Book Image

Learning Quantitative Finance with R

By : Dr. Param Jeet, PRASHANT VATS
Book Image

Learning Quantitative Finance with R

By: Dr. Param Jeet, PRASHANT VATS

Overview of this book

The role of a quantitative analyst is very challenging, yet lucrative, so there is a lot of competition for the role in top-tier organizations and investment banks. This book is your go-to resource if you want to equip yourself with the skills required to tackle any real-world problem in quantitative finance using the popular R programming language. You'll start by getting an understanding of the basics of R and its relevance in the field of quantitative finance. Once you've built this foundation, we'll dive into the practicalities of building financial models in R. This will help you have a fair understanding of the topics as well as their implementation, as the authors have presented some use cases along with examples that are easy to understand and correlate. We'll also look at risk management and optimization techniques for algorithmic trading. Finally, the book will explain some advanced concepts, such as trading using machine learning, optimizations, exotic options, and hedging. By the end of this book, you will have a firm grasp of the techniques required to implement basic quantitative finance models in R.
Table of Contents (16 chapters)
Learning Quantitative Finance with R
Credits
About the Authors
About the Reviewer
www.PacktPub.com
Customer Feedback
Preface

Option pricing


The binomial model works with the continuous process, while the Cox-Ross-Rubinstein model works with the discrete process. Option price depends upon stock price, strike price, interest rates, volatility, and time to expiry. We will use the package fOption for the Black-Scholes model. The following commands install and load this into the workspace:

> install.packages("fOptions") 
> library(fOptions) 

Black-Scholes model

Let us consider an example of call and put options using hypothetical data in June 2015 with a maturity of September 2015, that is, 3 months to time to maturity. Assume that the current price of the underlying stock is USD 900, the strike price is USD 950, the volatility is 22%, and the risk-free rate is 2%. We also have to set the cost of carry (b); in the original Black-Scholes model (with underlying paying no dividends), it equals the risk-free rate.

The following command GBSOption() calculates the call option price using all other parameters. The first...