Random Variables
Map uncertain outcomes to measurable numerical values.
Build the mental model first.
A random variable is a rule that assigns a number to each possible market outcome. The randomness is in the outcome, not in the rule.
Map uncertain outcomes to measurable numerical values.
Now make it exact.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Every model has a price.
Educational conventions are stated explicitly and may simplify market quotation or settlement details.
Rates are continuously compounded unless the section says otherwise.
Inputs are deterministic in the base model.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Why a quant cares.
P&L distributions, payoff definitions, risk measures and simulation all start here.
The hedge has opinions.
Start with the quote convention, then ask which Foundations risk survives the hedge. A number without its convention is merely well-dressed ambiguity.
Ask Bateman about this model →