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As a finance guy I don't see a lot of core innovation. Somehow I've been able to understand pretty much every financial instrument I've come across using a few

As a finance guy I don't see a lot of core innovation. Somehow I've been able to understand pretty much every financial instrument I've come across using a few basics that you learn immediately when you get into the business: Time value of money, optionality, non-arbitrage. There's a million ways to cook up a financial product from those and I'm not going to pretend I know them all, but it's like how a chef can look at a dish from another culture and still more or less describe what it is: sugar, fat, acidity, heat, etc. When exciting things have happened in finance it's often been purely because the exciting thing became legal. Things like buybacks or the repeal of Glass-Steagal. The other thing that can happen is that some sales team finds a way to sell the thing that creates an ecosystem around it, like Credit Default Swaps. Rarely is it the financial contract itself that is so inventive as to create a market.

pyuser583 3y ago
Is there a book about this you recommend? Those basic concepts?
- lordnacho 3y ago
  Hull. Options, Futures, and Other Derivatives. Also Wilmott. Can't remember the name but it will be obvious. It's pretty much high school math, you establish what the cash flows are and the value of the thing flows from there. When it comes to optionality you probably haven't done stochastic calculus in high school, but you can follow along anyway. Both books will explain interesting things like how to price an option on an option, that kind of thing. Non-arbitrage is what holds the the whole thing together: if the price didn't follow {rules} then you could do {steps} to make free money.
  - temp51723 3y ago
    Paul Wilmott Introduces Quantitative Finance
gizmo 3y ago
> Time value of money, optionality, non-arbitrage. Another big one is "opacity". A financial product that is convoluted and needlessly complicated allows the most sophisticated financial players to consistently take advantage of the rest. Much in finance is zero sum. Your outperformance is somebody else's underperformance. Financial products that are understood by everybody will not make you a lot of money, because they will trade approximately at their fair value. This is why so much in finance is complex instead of simple. By analogy: PDF is terribly complicated because Adobe didn't want their PDF software to become commoditized. A bad and illogical file spec benefits Adobe at the expense of everybody else.
- sharemywin 3y ago
  JavaScript frameworks?
nologic01 3y ago
An important aspect of innovation in financial services is improved risk management. A mildly cynical person might start giggling uncontrollably at the idea that the financial sector is propagating good risk management technology, yet the picture is quite nuanced: Our world would be a more brutal place without insurance contracts and pension schemes. So there is a grain of truth. There are genuine if unfinished financial innovations and they are important. The trouble is that, by-and-large, recent decades have seen nothing of lasting utility coming from the financial sector. In fact the whole thing seems to be unwinding. Take for example the suddenly hot topic of interest rate risk which is blowing up regional US banks left and right. This was supposed to be a solved risk management problem. Interest rate derivatives have been developed after the Savings and Loan crisis and investment banks have made gazillions of revenue peddling "interest risk management" tools. Much has been said about the role of regional bank managers, the role of social media the role of watering down regulation etc. What I have not seen much discussed is the role of those risk management intermediaries. MIA? I at some point a smart cookie will follow the money and publish a lurid account of how the "solved problem" went all pear shape.

pyuser583 3y ago

Is there a book about this you recommend? Those basic concepts?

lordnacho 3y ago
Hull. Options, Futures, and Other Derivatives. Also Wilmott. Can't remember the name but it will be obvious. It's pretty much high school math, you establish what the cash flows are and the value of the thing flows from there. When it comes to optionality you probably haven't done stochastic calculus in high school, but you can follow along anyway. Both books will explain interesting things like how to price an option on an option, that kind of thing. Non-arbitrage is what holds the the whole thing together: if the price didn't follow {rules} then you could do {steps} to make free money.
- temp51723 3y ago
  Paul Wilmott Introduces Quantitative Finance

gizmo 3y ago

> Time value of money, optionality, non-arbitrage. Another big one is "opacity". A financial product that is convoluted and needlessly complicated allows the most sophisticated financial players to consistently take advantage of the rest. Much in finance is zero sum. Your outperformance is somebody else's underperformance. Financial products that are understood by everybody will not make you a lot of money, because they will trade approximately at their fair value. This is why so much in finance is complex instead of simple. By analogy: PDF is terribly complicated because Adobe didn't want their PDF software to become commoditized. A bad and illogical file spec benefits Adobe at the expense of everybody else.

sharemywin 3y ago
JavaScript frameworks?

nologic01 3y ago

An important aspect of innovation in financial services is improved risk management. A mildly cynical person might start giggling uncontrollably at the idea that the financial sector is propagating good risk management technology, yet the picture is quite nuanced: Our world would be a more brutal place without insurance contracts and pension schemes. So there is a grain of truth. There are genuine if unfinished financial innovations and they are important. The trouble is that, by-and-large, recent decades have seen nothing of lasting utility coming from the financial sector. In fact the whole thing seems to be unwinding. Take for example the suddenly hot topic of interest rate risk which is blowing up regional US banks left and right. This was supposed to be a solved risk management problem. Interest rate derivatives have been developed after the Savings and Loan crisis and investment banks have made gazillions of revenue peddling "interest risk management" tools. Much has been said about the role of regional bank managers, the role of social media the role of watering down regulation etc. What I have not seen much discussed is the role of those risk management intermediaries. MIA? I at some point a smart cookie will follow the money and publish a lurid account of how the "solved problem" went all pear shape.