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bindex_derman.qxd 7/21/04 12:18 PM Page 273 Index A American Stock Exchange, A Programming Language (APL), 114 options conference,Amex, 154 Academic jobs, scarcity, 51 warrants, 217 Academics, isolation, 87–88 Analytics (company), 119 Achyuthuni, Rao, 219 Anderson, P.W., 27 Adams, Scott, 103 Animorphic (company), 182 Adjustable Rate Mortgage (ARM) Anthroposophists, 89 ARM-based structures, 196 APL. See A Programming Language idiosyncrasies, 192 Applied mathematics 21 pools, 196–198 Applied physics, employment, 92 prepayment rates, regression model, Arab oil embargo (1973), 4 201 Arb group. See Meriwether research group, 190 Area 10. See Bell Laboratories Adler, Dennis, 141 Area 90 (Network Systems). See Bell Adler, Margot, 96 Laboratories AI. See Artificial intelligence ARM. See Adjustable Rate Mortgage Akers, Karen, 96 Aron, J., 205 Algorithmics (financial software Art of Computer Programming,The company), 179 (Knuth), 114 Allen, Paul, 115 Arthur D. Little and Co., 144 Allstate (company), 6 Artificial intelligence (AI), Goldman Amazon.com, 108 approach, 208 American Express Asian call option, purpose, 222 merger, 179COPYRIGHTEDAspen MATERIAL Center for Physics, 57, 81 American Finance Association, 241 Asymetrix (company), 115 American Mathematical Society, 78 Atomic physics, 21, 38, 82 American mortgage market, size, AT&T. See Bell Laboratories 192 advanced switching systems, 4 American Physical Society, 76 business uniform, 126 meeting (1969), 94 employment, view of, 105 American put value, closed-form penal colony, experienced as, 95 solution (search for), 97 share, future price (variation), 153 273 bindex_derman.qxd 7/21/04 12:18 PM Page 274 Ⅵ 274 Ⅵ INDEX AT&T Technical Journal, 113 Members of Technical Staff (MTS), At-the-money option, 232 98–101 At-the-money put, 226 programming duties, 108 Auguries of Innocence (Blake), 90 treatment, 102 AutoBond (Diller), creation, 124, 179 space program funding, 93 Average call option, purpose, 222 Bell System Technical Journal, 100 Avery, Oswald, 77 Bell Telephone Companies, 103 Bellcore (company), 103 B Bellow, Saul, 72 Baby Bells, divestiture from AT&T, Bergier,Alex, 229–231 103 Berk, Jonathan, 139 Back-of-the-envelope methods, 199 Berkeley University, 3, 105 Backus, John, 111–112 Bernstein, Jeremy, 57, 80 Backus Normal Form (BNF), 112 Beta decay, 35 Baker, Howard, 154 Bettelheim, Bruno, 72 Bank of America, partnership. Bezos, Jeff, 108 See D.E. Shaw & Co. BGM. See Brace-Gatarek-Musiela Bankers Trust, 252 Big Bang, 41 Bannister, Roger, 57 Binomial model, 234–235 Bardeen, John, 100 Cox-Ross-Rubinstein model, 130, Barfield, Owen, 72 135 Barrier options Binomial trees, 235. See also Implied hedging gold production with. See binomial tree Long-term barrier options Bio-informatics programs, 180 jump probability/size, sensitivity to, BK. See Black-Karasinski 233 Black, Fischer, 139–140, 143–144, BDT. See Black-Derman-Toy 155–156 Bear Stearns, 126, 178–179 awards, 171, 261 mortgage portfolio valuation clarity/directness/informality, system, 124 167–168 Bég, Mirza Abdul Baqi, 78, 119 collaboration, 154, 188 Bell, Beverly, 150, 160 death, 172 Bell Journal of Economics and disapproval, 148–149 Management Science, 101 first meeting, 146–148 Bell Laboratories (AT&T), 4, 41, 81 independent thinking, 171 Area 10, 100–101, 113 meetings, 167 Area 90 (Network Systems), 100 patience, 162 arrival, 141–142 precision, 148–150 bureaucracy re-employment by, 204 depth of, 187 speech, 202 irrationality, 103–104 view of quant groups, 218 company rules, 96–97 Black box computerized statistical employment, 92–94 arbitrage, 13 exit, 126–127 Black-Derman-Toy (BDT) model, managerial hierarchy, 99–100 160–162 manageriality, cult of, 101–102 application, 190 bindex_derman.qxd 7/21/04 12:18 PM Page 275 INDEX Ⅵ 275 Ⅵ availability, 199 Bloomberg (financial software com- development, 234, 263 pany), 5 equal-period version, 163 BNF. See Backus Normal Form research, publicizing, 169 Bohr, Niels, 2 stochastic factor, addition of, 163–164 Bond options two-dimensional version, model. See Goldman, Sachs and Co. investigation, 165 sale, 133 work, completion, 184 traders, 141 Black-Karasinski (BK) model, 161 valuation models, 130 trees (with variable periods), Bond Portfolio Analysis (BPA), 121, incorporation, 163 187, 190 Black-Scholes calculator, usage, 12 group, 127 Black-Scholes distribution, 152–153 reports, 194 Black-Scholes formalism, 193 Bonds Black-Scholes formula convexity, 11 calibration, 214 duration, 11, 148 what it tells you, 212–213 issuance, 121 Black-Scholes implied volatilities, 227 portfolios, structuring, 139 Black-Scholes model prices, calibrating to, 159 coding, 195 risk system, 179 Black-Scholes options pricing model, traders, analytic/mathematical skills, 5, 143–147 122 calibration, 214 values, comparison, 226 extensions, 241–242 yield, 152 improvement, local volatility 247 Bookstaber, Rick, 154 risk, cancellation, 8 Borror, Jeff, 126 seminar on, 105 Bosco usage, 10, 151 creation, 136 usefulness, 7 demonstration, 147 Black-Scholes single-volatility usage, 141 framework, 244–245 BPA. See Bond Portfolio Analysis Black-Scholes stock option model, Brace-Gatarek-Musiela (BGM) modifications for bonds, 134 model, 161 Black-Scholes value Brattain,Walter H., 100 replication method, convergence to, Brenner, Menachem, 154 170–171 Bronx High School of Science, 39 Black-Scholes-Merton Brookhaven National Laboratories, framework, 168 20, 43–44 model, 172 Bubble chamber20 Blaha, Steve, 103–104, 114 Buckwalter,Alan, 244 Blake,William, 30, 64, 90. See also Buddhism, living principles, 20 Songs of Innocence and Business Analysis Systems Center, 93, Experience,Auguries of 97, 117, 126 Innocence arrival, 108 Blavatsky, Madame, 73 escape from, 112–113 Bloomberg, Michael, 199 location, 100 bindex_derman.qxd 7/21/04 12:18 PM Page 276 Ⅵ 276 Ⅵ INDEX C Citibank, 200, 252 C (programming language), 11, 100, Civilization, discontents, 203 110 Clarendon Labs, 70 usage, 106–107, 113, 135 Clark,Wesley, 262 C++ (programming language), 106, CNN, 263 182 Cobol, usage, 119 usage, 179 Cobrinik, Zach, 120 C (program), generation, 115 Cockney rhyming, 138 C programming (test), 126 Collective behavior, 27 CAC-30, 222 Columbia University, 3, 265 call option, purpose, 221 antinepotism laws, 23 California Institute of Technology computer science courses, 108 (Caltech), 46 dog years, 29 Call options, 132. graduate study, 14, 21 purpose. See also Asian call option; lessons learned, 26 Average call option; CAC-30 physics Callable bonds, 160 class, size, 93 Cambodia,American invasion, 49–50 department, 22 Cambridge Tripos examination, professors, 37 21–22 “quals” (qualifying exams) 30 Cape Town. See University of Cape Commodity inflation (1990s), 91–92 Tow n Compton scattering, Klein-Nishina Capital Asset Pricing Model (CAPM), formula, 70 105, 169–170 Computer languages, grammar, 112 CAPM. See Capital Asset Pricing Computer programs, writing, 30 Model Continuous Time Finance (Merton), 246 Casio, information-storing watch, 150 Continuous-time financial modeling, C-ATS (company), 179 246 CDC IXIS (company), 186 Cooper, Graham, 238, 243 Celestial Seasonings Tea Company, Coppola, Francis Ford, 180 86 Corey, E.J., 29 CERN. See European Center for Cosmic Code,The (Pagels), 79–80 Nuclear Research Cosmic rays, 20 Chang, Lay Nam, 60–62, 66 Cosmology, 80 Chaos: Making a New Science (Gleick), Courant Institute, 3 71 Cox, John C. Chargaff, Erwin, 186 award, 261 Charmed quark, 60 textbooks, 141–142, 224, 235 decay, 66 Cox-Ingersoll-Ross (CIR) model, Chase, Chevy, 140 161 Chogyam Trungpa, 85 Cox-Ross-Rubinstein model. Chomsky, Noam, 112 See Binomial options Christ, Norman, 42–43, 44, 49–50, Cranks, 14 119 Cronin, Jim, 62 CIR. See Cox-Ingersoll-Ross Currency, natural, 213 Circumstance, force, 175 Cvitanovic, Predrag, 70–71 bindex_derman.qxd 7/21/04 12:18 PM Page 277 INDEX Ⅵ 277 Ⅵ D Diffusion, 229–232. See also Stock Dattatreya, Ravi, 120, 130, 132 prices Goldman departure, 141 model. See Jump-diffusion model; introduction, 126 Yield model, for bond options, 148, Digital (Digital Equipment 153–154 Corporation), 108 modification, 134, 150 Dilbert (Adams), 103 D.E. Shaw & Co. See Shaw & Co. Diller, Stan, 120–121, 123, 178 Bank of America, partnership, 110 FSG control, 137 creation, 109 influence, 124 Delta, 225 interview, 124–125 Dembo, Ron, 139 view of quant groups, 218 Demeterfi, Kresimir, 189 Diller’s Dillies, 123 Dengler,Ted,180–181 Dillon Reed, 141 Denmark. See Kingdom of Denmark Dimuons Department of Defense, research distribution, 60 funding, 3–4 events, 58–59 Department of Energy production, theory, 66 research funding, 3–4 speed, 61–62 research grant, 49 Dirac, Paul, 62 Young Investigator Award in High Dissident Row, 138 Energy Physics Research, 86 Distraction, during meditation, 88 Derivative security, 5–6 DLJ (company), 252 characteristic, 6 Doctoral research, 53 Derivatives. See Interest-rate Doctoral thesis, 45 derivatives completion, 49–50 scandals. See Orange County; Doers, contrast. See Thinkers Proctor and Gamble DOS, 140, 147, 219 Derivatives Analysis group, Dot-com bubble, termination, 102 See Goldman, Sachs & Co. Dove,Arthur, 73 Derivatives:The State of the Art, Downs, Jim, 97, 99, 101 (conference) 246 Dress for Success (Molloy), 103 Derivatives (Wilmott), 267 Dumas,Alexandre, 138 Derman, Eva, 49, 53, 54, 57, 58, 62, Dumas,William (Roscoe), 138–139 67, 78, 81–84, 90–94, 120, Dupire, Bruno, 238, 241 125, 130, 135, 201 IAFE talk, 243 Derman, Joshua, 69, 71, 76, 79, 81–84, paper, submittal, 243 86, 90, 91, 94, 95, 97, 116, 117, Duration hedging