Working on practical problems while reading

[sleekmover]

During my prep for MFE (in anticipation of admission) I am going through some text books. While the theory definitely helps but is it not more useful if one gets a chance to apply that theory in a practical problem as well. I am sure there must be lots of us out there who are working in financial sector and will have some examples of how they are applying theory to the porblems that they are required to solve as part of their job.

I have got a requirement to implement a Mark to Market calculation per trade for Swaptions and Interest Rate Guarantees (Caps, Floors, Straddles etc) in a system. The requirements have been consolidated by middle office in a document and passed on to me and my team. In the past I would have programmed the calculations without giving much serious thought. I would have consulted some online communities but since the document is coming from business who know their subject pretty well I would not have bothered. However, now while I am reading the book from Hull I can see that chapters 27 to 31 specifically talk about this subject in detail. I am going to look at the specification in detail and compare it with the notes on these chapters. If there are some missing items/considerations, who knows I might even suggest this back to business?
Additionally, while going through the text and specifications I came across T4M, TAM, TAG Swaps. These are French IRDs and have a different yied curve compared to the zero rate yield curve used in almost all countries deling with IRDs. An interesting article pointed me to the difficulties software vendors have been facing in the French market as it has its own preferences and way of dealing with IRDs. Since there were no products that cater to the T4M swap yield curve, a french bank created its own curve and then handed over to a software vendor so other French banks can use it.

I love this marrying up of practical and theoritical concepts. If people have more such examples I am sure those will benefit many people in the quant community.

 

[Tsotne]

This is most achieved while studying at university and at the same time having internship or part time job. I understand your point. Everyone should seek to keep theory and practice combined after finishing formal studies.

 

[sleekmover]

Again, while studying Hull I realized that concepts get more clearer to me if I do some practicals around them. For many years I have been contemplating participating in the India equity market as day trader. I feel now is the time to get this all together at one place. I have decided to trade in options (Call options to be specific) using my motilaloswal trading account. Till now I have bought stocks at the bottom of market and have kept invested for at least 5 years before moving out. I would now like to be an active trader there.
I need a two months period to plan and study before I delve deep into the market. Here is my plan for that:
1) Get the funding - Rs 100000 ($2000) should be enough to start
2) Understand the Indian market - which stocks allow option trading, Options validity etc.
3) Study Hull completely to help me derive Call option prices (and see if I can benefit from arbitrage itself...) and get useful information out from stock yield curves
4) Write up a C++ (and or Excel sheet using VBA) program to get key indicators based on market inputs
5) Do some dummy trades by entering them in Excel sheet and monitoring performance daily till the Call option end date comes.
6) Attend an options trading class in India. Many mutual funds in India do this for free to encourage people into Options trading

What else?

 

[sleekmover]

ah yes!
7) Brush up my maths skills - first some basic stuff around Stochastic calculus/probability/curves and then on actual pricing of options using advanced algorithms such as Monte Carlo/Black Sholes etc