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 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.