Study Uncovers Significant Flaws in Standard Models for Financial Derivatives

Using Mathematica, Dr. William Shaw Presents Corrections to the Models

The conventional wisdom isn't so wise when it comes to derivatives trading, according to Dr. William Shaw of Nomura International PLC, the wholly owned European subsidiary of The Nomura Securities Co., Ltd. of Japan, one of the world's largest investment banks. Using Mathematica, the same sophisticated technical computing system used by scientists and engineers worldwide to perform complex calculations, Shaw has discovered that many of the standard textbook models for derivative securities are seriously flawed.

Dr. Shaw's methods and results also form the basis of his book, Modelling Financial Derivatives with Mathematica, published by Cambridge University Press. You can review the first chapter here on the web. (You can also download the first chapter in notebook format.)

"Derivative securities are capable of exhibiting forms of mathematical pathology that confound intuition and play havoc with even state-of-the-art algorithms," says Shaw. "These peculiarities are readily exposed by the symbolic processing capabilities of Mathematica."

Dr. William Shaw is the head of Financial Instrument Modelling in the Quantitative Analysis Group of Nomura International PLC and author of Modelling Financial Derivatives with Mathematica.

Find out more about Mathematical Pathologies in Derivatives Modeling.

A book update, including information on Mathematica 5 compatibility, is available for download.