Risk Neutral Valuation

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780" align="center"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_bingham_and_kiesel.gif" width="134" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Risk Neutral Valuation</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap8"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 164, 33"> </map> <img border="0" src="../images_title/bingha11.gif" usemap="#FPMap8" width="264" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="bottom" height="64" align="center" width="50%" rowspan="4">  </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="46%" valign="top" rowspan="2"> <p align="left" class="body_expanded"><strong style="font-weight: 400">Authors of financial engineering texts face a quandary: how technical to make a book? It is easy to alienate readers by being too technical, but it is just as easy to write a fluff book that communicates nothing of substance. With this book, authors Bingham and Kiesel have got the balance just right.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table7"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body_expanded"><strong style="font-weight: 400">There is a large population of fairly quantitative professionals entering finance. They have degrees in math or physics. Maybe they have taken a few quantitative graduate courses. Few are experts in functional analysis or stochastic calculus, but they are sophisticated and would make excellent financial engineers—if only they could make the transition. This is the book for them! It is mathematically rigorous but with a practical, reader-oriented focus. Results are expressed formally as mathematical theorems, but the authors skip most proofs. The narrative moves along at a nice clip, so you never get bogged down in minutia.  </strong></p> <p align="left" class="body_expanded">An opening chapter discusses topics in modern finance. An emphasis on arbitrage lays the groundwork for pricing concepts in subsequent chapters. </p> <p align="left" class="body_expanded">The next five chapters develop stochastic calculus and financial engineering theory. This is the meat of the book. Concepts are developed first in discrete time and then in continuous time, which is excellent for building intuition. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">1. Derivative background <p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">2. Probability background <p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">3. Stochastic processes in discrete time<p class="contents_compressed" style="margin-top: 4; margin-bottom: 4"> 4. Mathematical finance in discrete time<p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">5. Stochastic processes in continuous time<p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">6. Mathematical finance in continuous time<p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">7. Incomplete markets <p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">8. Interest rate theory <p class="contents_compressed" style="margin-top: 4; margin-bottom: 4">9. Credit risk </td> </tr> </table> </td> </tr> </table> </td> <td width="54%" valign="top" class="body"> <p align="left" class="body"> The final three chapters explore more specialized topics:</p> <p align="left" class="body" style="margin-top: 8; margin-bottom: 8"> <img border="0" src="../images/bullet.gif" width="20" height="10">incomplete markets</p> <p align="left" class="body" style="margin-top: 8; margin-bottom: 8"> <img border="0" src="../images/bullet.gif" width="20" height="10">interest rate models, and</p> <p align="left" class="body" style="margin-top: 8; margin-bottom: 8"> <img border="0" src="../images/bullet.gif" width="20" height="10">modeling credit risk.</p> <p align="left" class="body">While this is a book about theory, it is theory with a practical bent. The authors present financial engineering as it is used today—on real trading floors. Their comparison of the LIBOR market model and the swap market model will appeal to users. Another feature I really like is brief historical sections that describe the origins of mathematical and financial engineering concepts. That historical context lends relevance to the theory.</p> <p align="left" class="body_expanded">Who is the book for? Almost anyone who has a strong background in math and wants a command of financial engineering theory. The book is technical but not too technical. I give it a technical rating of <map name="FPMap7"> <area href="../main/ratings.htm" shape="rect" coords="0, 0, 89, 15"> </map> <img border="0" src="../images/tech_5.gif" usemap="#FPMap7" align="top" width="90" height="16">, but it is at the easier end of that rating. You don't need to know measure theory or stochastic calculus to read this book, but some exposure to them will be invaluable. The style of writing will be familiar to anyone who has ever taken a graduate level math course. If you ever have, I think you will find the book very accessible.</p> <p align="left" class="body_expanded">In a nutshell, <strong style="font-weight: 400"> Bingham and Kiesel cover</strong> rigorously what books such as <strong style="font-weight: 400">Baxter and Rennie (<a href="../titles/baxter_and_rennie_(1996).htm">1996</a>), Neftci (<a href="../titles/neftci_s_(2000).htm">2000</a>) or Joshi (<a href="../titles/joshi_m_2003.htm">2003</a>) do intuitively. If you have the math background, you will love this book!</strong></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="54%" valign="bottom" class="body"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="50%" bgcolor="#FFFFCC" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 0; margin-left:10; margin-right:5; margin-top:0"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet_line_space" style="margin-left: 10; margin-right: 5; margin-top:7; margin-bottom:7"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_basic.htm">Financial Engineering - Basic Theory</a></p> <p class="bullet_line_space" style="margin-left: 10; margin-right: 5; margin-top:7; margin-bottom:7"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_intermediate.htm">Financial Engineering - Intermediate Theory</a><p class="bullet_line_space" style="margin-left: 10; margin-right: 5; margin-top:7; margin-bottom:7"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_theory.htm">Financial Engineering - Advanced Theory</a><p class="bullet_line_space" style="margin-left: 10; margin-right: 5; margin-top:7; margin-bottom:7"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_numerical_methods.htm">Financial Engineering - Numerical Methods</a></td> </tr> </table> </td> </tr> </table>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>