Valuation Versus Risk Management

Valuation and risk management, two sides of the quant business, must be treated with equal sophistication, with equal respect, and with equal suspicion. And there must be closer interaction between them.

In education, valuation should not be the domain of the most abstract of mathematicians with risk management its more primitive partner. In practice, quants must not produce models that risk managers cannot understand.

At every stage of valuation and model development you must be asking questions about risk and robustness. It is dangerous to come up with some fancy model and only afterwards start asking questions about model error. Anyone who has ever calibrated a model knows that the methods used to mitigate model risk almost come as an afterthought, and are totally inconsistent with the original model. This need not be the case.

In the CQF we treat valuation and risk management as equals. The structure of the CQF is unashamedly mathematical. Module by module we add mathematical flexibility, and in each lecture you will see model risk and model robustness discussed alongside the theory of valuation. This is how quantitative finance ought to be taught. This is the mature approach to the subject, and it will help to resolve many of the discrepancies between finance theory and finance practice.

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