models

There is an apocryphal story about a bar in New York, a hangout for models. It is about a cruel joke played on a young, 20-something quant* employed in an investment bank. The traders suspected that the geeky young man had never had a date. They took him to the bar and told him that it was frequented by his type of woman - modellers**. The young man was dubious, sensing that he was being set up, but he desperately wanted to bond with the traders to reduce the constant ragging that he endured.

They took their places at the bar and fuelled themselves to an appropriate level of intoxication. 'You see that girl,' a trader nudged the quant. The quant focused his glasses on a tall woman sitting at a table. 'She's giving you the eye,' the trader continued. 'Go over,' he commanded. 'Talk to her.'

The quant sensed danger; this was not smart. The other traders now joined in, urging him to make a move. Left without choice, he pushed back his chair and began to walk in the general direction of the woman. The traders were taking bets on the result of the encounter: the betting favored the quant being slapped and told to 'F*&$ off'.

The quant made his way to the table. 'Can i join you?' he asked. The woman scrutinized her suitor. He did not look like a sexual deviant. She nodded.

The quant set down, thinking of a way to start a conversation. He remember they were modellers. 'I'm working on a new model that adapts the Black-Scholes framework to incorporate mean reversion in commodities,' he blurted out. The woman looked at him strangely. 'You know,' she drawled. 'I did my PhD on a similar problem. That's before i realized that there's more money in strutting up and down catwalks in your underwear.' She smiled at the young man. 'Where are you from?' The quant smiled back broadly. Models*** are sometimes full of surprises.

The worlds of derivatives and models frequently collide..

(adapted from Traders, Guns & money - Satyajit Das, 2006; good entry level book to know about derivatives beyond the classroom.)

*quant, root word "quantitative". name for person who's highly educated in quantitative methods or mathematics, hired by trading desks to create mathematical models. Usually PhDs in finance or physics or any other quantitative science. Often known as rocket scientists, some of them, incidentally, really are rocket scientists before dabbling in the world of finance
**people who create mathematical models
***pun. fashion models, not mathematical models in the sentence's first intentions. But both intended