Financial Numerical Recipes in C++

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This book is a discussion of the calculation of specific formulas in finance. The field of finance has seen a rapid development in recent years, with increasing mathematical sophistication. While the formalization of the field can be traced back to the work of Markowitz (1952) on investors mean-variance decisions and Modigliani and Miller (1958) on the capital structure problem, it was the solution for the price of a call option by Black and Scholes (1973); Merton (1973) which really was the starting point for the mathematicalization of finance. The fields of derivatives and fixed income have since then been the main fields where complicated formulas are used. The author intends this book to be of use for people who want to both understand and use these formulas, which explains why most of the algorithms presented later are derivatives prices.

This project started when the author was teaching a course in derivatives at the University of British Columbia, in the course of which he sat down and wrote code for calculating the formulas he was teaching. He has always found that implementation helps understanding these things. For teaching such complicated material it is often useful to actually look at the implementation of how the calculation is done in practice. The purpose of the book is therefore primarily pedagogical, although the author believes all the routines presented are correct and reasonably efficient, and he knows they are also used by people to price real options.

To implement the algorithms in a computer language the author chose C++. His students keep asking why anybody would want to use such a backwoods computer language, they think a spreadsheet can solve all the worlds problems. The author has some experience with alternative systems for computing, and no matter what, in the end you end up being frustrated with higher end "languages", such as Matlab or R (Not to mention the straitjacket which is a spreadsheet.) and going back to implementation in a standard language. In the author's experience with empirical finance he has come to realize that nothing beats knowledge of a real computer language. This used to be FORTRAN, then C, and now it is C++. All example algorithms are therefore coded in C++. The author does acknowledge that matrix tools like Matlab are very good for rapid prototyping and compact calculations, and will in addition to C++ in places also illustrate the use of Matlab, as well as other (public domain) tools.

This book is published as open-access, which means it is freely available to read, download, and share without restrictions.

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