An Introduction to Algorithmic Finance, Algorithmic Trading and Blockchain

Satya Chakravarty, Palash Sarkar

• Publisher: Emerald Publishing Limited
• Year: 2020
• Print ISBN: 9781789738940
• eBook ISBN: 9781789738957
• Topic: Business
• Subtopic: Business General
• Index: Business

The purpose of An Introduction to Algorithmic Finance is to provide a broad-based accessible introduction to three of the presently most important areas of computational finance, namely, option pricing, algorithmic trading and blockchain. This will provide a basic understanding required for a career in the finance industry and for doing more specialized courses in finance.An Introduction to Algorithmic Finance breaks down into three parts. The first part provides the necessary theoretical background to Derivatives, Options and Stochastic Dominance. The second part covers various algorithmic issues of finance, discussing specific algorithms, their applications and consequences. The third part of the book is devoted to blockchain and cryptocurrency which complements the first two parts.An Introduction to Algorithmic Finance is an interesting, important read for anyone interested in or invested in the finance industry & it highlights and explains current phenomena in algorithmic finance in an articulate manner.

Part I
Derivatives, Options and Stochastic Dominance

Chapter 1

Background and Preliminaries

The financial industry is enormously important to state, national and world economies. This industry relies extensively on mathematical modeling of underlying instruments. Computational techniques become helpful in designing related algorithms that enable us to understand how markets function and also lend themselves to highly relevant research problems.

To understand the application of a specific computational technique to the particular financial instrument, it becomes indispensable to have a clear perception of the underlying theory. However, because of vastness of the theoretical literature, some selection becomes necessary.

We choose the highly attractive field of option pricing, a core task of computational finance and risk analysis. An option is a contract that gives the holder the right, but not an obligation, to buy or sell an asset at a pre-agreed price, the strike price, on or before the date of expiry, the maturity date. The broad field of option pricing is quite ambitious and diverse enough to call for a wide range of computational tools. Confining mostly to option pricing enables us to have a more coherent and comprehensive textbook, to a large extent, and avoids being distracted away from computational issues. An option is a standard example of a derivative, a financial instrument whose value relies on one or more assets that are usually referred to as underlying assets. Generally, it takes the form of a contract to buy or sell an asset or item like commodity, property, etc. at the strike price, on or before the expiration date. Other examples of a derivative include bonds, futures contracts, forward contracts and swaps. (For detailed discussions see, among others, Jarrow and Turnbull, 2000.) The financial market in which derivatives are traded may be designated as the derivatives market. We assume a perfect market in the sense that there are no costs of transactions, no restrictions on short sales and existence of a common borrowing and lending rate. Short selling is a business tactic that involves borrowing an asset and selling it immediately, repurchasing the asset (hopefully at a lower price) and returning it to the lender to close the process. (Chapters 11 and 15 of this monograph provide further discussions along this line.)

A derivatives market can be partitioned into two subgroups, one in which derivatives are traded in an organised exchange market where maintenance of market price and all transparencies are provided. An example of an exchange-traded derivative is an option. Under a futures contract, an exchange-traded agreement, the buyer is accountable to buy the underlying asset at a pre-arranged price at a future date. The seller makes the commitment to hand over the asset at the settled price and date. Another market-traded derivative is a bond, a debt security issued by government and corporate sectors to raise funds for various purposes including expansion of one or more sectors, infrastructural improvements and payment of existing debts. A financial market in which trading of bonds takes place is known as a bond or credit or debt market. A trading in the other market is of over-the-counter (OTC) type. This type of off exchange trading takes place directly between the traders without supervision of an exchange. An example of an OTC derivative is a forward contract under which two parties make an agreement to buy or sell an asset at a designated date on a promised price. A swap is an off exchange-traded derivative under which ...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Preface
• Part I Derivatives, Options and Stochastic Dominance
• Part II Algorithmic Issues
• Part III Blockchain and Cryptocurrency
• References
• Index