Notoriously, works of mathematical finance can be precise, and they can be
comprehensible. Sadly, as Dr Johnson might have put it, the ones which are
precise are not necessarily comprehensible, and those comprehensible are not
necessarily precise.
But both are needed. The mathematics of finance is not easy, and much
market practice is based on a soft understanding of what is actually going on.
This is usually enough for experienced practitioners to price existing con-
contracts, but often insufficient for innovative new products. Novices, managers
and regulators can be left to stumble around in literature which is ill suited
to their need for a clear explanation of the basic principles. Such 'seat of
the pants' practices are more suited to the pioneering days of an industry,
rather than the mature $15 trillion market which the derivatives business has
become.
On the academic side, effort is too often expended on finding precise
answers to the wrong questions. When working in isolation from the market,
the temptation is to find analytic answers for their own sake with no reference
to the concerns of practitioners. In particular, the importance of hedging
both as a justification for the price and as an important end in itself is often
underplayed. Scholars need to be aware of such financial issues, if only
because some of the very best work has arisen in answering the questions of
industry rather than academe.