Pawel Lewicki is an associate in the Derivatives Research department of J.P. Morgan Securities Inc. in New York, where he works in the area of interest rate derivatives, with a concentration in credit derivatives. The role of the Derivative Research department, where he has been for more than a year, is to investigate all problems related to the fair pricing and hedging of derivative instruments.
"A derivative is an instrument whose value is not determined by itself but rather it is determined in relation to some other, traded, underlying instrument," says Pawel. "Such derivative instruments are currently traded at some exchanges (like Chicago Board Options Exchange) and over the counter. My particular area, i.e. credit derivatives, is a new, recently developed application of the same derivative ideas, but applied to credit and loan related issues. It is concerned with synthetic credit exposures, i.e. it enables an investor to get exposure to the credit of a particular name without buying its bond or issuing a loan to that name."
Concepts from both mathematics and finance play an important role in his work. Fair pricing can be expressed completely in mathematical terms and the whole subject of derivatives saw its biggest development only after basic theoretical issues had been resolved by Black and Scholes on the ground of financial mathematics, which is as much a part of finance as a part of mathematics. "Therefore, in my every day work life," notes Pawel, "the expected values and partial differential equations are as present as fixed income bonds and loans."
Pawel has a M.Sc. in mathematics from University of Warsaw, Poland, where he worked in probability theory, and a Ph.D. from New York University, Courant Institute, where he worked in wave propagation in random media. Before joining J.P. Morgan, he worked at Schlumberger-Doll Research between 1993 and 1994 in the department of geophysics and was an instructor of mathematics at the University of Utah in the fall of 1994. He took his current position at J.P. Morgan due to his interest in mathematical finance and as a result of a series of contacts with people in the financial industry.
"It was always my intention to seek a job in industry," he says. "The basic reason behind my decision is my interest in applications of mathematics to real life problems. I enjoy the constant attention my managers pay to the work I am doing and its immediate applicability in life."
His advice to anyone interested in working outside academia is to decide early enough and to stick to this original decision. "The work in industry will require more applied mathematics and less of the true mathematical technicalities, which is not to say that one can go on doing something without deep understanding of the subject," he says. "However, it takes time to prepare for either type of career and therefore it is important to decide early enough which degree one is going to pursue."
Pawel admits that all applied mathematics courses are quite valuable while working in derivatives. "However," he adds, "it is particularly important to develop a good understanding of differential equations, partial differential equations and probability theory. Clearly, the numerical side of the job requires some understanding of numerical algorithms at their basic level as well as the ability to program fluently in C. As far as non-mathematical courses are concerned, I would stress basic understanding of financial markets, in particular option markets."
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