therefore starting this book with an attempt to explain how the financial industry works. This is what Part 1 of the book is about.

Before we can examine the way the financial industry operates today, however, it is important to discuss why it exists in the first place, and how and why it took its present form. Therefore, in this opening chapter, we discuss the "why" questions about the financial industry and financial markets, while the next chapter will focus on the "how." Finally, the last chapter of Part 1 will take a look inside one of the industry players to see how it is put together. That's the plan, and let us now delve into the first part of it: figuring out why Wall Street is there.

The short answer to the question of why the financial markets exist is that, given that capital is the lifeblood of capitalism, there needs to be some type of "cardiovascular system" that carries it around the capitalist economy. At any given time, there are people and organizations (companies, governments, and individuals) that want money—to invest in a new factory, to build a highway, to pay for prescription drugs for seniors, to buy a house, and so on. At the same time, there are people and organizations that have money to invest—a family saving for college, an insurance company sitting on a pool of premiums, a social security trust fund. The first group is willing and able to pay the second group for the use of its capital; the question is, how do they find each other? This is exactly where the financial markets come in.

Note that these two groups of people have existed in every society from the beginning of history. Suppose that in medieval Europe, a king wanted to wage another costly war, and city merchants had money. They would ultimately find each other, and the king would be off to his war, and the merchants (if they and the king were lucky) would grow somewhat richer from its spoils. A society does not have to be capitalist to have capital and the need to invest it. However, back then, "ultimately" could be a long time, and the amounts of money that kings could raise by arranging loans from individual merchants were minuscule by modern standards, so the process of raising money for projects was quite inefficient (as it still is in much of today's world). So both groups kept trying different ways of putting capital to work, and that effort went on for many centuries and continues today. The modern financial system is the result of that long effort.

Interestingly, despite this long and varied history, humanity has been able to come up with only three logically distinct ways of moving money and other forms of capital from those who have it to those who want to use it. These are, in order of historical appearance, theft, debt, and equity. We do not discuss theft in this book, as it is covered extensively elsewhere and is not (supposed to be) part of the financial system whose workings we are trying to understand, so we proceed with the briefest of overviews of the evolution of the other two modes of capital transfer: debt and equity.

THE HISTORY OF DEBT MARKETS

The concept of debt predates recorded history. People would borrow a tool from a neighbor in prehistoric societies, just as they do today. They also borrowed living things that could multiply, such as seed or farm animals, and it is only natural that when people borrowed such things, they could return, say at harvest time, something more than they originally took, which gave rise to lending with interest. The earliest recorded laws—those of Hammurabi, dating from about 1800 BC—not only recognized but attempted to regulate such loans by imposing a 33? percent per annum limit on interest on loans of grain. By that time, it had already become common to lend money (rather than seed and livestock) for interest.

The individually negotiated loan described in the laws of Hammurabi—effectively a binding agreement between two specific parties outlining when the principal (the borrowed amount) was to be returned and how much interest was to be paid—has remained the most common legal form of debt ever since. This is the arrangement we enter into when we take out a personal loan at a bank today. Of course, the banks themselves went through a lot of changes before they took their present form, but the essence of the bank-lending business has not changed much in the last 3,800 years. While banks are the mainstay of personal finance in most of the developed world today, corporate entities and institutional investors, especially in the United States, the United Kingdom, and the rest of the Anglo-Saxon world, usually rely on a newer branch of finance, the capital markets, that has developed over the last 800 years. Wall Street is an offshoot from that branch, and therefore in what follows we focus on this relative novelty.

Strictly speaking, one can argue that financial markets existed much earlier than we claim here. In ancient Rome, the government of the republic outsourced tasks such as tax collection and some municipal services to semi-private entities that raised their operating capital by selling shares to the public, and people traded these shares (known as particulae, or particles) in the Roman Forum as early as the second century BC (Cicero inveighed against trading of particulae, calling it gambling). However, it is a sad fact of Western history that this Roman invention, together with a great many others, was completely forgotten after the fall of Rome and had very little effect on the formation of the modern capital markets.

The roots of modern capital markets are not in this Roman practice, but rather in the medieval trade fairs, which began to appear all over Western Europe as early as the eleventh century AD....

Details zur Ausgabe

• Verlag: McGraw-Hill Education Ltd
• Erscheinungsdatum: 2006
• Sprache: Englisch
• ISBN 10: 0071468293
• ISBN 13: 9780071468299
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 576
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: gpsr@libri.de; gpsr@libri.de; ; Friedensallee 273; Hamburg; 22763; Deutschland