For those starting out as
practitioners of mathematical finance, this is an ideal introduction. It provides the
reader with a clear understanding of the intuition behind derivatives pricing, how models
are implemented, and how they are used and adapted in practice. Strengths and weaknesses
of different models, e.g. Black-Scholes, stochastic volatility, jump-diffusion and
variance gamma, are examined. Both the theory and the implementation of the
industry-standard LIBOR market model are considered in detail. Uniquely, the book includes
extensive discussion of the ideas behind the models, and is even-handed in examining
various approaches to the subject. Thus each pricing problem is solved using several
methods. Worked examples and exercises, with answers, are provided in plenty, and computer
projects are given for many problems. The author brings to this book a blend of practical
experience and rigorous mathematical background, and supplies here the working knowledge
needed to become a good quantitative analyst.
Table of Contents
Preface;
1. Risk;
2. Pricing methodologies and
arbitrage;
3. Trees and option pricing;
4. Practicalities;
5. The Ito calculus;
6. Risk neutrality and
martingale measures;
7. The practical pricing of
a European option;
8. Continuous barrier
options;
9. Multi-look exotic
options;
10. Static replication;
11. Multiple sources of
risk;
12. Options with early
exercise features;
13. Interest rate
derivatives;
14. The pricing of exotic
interest rate derivatives;
15. Incomplete markets and
jump-diffusion processes;
16. Stochastic volatility;
17. Variance gamma models;
8. Smile dynamics and the
pricing of exotic options;
Appendix A. Financial and
mathematical jargon;
Appendix B. Computer
projects;
Appendix C. Elements of
probability theory;
Appendix D. Hints and
answers to questions;
Bibliography;
Index.
466 pages