Much financial engineering and risk management today is concentrated on calculating the theoretically correct answer to a problem. Two examples of this are as follows.
Firstly, when asked for the square root of three, many people will take the time to work it out to be 1.732051. A quicker approach is to think that the answer is somewhere between 1.4 and two (as many people know that the square root of two is around 1.4 and the square root of four is two). Hence, given some intuitive interpolation, I can suggest that a market of 1.7 – 1.8 would be in the correct range.
Secondly, consider a convertible bond which trades actively in the market at 101-102. A model which offers a sophisticated but very theoretical treatment of the credit in a convertible bond values the same bond at 104. Does this make the bond cheap? Yes, if the value offered in the treatment of the credit is realisable in the real world. If not, then the value of the bond is 101-102 – non-realisable theoretical value is worthless.
The philosophy of Moore Quantitative Solutions Limited is to deliver practical, real-world and efficient solutions for derivative requirements and risk management. We will implement and offer practical advice – not simply talk about the theory – whilst being aware of issues such as the pitfalls of calibrating the model to the market, limited liquidity, bid-offer spreads, etc. We will take on clearly defined projects with specified end-products and will deliver usable, pragmatic results. Most work is performed off-site to reduce costs and overheads to the client.