Paul Wilmot: The Problem with Derivatives, Quants, and Risk Management Today

Original source: SimoleonSense.com .

Paul Wilmot is my favorite quant…

H/T MoneyScience
Introduction

Paul Wilmott is a financial consultant, specializing in derivatives, risk management and quantitative finance. He has worked with many leading US and European financial institutions. Paul studied mathematics at St Catherine’s College, Oxford, where he also received his DPhil. He founded the Diploma in Mathematical Finance at Oxford University and the journal Applied Mathematical Finance. He is the author of Paul Wilmott Introduces Quantitative Finance (Wiley 2007), Paul Wilmott On Quantitative Finance (Wiley 2006), Frequently Asked Questions in Quantitative Finance (Wiley 2006), and other financial textbooks. He has written over 100 research articles on finance and mathematics. Paul Wilmott was a founding partner of the volatility arbitrage hedge fund Caissa Capital which managed $170million. His responsibilities included forecasting, derivatives pricing, and risk management. Dr Wilmott is the proprietor of www.wilmott.com, the popular quantitative finance community website, the quant magazine Wilmott and is the Course Director for the world’s largest quant education programme the Certificate in Quantitative Finance (www.cqf.com).

Topics Covered

Current content: Introduction

Current content: The press has recently vilified derivatives and Warren Buffett famously called them “weapons of financial mass destruction.” What’s your feeling?

Current content: What’s the solution, then, as derivatives seem here to stay, be it for hedging and portfolio efficiency, or for unique different trading strategies? Is the answer greater transparency as some people have called for?

What about the regulators, then? Increasingly, there have been calls for greater regulation to solve the problems within the system, such as the nature of compensation.

Let’s talk about the instrument that’s been most in the press, credit default swaps (CDS), where the size of the market has become ridiculously large compared to the companies whose defaults they’re underwriting. What do you see as their future?

One thing that seems certain is that leverage is not going to be the same going forward. What’s the bank of the future going to look like?

Hedge funds have been particularly blamed for their role in the credit crunch. Were they culpable or just one of the culprits, along with banks and those investors who drove the demand for securitization?

The problem has now moved on from the financial sphere into the real economy. How do you wean people off this easy credit?

Quants have also had a rough ride recently thanks to CDOs and the like. What are your thoughts and what is the future for them?

People often don’t realize that any theory is only as good as its axioms. So what can be done about this?

Let’s end with the question that resonates most in the minds of financial leaders these days. What lessons, if any, can we take from the credit crunch?