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Mathematics in Financial Industry Frans Boshuizen 15 December 2009
Mathematics in Financial Industry <ul><li>Retail banking </li></ul><ul><li>Investment banking </li></ul><ul><li>Insurance ...
Statistics <ul><li>Internal models for capital adequacy testing (Basle II, Solvency II): </li></ul><ul><ul><li>Multivariat...
Finance – cash flow modeling <ul><li>Retail bank </li></ul><ul><li>Most complex product in Finance: Mortgage </li></ul><ul...
Risk management <ul><li>Market risk </li></ul><ul><li>Value-at-risk </li></ul><ul><li>Earnings-at-risk </li></ul><ul><li>H...
Asset Liability Management <ul><li>Classical Markovitz efficient frontier (asset only) </li></ul><ul><li>Liability driven ...
Scenario generation <ul><li>Yield curve fitting methods </li></ul><ul><li>Time-series modelling </li></ul><ul><ul><li>auto...
Structured products <ul><li>Derivative pricing </li></ul><ul><ul><li>Interest rate derivatives  </li></ul></ul><ul><ul><li...
General <ul><li>Few financial institutions have pure research departments </li></ul><ul><li>Better ‘to stand with your fee...
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Mathematics in Financial Industry Frans Boshuizen

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Transcript of "Mathematics in Financial Industry Frans Boshuizen"

  1. 1. Mathematics in Financial Industry Frans Boshuizen 15 December 2009
  2. 2. Mathematics in Financial Industry <ul><li>Retail banking </li></ul><ul><li>Investment banking </li></ul><ul><li>Insurance </li></ul><ul><li>Pension funds </li></ul><ul><li>Risk Management </li></ul><ul><li>Investment Management </li></ul><ul><li>Trading environment – structured products </li></ul><ul><li>Product development </li></ul>
  3. 3. Statistics <ul><li>Internal models for capital adequacy testing (Basle II, Solvency II): </li></ul><ul><ul><li>Multivariate statistics </li></ul></ul><ul><ul><li>Extreme value statistics </li></ul></ul><ul><ul><li>Dependence – copula’s </li></ul></ul>
  4. 4. Finance – cash flow modeling <ul><li>Retail bank </li></ul><ul><li>Most complex product in Finance: Mortgage </li></ul><ul><ul><li>Forward starting </li></ul></ul><ul><ul><li>Prepayment risk </li></ul></ul><ul><ul><li>Losses depending on economic cycle … </li></ul></ul><ul><ul><li>Some mortgages have explicit embedded derivatives such as caps and floors </li></ul></ul><ul><ul><li>Structured mortgage products (MBS) </li></ul></ul><ul><li>Variable rate savings accounts </li></ul><ul><li>Insurance </li></ul><ul><li>Guarantees and profit sharing </li></ul><ul><li>Separate accounts for pension clients </li></ul>
  5. 5. Risk management <ul><li>Market risk </li></ul><ul><li>Value-at-risk </li></ul><ul><li>Earnings-at-risk </li></ul><ul><li>Hedging decisions </li></ul><ul><li>Stress tests </li></ul><ul><li>Concentration risk </li></ul><ul><li>Credit risk </li></ul><ul><li>Modelling loss distributions </li></ul><ul><li>Based on economic time series and customer data </li></ul><ul><li>Actuarial risk </li></ul><ul><li>Mortality </li></ul><ul><li>Longevity </li></ul><ul><li>Disability </li></ul><ul><li>Operational risk/Strategic risk </li></ul><ul><li>Liquidity risk </li></ul>
  6. 6. Asset Liability Management <ul><li>Classical Markovitz efficient frontier (asset only) </li></ul><ul><li>Liability driven benchmarks </li></ul><ul><li>Replicating portfolios – optimization tool </li></ul><ul><li>Fair value of liabilities – incomplete markets </li></ul><ul><li>More complex scenario models for ALM-decisions </li></ul><ul><li>For pension funds more complex: </li></ul><ul><ul><li>Investment policy </li></ul></ul><ul><ul><li>Indexation: compensation policy for inflation </li></ul></ul><ul><ul><li>Premium policy </li></ul></ul>
  7. 7. Scenario generation <ul><li>Yield curve fitting methods </li></ul><ul><li>Time-series modelling </li></ul><ul><ul><li>autocorrelation </li></ul></ul><ul><li>Modelling of cycles (Fourier analysis) – Hens Steehouwer (Ortec) </li></ul>
  8. 8. Structured products <ul><li>Derivative pricing </li></ul><ul><ul><li>Interest rate derivatives </li></ul></ul><ul><ul><li>Equity derivatives </li></ul></ul><ul><ul><li>Inflation derivatives </li></ul></ul><ul><ul><li>Credit derivatives </li></ul></ul><ul><ul><li>Hybrids </li></ul></ul><ul><li>Structuring by ‘investment banks’ </li></ul><ul><li>Used as hedge instruments by banks, insurance companies and pension funds </li></ul>
  9. 9. General <ul><li>Few financial institutions have pure research departments </li></ul><ul><li>Better ‘to stand with your feet in the mud’ </li></ul><ul><ul><li>Modelling in combination with policy and reporting </li></ul></ul><ul><li>Model validation </li></ul><ul><li>Consultancy firms </li></ul><ul><ul><li>Accountings firms </li></ul></ul><ul><ul><li>Actuarial firms </li></ul></ul><ul><ul><li>Specialist risk consultancy </li></ul></ul>
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