Financial instrument pricing using C++

Getting into the lucrative parts of coding

Reducing security risks from open source software

Book review C++ is the most used language in that most lucrative of fields: financial engineering. Yet most of the people who use it for derivatives have no formal training in programming, and often use C++ as little more than C, or even as a mutant form of Fortran. The results are not always pretty.

Duffy tries to show how modern OO and pattern directed development could produce more robust code - that still runs fast. To that end, he doesn’t cop out by solving all “hard” problems by Monte Carlo simulation and, given that this sort of work is mostly structured number crunching, he adds to his coverage: STL, XML, Excel interfacing and patterns; as well as a good treatment of the underlying maths. That’s broader than most programming books even attempt and this means that the coverage of things like STL and UML are shallower than they’d be in a dedicated book. Nevertheless, if all you’re going to be doing is pricing basket options, then this focus probably suits you.

This book is aimed at those with at least undergraduate maths, so it first refreshes basic stats, calculus and linear algebra before getting to the real meat: numerical solutions to partial and stochastic differential equations (see here for some notes on the techniques mentioned below). Starting with the standard Euler scheme for discretisation, Duffy shows how this is hopelessly bad in the Black Scholes (BS) framework; and moves quickly into more appropriate fitting schemes, through Richardson and the more widely used predictor-corrector. As this is basically a cookbook, there’s not a lot of formal proof, although the code does allow you to compare the quality of the output of the methods described.

The more efficient methods tend to require the repeated solution of systems of equations, and Duffy skips lightly over the Cryer scheme brought to finance by Wilmott. A little more hand holding in this area would have added greatly to the value of the book. But the application of this set of techniques to BS is rather good, bringing in Crank Nicolson with its limitations; and showing how ADI et al can mitigate most of the issues, albeit at the cost of more complexity. The section on exotics is again too brief, but gives good tips on getting started.

There’s also an XML section, for no good reason that I can think of [fashion? Ed]; although it competently manages to link the relevant ideas into financial data even though hardly any quants get their data in that form as yet. The more common way of getting data is through Excel, and Duffy covers COM in enough depth that you can cook up your own interface relatively quickly.

In this it goes rather further and deeper than Bourg’s Excel book (see my review here), and thus it’s not really ideal for a beginner; but it’s refreshing to see someone go beyond yet another “…for dummies” level book.

Financial Instrument Pricing Using C++

Verdict: Duffy’s book is far from ideal as your first book on programming in mathematical finance (Wilmott, Joshi and Stroustrup cover that) but in today’s market, it is easily the best book to read after them.

Author: Daniel Duffy

Publisher: John Wiley & Son

ISBN: 0470855096

Media: Book

Buy this book at Cash & Carrion!

The Power of One eBook: Top reasons to choose HP BladeSystem

More from The Register

next story
NO MORE ALL CAPS and other pleasures of Visual Studio 14
Unpicking a packed preview that breaks down ASP.NET
Cheer up, Nokia fans. It can start making mobes again in 18 months
The real winner of the Nokia sale is *drumroll* ... Nokia
Mozilla fixes CRITICAL security holes in Firefox, urges v31 upgrade
Misc memory hazards 'could be exploited' - and guess what, one's a Javascript vuln
Put down that Oracle database patch: It could cost $23,000 per CPU
On-by-default INMEMORY tech a boon for developers ... as long as they can afford it
Google shows off new Chrome OS look
Athena springs full-grown from Chromium project's head
Apple: We'll unleash OS X Yosemite beta on the MASSES on 24 July
Starting today, regular fanbois will be guinea pigs, it tells Reg
HIDDEN packet sniffer spy tech in MILLIONS of iPhones, iPads – expert
Don't panic though – Apple's backdoor is not wide open to all, guru tells us
prev story


Top three mobile application threats
Prevent sensitive data leakage over insecure channels or stolen mobile devices.
Implementing global e-invoicing with guaranteed legal certainty
Explaining the role local tax compliance plays in successful supply chain management and e-business and how leading global brands are addressing this.
Boost IT visibility and business value
How building a great service catalog relieves pressure points and demonstrates the value of IT service management.
Designing a Defense for Mobile Applications
Learn about the various considerations for defending mobile applications - from the application architecture itself to the myriad testing technologies.
Build a business case: developing custom apps
Learn how to maximize the value of custom applications by accelerating and simplifying their development.