Opportunities in Finance for PhDs

1
Opportunities in Finance for PhDs

• by Peter Carr, PhD
• Principal, Banc of America Securities

2
Introduction

• Please ask questions at any time
• Here are some questions Ill be answering
• Who are the players?
• What is finance?
• When should you decide?
• Where would you work?
• Why go into finance?

3
Some Terminology

• Quants
• Wall Street
• Commercial vs Investment Banking
• Hedge Funds
• Derivatives

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Who Hires PhDs?

• Banks hire quants to develop models and to check
  them.
• Banks and hedge funds hire PhDs to develop
  quantitative trading strategies.
• Government agencies such as the Fed, FNMA,
  Freddie Mac, CFTC and the SEC hire PhDs to do
  research and to audit models.
• Software firms hire PhDs to specify models.

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Who are the Players?

• Quants
• Traders
• Structurers/Marketers
• Developers
• Risk Managers
• Middle Office/Back Office
• I bankers
• Analysts
• Strategists

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Job Titles

• Assistant/Associate
• Vice President
• Principal/Senior Vice President
• Managing Director/Partner
• ?

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Why Go into Finance?

• Challenging multi-disciplinary problems.
• Fast-paced competitive environment.
• Enjoy interacting with people and computers.
• As a new field, there is a lot of low hanging
  fruit.
• Compensation is good, but hours are long and
  frustrations can be enormous.
• You dont have to wear a suit or skirt.

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Where Would You Work?

• New York, London, and Tokyo are the largest
  financial centers.
• In the USA, PhDs also work in Chicago, LA,
  Atlanta, Charlotte, SF, Tulsa, and Houston.
• Internationally, PhDs ply their trade in
  Toronto, Paris, Frankfurt, Hong Kong, Singapore,
  and Sydney.
• Travel is usually a small part of the job.

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When Should You Decide?

• Forward contracting is rare for PhDs. Companies
  usually have no need (no head count) or just one.
• The interview process takes a few months and
  usually involves multiple visits.
• If you have a strong locational preference for
  NY, London or Tokyo, you might consider moving
  there first.
• Send your resume and cover letter 1-3 months
  before graduating.

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Get a Job

• The qualities most in demand are
• communication skills
• analytical skills
• computational skills.
• cradle to grave capability.
• Most firms believe that the finance can be
  learned on the job. However, risk management is
  probably the largest growth area and likes
  financial/empirical skills.

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Interviewing Skills

• Take charge
• Bring your resume
• Remember names
• Brain teasers
• Dont discuss comp, hours, vacations and other
  perks until you have an offer.

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Communication Skills

• Black Scholes is the language of options
• A picture is worth a thousand words
• Walk the walk and talk the talk
• Tolerate ambiguity in others dont tolerate it
  in yourself.

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Analytical Skills

• Probability Theory
• PDEs
• Mathematical Maturity
• Financial Maturity

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Computational Skills

• (Quasi) Monte Carlo
• Finite Differences/Trees
• Root Finding
• Splines
• Fourier Methods
• C/C/Java, not Fortran,Pascal
• Unix and NT are most widely used OSs

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Some Financial Instruments

• Bonds, Stocks, Commodities, FX
• Forwards, Futures, Swaps
• Vanilla Options
• Exotic Options
• Convertibles/Structured Notes
• Credit Derivatives

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Learning Derivatives Pricing

• Hull is usually too easy for PhDs, yet too hard
  for most MBAs - for non-quant Wall Streeters, it
  is just right.
• I recommend reading the classics - Black Scholes
  73, Merton 73, Black 76, Cox Ross Rubinstein 79,
  Heath Jarrow Morton 88, Dupire 94.
• There are now many excellent books presenting the
  martingale approach to pricing.
• The PDE approach is emphasized in Wilmotts books.

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A Quants Career Path

• First job is often computer intensive
• With experience, quants often
• head quant groups
• trade
• structure
• manage risk.
• With even more experience, some quants
• start hedge funds
• manage departments.
• The fastest way to move up is to get dollars
  attached to your name.

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Some Good Things to Know

• Wall Street research is not academic research.
• All theories are wrong.
• Uneducated does not mean dumb.
• Location, location, location.
• Buy low sell high.