Risk Latte - Making Quants out of Monkeys

Making Quants out of Monkeys

Rahul Bhattacharya
July 04,2006

In the fall of 1997, about three months after the devaluation of the Thai Baht and the beginning of the Asian financial crisis, I had come to Hong Kong for a job interview with Delhi-Bombay bank. Delhi-Bombay bank is one of Europe 's largest banks and a global behemoth that prides on, amongst other financial achievements, hiring the brightest Ph.D.s in Engineering and Sciences and turning them into quants, or "rocket scientists". It is another matter and one of those bizarre and ludicrous facts of life that a Ph.D. in Computer Science of Physics needs to become a banker to be finally called a "rocket scientist".

I was interviewing for the position of a quantitative analyst (the bank called such people "structurers", a word that does not exist in the English language dictionary) in a division called Relative Value Group, whatever that was. Till this day I marvel at my good fortune: of meeting with the gods of global markets. How I landed this interview, I honestly don't know, but if ever anyone asks me what would be my single biggest achievement in life it would be very difficult for me not to mention this feat. I was not from MIT, Cal Tech or LSE. Hell, I was not even from any of the IITs in India . I was not a Ph.D. and my CV was splattered with names of different employers across the globe; I was working for a boutique investment bank alright, but I was nowhere near the guys, in academic pedigree and skills, who make it to the Delhi-Bombay bank's Relative Value Group. And yet I managed a phone interview and finally managed to get an interview in person.

The guy who took my interview on the phone, one Mr. X, had asked me the difference between implied volatility and historical volatility and I had replied, rather sheepishly, that implied volatility is a geometrical concept whereas historical volatility is a statistical concept and there is a topological equivalence between them. This was pure bullshit; at least that was what my interviewer told me on the phone. After a few minutes into the interview he said: "cut the crap, just tell me how the volatility varies with the price of an option and how can we take that into account when pricing." And I again replied: "which volatility?" To me, the entire notion of volatility was suspect. Every time he brought up the issue of pricing a derivative we would get stuck on the concept of volatility and correlation. I said, "Sir, the concept of volatility and correlation are suspect. So we need to know what we mean by them. If you are talking about the statistical measure of correlation or volatility then that is fine. But if it is the implied concepts that you are talking about then we have a problem, for I am not sure if we can talk about implied variance or implied covariance, and if can't then we need to redefine volatility and correlation."

A few days later someone from HR of the bank called me and said that they wanted me to come to Hong Kong for a face to face interview with Mr. X.

The interview lasted exactly ten minutes, nine of which I kept silent. There were four guys in total, one of them a twenty something and a freshly minted Ivy league Ph.D. who came in with a laptop computer. One of them started off with something like this: "so, what is topological, topogogical..topo-what? - about my trade, you know I just put in an arbitrage trade.......what is topo-whatever about this?" Laughter all around. The kid, while playing with his laptop, asked me: "which school did you go to?" "Do you know what the Avogadro's number is?" "OK, let's take a stochastic equation of bond following a Brownian motion...." I wanted to correct him and say that a bond does not follow a Brownian motion like equity but rather it follows a Brownian bridge, but kept mum. The gods were busy asking me questions, and the funny thing was no one in that group gave me any time for any answers. They had come to hear their own voice.

Finally, Mr. X, took a piece of paper and drew a two dimensional graph. He said: " this is how the price of an option changes with the volatility....it is a straight line. It is a linear relationship and similarly I can use a two dimensional plane of volatility varying with price and time and then create a surface to price the options from the surface. What is so topological or mysterious about it?" The kid grinned and said: "yeah, it is simple math, you know. Math makes a quant out of a monkey!" More laughter. I took the piece the piece of paper on which he had drawn the graph and crumpled it. I said: "now the surface has wrinkles, your graph is no longer linear, Sir."

In the years between then and now, I have met numerous Ph.D.s and non-Ph.D.s; bright young Indian and Chinese engineers and scientists who don't work for banks like Delhi-Bombay bank and who are all monkeys, all very bright and all "rocket scientists" in the true sense of the phrase. And more importantly, these rocket scientists know that there is a world of a difference between a plane sheet of paper and crumpled one, that one is linear and the other is non-linear. Today, I truly believe we can turn these monkeys into quants who can become the pall bearers of the revolution that is taking place in the world of banking and finance.

A few days ago, I bumped into Mr. X in one of the bars in Lan Kwai Fong, a fashionable night club area of Hong Kong frequented by a lot of bankers. Of course, he did not recognize me. But as fate would have it, we were sitting pretty close to each other and somehow it turned out that the person with whom I was also very well acquainted with him. Banking is a small world in Hong Kong . After the pleasantries, he asked me "Do I know you? You seem very familiar. Cant place you, but I think I have met you before" And without giving me a chance to speak, he looked at my card and said: "Risk Latte, that's a funny name! What do you do?" I replied: "I make quants out of monkeys".



© Rahul Bhattacharya
This column is written by Rahul Bhattacharya and reflects his own views about life and business. It does not necessarily reflect the views and opinions of other members of Risk Latte Company Limited, Hong Kong (“the Company”) and the Company accepts no responsibility for any factual errors contained in the column and strongly advises readers not to pay much attention to it.

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