actuary considering QF

[examinator]

Hey Quants. I am currently in my last year of obtaining a bachelors degree in mathematics and also persuing a career in actuarial science. I have been studying for my 3rd exam MFE which is entirely option pricing (binomial trees, black-scholes, brownian motion etc) and also covers interest rate models. I am finding it very facinating so much that I am now considering QF. Years from now I would like to establish an investment portfolio and trade to the point where I can retire and do it full time. So I have a ot of questions for you guys feel free to answer anyone of the questions if you don't want to read them all.

1.) The actuarial curriculum would give me skills in probability and statistical inference, statistical modeling, credibilty theory, financial mathematics, Options pricing and manging risk, and corporate enterprise finance and investments. Say I throw in a C.F.A credential would this skill set give me the potential to become a successful investor/trader or should I just become a quant if this is really what I want to do?

2.) Does the advanced mathematical knowledge a quant learns give them the potential to become highly successful investors/traders? In other words can all this advanced financial modeling and analysis be used to exploit the market and make $$$ given you have a large bankroll?

3.) when I pass the first 4 actuarial exams (probability, financial mathematics, statistical modeling and stochastic processes, financial economics(option pricing), and credibility theory) would these plus my degree be enough to land me a entry level quant position?

4.) Is there an examination process for becoming a quant? What is the starting salary for a quant and what is the ending salary of the average retiring quant?

Sorry for the long post. thanks in advance!

 

[alain]

Here are my answers:

1 and 2) Nothing prepares you to be a succesful investor or trader just practice and experience. Take some money and play with it.

3) It might be possible. It all depends on you. If you are able to land and interview and how well you do in the interview. Keep in mind that you will be going agains people with masters and PhDs so you need to be extremely well prepared. It's not impossible but it could be unlikly.

4) No, no tests of any kind. Starting salaries vary from 40s to 100s depending on your experience. Ending salary also depends on you.

 

[examinator]

Thanks for the quick reply.

On 1 & 2. I know successful investing will only come with experience and perseverance. So you mean to tell me being a quant for a career gives no added advantage to becoming a sucessful investor over persuing another career? Don't quant employers use you to make profits in the finance world? What exactly are you guys used for?

Say I land a quant job with my actuarial credentials and I throw in the CFA as well? Will I be required to continue studying in my free time?

Sorry for all these newbie questions.

 

[Eugene Krel]

You may want to browse these forums for a couple of hours and read the other threads as well as the wiki. There are several informative posts that will help you understand how a quant is used.

There is no "syllabus" for a quant like there is for an actuary. However, you are expected to learn what you need to do the job and stay competitive. Your exams (soa) may help demonstrate mathematical knowledge, but only as long as the interviewer knows what the exams cover.

The actuarial syllabus doesn't prepare one for a programming intensive job, so make sure to learn c++ as well as you can.

 

[alain]

it might depends. What kind of asset classes or instruments are we talking about here?

correct, employers use quants to make money because quants (in theory) are prepared to price complex financial instruments, find out the true value of those instruments (that's the basic idea). They can also, again in theory, minimize risks of investing in financial markets.

As for last question, you will never stop studying in this field.

 

[examinator]

You tell me.
I would guess options since to me it seems that there fair value is in the realistic grasp of mathematics as the cost of an option is really an insurance premium for how risky the asset is. Couldn't one buy undervalued options and sell them for more than they are worth or vice versa? Or just be a option writer in which a small amount of money would be added to the premium which in the long run would represent your profit? Of course you would need a large bankroll or at least no how much you can "gamble" given the size of your bankroll in order to protect yourself from random fluctuations from the mean.

 

[IlyaKEightSix]

Options as insurance...uck. Thinking like that rather along the lines of a casino takes the fun out of it.

 

[doug reich]

All of those strategies are out there: selling naked options is speculation of the highest order; see Victor Niederhofer. Buying cheap, out of the money options is Nassim Taleb's bread and butter; see his books: the Black Swan and Fooled By Randomness.

You'll find that the more approachable a subject, the hard it is to make money. Anyway, the method of pricing is not generally not complicated; the challenge is getting the right parameters.

You tell me.
I would guess options since to me it seems that there fair value is in the realistic grasp of mathematics as the cost of an option is really an insurance premium for how risky the asset is. Couldn't one buy undervalued options and sell them for more than they are worth or vice versa? Or just be a option writer in which a small amount of money would be added to the premium which in the long run would represent your profit? Of course you would need a large bankroll or at least no how much you can "gamble" given the size of your bankroll in order to protect yourself from random fluctuations from the mean.

 

[examinator]

All of those strategies are out there: selling naked options is speculation of the highest order; see Victor Niederhofer. Buying cheap, out of the money options is Nassim Taleb's bread and butter; see his books: the Black Swan and Fooled By Randomness.

You'll find that the more approachable a subject, the hard it is to make money. Anyway, the method of pricing is not generally not complicated; the challenge is getting the right parameters.

I agree, assuming volatility is constant is being to optimistic, in fact a price chart looks like a random variable that is constantly changing its parameters at random points in time, which actually makes sense since the market is constantly "updating itself" when new information is learned.

I'll look into the authors you mentioned. What are some good books that go beyond the basic option pricing models, in particular developing models with a non constant volatility and go in depth at making a model realistic as possible?

 

[DominiConnor]

"Of course you would need a large bankroll or at least no how much you can "gamble" given the size of your bankroll in order to protect yourself from random fluctuations from the mean."

Examinator might find the Kelly Criteria an interesting thing to learn about relevant, and if you read Bill Ziemba's work on utilising it, slightly scary

 

[zlyufl]

Ok, I realized I am entitled to answer your questions as a senior PhD student in finance who finished all preliminary exams of SOA and passed three levels of CFA, did quant internship on the street.

1) Completely agree with all the postings above.
Besides, QF, SOA and CFA are distinctively different sets with visible overlap. If you accumulate them in a organized way, it does pull you closer to a successful investor, but I still think hands on experience, constant self-reflection and superior psychology and mentality are the crucial ingredients.

2) No better answer than answers downstairs.

3) I don't think so, seriously. The spectrum and depth of material covered in SOA preliminary exams are far below the fundamental qualification for an entry level quant. Plus, you never code just by passing SOA exams. I know McDonald's book is very well-written, insightful book ( I found it illuminating too when I prepared for my SOA MFE even I had considerable exposure and solid training in related field before) which invites you to the derivative world, but it is far from enough to achieve what you expect.

4) no Further comment.

I hope my answers help.

 

[IlyaKEightSix]

Well I just got a 5 (failure barely) on my FM exam. From my experience, all of the stuff you study for you use very little of at work if anything at all. I'm pushing papers and doing data updates and audit projects, but not using probability or finance, which is disenchanting to say the least.

Part of the appeal of being a quant is that what you're expected to learn in academia I feel that you're expected to use, not just to learn so you can toot a horn to command a paycheck.

Right now though, actuarial science is still a very strong career option for me, but I'm also really wanting to make money for Goldman Sachs, since that firm doesn't screw around. I feel I could learn so much there, if only I can get in.