Latin sayingPersonal translation: Haste slowly.
The starting point of the reflection was my quest to answer the question ``What is the present value of a FRA?'' in a way that convinces me. The initial intend was a personal quest to understand the foundation of a fundamental, and in appearance simple, quantitative finance question. I could not find an answer in the literature satisfactory to me. The answers I could find were either ``it is trivial'', i.e. ``don't ask silly questions'', either a description of a replication argument for which it was not acceptable to discuss the numerous hidden hypothesis. Discussing the hypothesis was not politically correct as a scientist and as a business manager. For the former, it questioned a foundation of quantitative finance, and thus the developments build on those foundations. For the latter, it was not seen positively by executive committee members, board members and supervisors as it casted doubts on official accounting figures - maybe rightly so - and had legal implications; it was not acceptable to say that official figures were "fishy" or even simply uncertain.
Ironically, the first article to come out of those reflections, titled The Irony in derivatives discounting, was published just one month before the now famous August 2007. The publication was not a prediction of what would happen in the derivative market just after and should not be seen as a premonition. Neither should it be seen as a cause of the crisis. It was nevertheless an indication of inconsistencies in the practice of derivative pricing that were not answered by a coherent theoretical framework.
The book, which started, unbeknown to its author, seven years ago, is intended to be a description of the current status of the subject, which is now called the multi-curve framework. It borrows from the developments of numerous practitioners and academics working on the subject. The length of the bibliography, with most of the references dating from 2009 and after, is a witness of the activity on the subject over the last years.
Hopefully the reader will find as much interest in the subject as I have over the last eight years. Hopefully he will also be intrigued, surprised, amused and maybe amazed at some of the subject facets.
Oh, by the way, my quest is still on! I'm still asking myself ``What is the present value of a FRA?'', even if the question has changed to ``What is the collateral quote of a FRA?'' (read the book for the meaning behind the new question ;) ). A question source of insomnia ... and maybe the starting point of another book in a couple of years.
P.S. This post is largely inspired by the book preface.