Quantum Finance – The New Frontier

Abstract

Why do we need Quantum Finance? The answer is - for more intelligent forecasting and trading systems than available otherwise. We use theories of finance to price financial instruments. But we often cannot provide an analytical solution like a formula to price a financial product. An example is stock option pricing. Though there is a closed-form solution with the Black-Scholes-Merton model with inherent inadequacies, we still need to adopt alternate numerical solutions and computer simulations to price options (for example, the Heston model). This is the area of computational finance. But computational finance solutions on existing computers are slow to converge to a solution leading to inaccurate pricing and trading strategies in quickly changing markets. So, researchers have been trying to develop alternate computing techniques since the 1990s. Quantum finance, inspired by the development of quantum mechanics, is an alternative. Better pricing of financial instruments, which can positively impact trading and hedging strategies, becomes much more intelligent, accurate, and close to “reality” with the development of quantum finance models and artificial intelligence.