What is the purpose of derivative modelling?
Is it, as some traders have suggested a way of reusing obscure mathematics so that it doesn’t feel unwanted? Is it a
means by which society can cordon off socially inept individuals and keep them in one place thereby limiting the damage they
can do to society?
I would of course suggest not. But there
must be a reason for this branch of financial mathematics. There are the obvious ones that are bandied about, such as providing
a value for derivatives that are seldom traded and hence difficult to value or helping traders manage their risk from complex
derivatives. But in truth these are difficult objectives and if we set are targets too high there is every possibility that
we will end up mangled on the ground, legs askew, bones broken and with significant brain damage. These are clearly not injuries
to be trifled with.
I would therefore suggest a slightly lower target, at least to start with. Traders and structurers work hard in their
daily life creating wealth for our society. They make huge sacrifices for their goals, but it is important for them to make
time for their own personal development.
I have always seen mathematics as a way of communing with God. God reveals the structure, the rules of his world through
the language of mathematics (long ago it was Latin, but that was just when mathematics was not fully developed). Fundamentally
the beauty of his world is expressed, and can only be viewed in its full glory, via mathematics. The purpose of derivative
valuations then is too help these shepherd’s of wealth (as I like to refer to front office staff) to appreciate the
magnificence of God in their daily life. And without wishing to overstep the bounds of potential reality, not to mention taste,
I think mathematics is also the ideal way to converse with God. Through their consideration of the equations which we somewhat
foolishly use to model securities, traders are in their way talking to God. Appreciating the beauty of creation is always
a necessary step to being able to understand the language in which God speaks. And of course this is wondrous thing, bringing
light in to the lives of the exhausted workers of God.