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  1. 1. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. India MBA JOBS IN WALL STREET ! I will tell you how to get into Wall Street without a degree from Harvard or Wharton ! You can enter Wall Street banks through the back door. 1
  2. 2. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. Now, for nearly two decades, American universities have been training mathematical finance professionals for Wall Street. A degree in Quantitative Finance became a short cut to Wall Street. The Courant Institute at New York University, University of California, University of Chicago, Rutgers University, began academic programs to train Quants for Wall Street. Carnegie-Mellon University began offering a supplemental crash course Quant program for MBA graduates. Engineering schools and mathematics departments of many American universities began offering master’s degree programs in Financial Engineering, Quantitative Finance, Computational Finance, and Mathematical Finance. 2
  3. 3. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. In a new wave, MBA graduates and Ph.D. graduates began enrolling at universities to earn a degree in quantitative finance. The new Quant brigade invading Wall Street began predicting stock market movements, assessing financial risk, pricing derivative financial products, and managing private equity funds. The exotic financial instruments evolved by the Quants would now allow banks to measure, control, transfer, distribute, and disperse risk. Banks in Wall Street could now engage in riskier lending practices and then offload the risk to banks in Europe and Asia. The Quant models guaranteed high returns, but were not exactly infallible. There was no guarantee that the underlying assumptions were flawless. Moreover, the Quants were physicists and mathematicians. They were not hard-core economists. Quants with less experience with statistical methods preferred to utilize partial differential equations. They often used numerical analysis, finite differences, and Monte Carlo Simulation to solve mathematical problems. 3
  4. 4. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. The first generation of Quants hired by Wall Street were physicists with Ph.D. degrees. At the present time however, universities have been producing entry-level Quants with 2-year Master’s degrees in Financial Engineering, Financial Mathematics, and Mathematical Finance. The best Quant schools are Carnegie Mellon University, Columbia University, Cornell University, New York University, Princeton University, Rutgers University, Stanford University, University of California at Berkeley, University of Chicago, and University of Michigan, Boston University, Georgia Institute of Technology, University of Toronto, and Baruch College. The Lally School of Management at Rensselaer Polytechnic Institute has a program in Financial Engineering and Risk Analysis (FERA). The Stuart School of Business at the Illinois Institute of Technology offers a Master’s degree program in Finance. Companies interested in Quants include JP Morgan Chase, Bloomberg, Goldman Sachs, Bank of America, Standard and Poor’s, Moody’s, Credit Suisse, and Deutsche Bank, Morgan Stanley, Ernst & Young, Fidelity Investments, Numerix, and Wachovia. 4
  5. 5. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. In banking outfits dealing with stocks and bonds, the Quants assist sales teams and traders. Over the years, as customers have become more financially sophisticated, a new generation of financial instruments known as derivatives have evolved. Fundamentally, derivatives are securities that promise a profit outcome based on some underlying primary securities or assets they are financially linked to. The value of these derivatives depend on the performance of the underlying securities or assets. Financial models built by Quants aim to establish rough guidelines that might help evolve derivative securities from the underlying primary securities. Eventually, by mathematically predicting the behavior of underlying securities based on interest rates and volatility, the financial models may help affirming scientifically accurate prices for derivative securities. Quant mathematics looks at modeling behavior of debt and equity issues. Quants use stochastic calculus, numerical analysis, and partial differential equations while analyzing financial issues. 5
  6. 6. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. When, risks are involved, a strategy known as Hedging can be used to offset risks. There are a variety of financial instruments available for hedging. These include Futures, Forwards, Options, and Swaps. The Quants working as front office researchers help in building sophisticated financial models to allow pricing and hedging of derivative securities. The models may include simulations and complex algorithms. Incidentally, the financial models need to be calibrated to certain critical parameters such as the money lending rates in the banking industry. Quants are expected to be capable of developing computer programs based on the financial models they create. Most banks wish to have programs written in C++ while Visual Basic is used for designing interfaces. Sometimes, there is a conflict between traders and Quants. Quite often, the traders downplay the importance of quantitative analysis. 6
  7. 7. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved.According to Efficient Market Hypothesis theory proposed by economists with anacademic slant, the market cannot be beaten. However, as markets in the realworld are often rigged by traders, it might become possible to beat rigged markets.Even if the EMH theory were to hold true, the ground reality is that markets taketime to react to new information. The market has an inertia of its own. This inertia presents plenty of money making opportunities to those who are quick on their feet. Those who can utilize high speed computers to outpace the market can make profits. The financial game is about one set of investors trying to outsmart another set of investors. There is a whole new industry firmly hinged on the basic idea of outsmarting the opponent. A new breed of mathematically astute portfolio managers have started soliciting billions of dollars from institutions and high net worth clients. To support this new industry, hundreds of mathematical equations have been developed. 7
  8. 8. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. The key belief is that there is no scientifically specific yardsticks to determining the legitimate value of an asset. Quite often, economic or financial value is virtually in the eyes of the beholder. Every asset has a notional intrinsic value. An opportunity to sell of buy has to be created around this intrinsic value. Analysts engage in fundamental analysis to arrive at this intrinsic value. Generally, the intrinsic value of a stock is based on the present value of its future dividends. There are plenty of risks in the stock market, but the rare possibility of windfall profits is seductive enough for investors with an appetite for financial adventure. Such investors put their money in Hedge funds or Quant Funds. 8
  9. 9. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. Most Hedge funds have a basket full of gimmicks to generate windfall profits. While some financial transactions used by Hedge funds may be unethical, they are not necessarily unlawful. As Hedge funds play around with about 2 trillion dollars, they can easily influence markets and rig markets. Incidentally, some Hedge funds collapsed because their financial models were inappropriately based on the normal distribution. 9
  10. 10. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. The Quants could legitimately inflate the value of a financial asset simply by creating a set of support equations that could justify desired valuations. This was the magic of mathematics. Equations created by physicists and mathematicians could be utilized intelligently to alter perception. This was exactly what the Wall Street banking cartel needed. Obviously, arguments in favor of inflated valuations and economic bubbles have some merit in Wall Street. After 1980, Wall Street bankers seriously began polishing the art of building wealth on paper through illusions and inflated stock market evaluations created with the use of powerful mathematical tools. Creating illusionary wealth through boom and bust cycles, or making risky investments in search of windfall profits were never crimes. Wall Street also set a new precedent in business by rewarding risk takers in failed investment banks with generous bonus packages running into millions of dollars. In Wall Street executive circles, the trait of risk taking is highly valued. Errors in judgement are condoned. 10
  11. 11. JOBS IN WALL STREET : Copyright © 2011 by Shivaprasad Srikantia. All Rights Reserved. 11