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Could your MD solve this simple equation?

As you ascend the corporate ladder in your banking career, expectations that you will do grunt work naturally diminish. Sometimes, however, people are promoted too soon and lack the skills to help those below them.

This can be especially problematic in an area like quantitative risk, where fundamental mathematical competency is of the utmost importance. For quant risk professionals doubtful of their MD, one equation can serve as a litmus test to prove a manager's worth.

The equation was revealed by Tanvir Bhatti, currently working on Risk at fintech digibank Revolut. Bhatti has an extensive history working on quantitative risk in investment banking, spending over 23 years across HSBC, JPMorgan and Citi where he ultimately became an MD and head of the firmwide model risk group.

Bhatti says "the Black-Scholes partial differential equation" is fundamental to success in the quant space. "To be a competent individual, as is the case with a majority of quants, you must also know how to apply this knowledge."

Giving an example, he said "a Managing Director, who worked in an advisory firm, interviewed with me 12 years ago." When asked to answer technical questions he became defensive and "could not provide a reasonable response."

The question he asked was this:

"Using a flat 3% curve and 20% vol I have: 
A) 3y into 1y ATM straddle 
B) 5y into 1y ATM straddle 
C) 10y into 1y ATM straddle 
Comparing prices, what is the relationship?"

Bhatti gives a look at the equation and a solution to it, seen below:

Bhatti describes MDs that cannot solve this as 'helicopters', "someone who hovers above the details and is not tested because of their seniority."

Not everyone was in full agreement, however. "Its ok to forget things that stop impacting one’s career path over time." said Rahul Malhotra, formerly a senior portfolio manager at Allianz Investments, "A senior manager’s role is often to make available resources to a junior quant or connect him with the right teammates."

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AUTHORAlex McMurray Editor

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