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What Is Applied Quantitative Finance?

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  • Written By: M. McGee
  • Edited By: Lauren Fritsky
  • Last Modified Date: 01 September 2016
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Applied quantitative finance is a way of determining the trends which are used to decide if an investment is worth the risk. This branch of economics works with real numbers that come from real companies to make decisions that will have a direct impact on profits and investments. Other forms of finance are often separated from hard numbers or direct impact on decisions. As a result, the information used, and the decisions made, by applied quantitative finance economists are often very high priority for the investment area of a company.

The world of economics is divided up in a number of ways. One of the most basic divisions is between quantitative and qualitative. Quantitative refers to using hard numbers as the focus points of analysis, such as the income of a company over a specific period or the number of specific products sold in December. Qualitative is the exact opposite; it focuses on the intangibles, looking at how they impact the situation as a whole. For instance, a qualitative factor would be the happiness level of the workers and how that impacts productivity.

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Another of the major divisions is between applied economics and pure economics. Pure studies focus on how money, business systems and industry affect each other and the world around them. These studies rarely use real world data and don’t come up with definitive answers to existing situations. Applied economics works directly with real data to look at things that are happening in the world. These studies look at profitability, long-term trends and market cycles to predict what will happen to the market in the future.

From the above divisions, the basic meaning of applied quantitative finance is clear; it is a method of using concrete numbers to look at real-world situations. This type of economics primarily deals with two areas: derivative pricing and profitability calculation. These two areas make up a huge portion of investing, meaning that applied quantitative finance is used in some way for most investment transactions.

Derivative pricing is generally the simpler of the main areas of applied quantitative finance. A derivative is an asset that gets its value from another asset. For example, a stock option has no value on its own; its entire worth is connected to the stock referred to in the option. In this case, applied quantitative finance is used to see the basic value of the underlying asset and decide how that value will change over time. A value is then assigned to the derivative that represents the view of what will happen in the future.

Profitability is a little more complex. In this case, applied quantitative finance attempts to see the long-term and short-term trends both with the studied asset and with the market itself. It then can make a determination based on past trends that will predict the asset’s value sometime in the future. This value is compared to current value to determine if the asset is worth investing in.

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