Equity Derivatives
Theory and Applications

This is a wonderful practitioner-oriented book for financial engineers who work in equity markets. Assuming broad familiarity with the theory and practice of financial engineering, it rolls up its sleeves and delves into a variety of cutting edge topics of interest to today's practitioners. These vary from a theoretical discussion of how Levy processes offer a convenient alternative to modeling jump diffusions to practical discussions of how to efficiently distribute derivatives pricing applications in networked UNIX or Windows environments. This is a book for practitioners!

 

An opening chapter reviews concepts from stochastic calculus. Mathematically correct, it does a wonderful job of clarifying why this or that theorem is relevant for practitioners. The next four chapters consider financial engineering topics:

incomplete markets,

Levy processes,

finite difference methods,

convertible bonds and asset swaps.

The next three chapters look at technology issues:

data representation with XML,

application connectivity: DCOM, CORBA, SOAP, WSDL, UDDI, etc.,

web-based quantitative services.

A final chapter looks at risk modeling—especially the simulation of a dynamic hedging strategy.

I love the writing style of this book. It is mathematically rigorous but with the easygoing informality of a practitioner who knows his subject. If you are a budding financial engineer, you will find the book highly accessible. There is so much of value here. For practicing financial engineers—or people who  want to be—it is an exceptional book.

Contents

1. Mathematical Introduction

Probability Basis

Processes

Stochastic Calculus

Financial Interpretations

Two Canonical Examples

2. Incomplete Markets

Martingale Measures

Self-Financing Strategies, Completeness, and No Arbitrage

Examples

Martingale Measures, Completeness, and No Arbitrage

Completing the Market

Pricing in Incomplete Markets

Variance-Optimal Pricing and Hedging

Super Hedging and Quantile Hedging

3. Financial Modeling with Levy Processes

A Primer on Levy Processes

Modeling with Levy Processes

Products and Models

Model Calibration and Smile Replication

Numerical Methods for Levy Processes

A Model Involving Levy Processes

4. Finite-Difference Methods for Multifactor Models

Pricing Models and PDEs

The Pricing PDE and Its Discretization

Explicit and Implicit Schemes

The ADI Scheme

Convergence and Performance

Dividend Treatment in Stochastic Volatility Models

5. Convertible Bonds and Asset Swaps

Convertible Bonds

Convertible Bond Asset Swaps

6. Data Representation

XML

XML Schema

XML Transformation

Market Data

7. Application Connectivity

Components

Distributed Components

SOAP

Web Services

8. Web-Based Quantitative Services

Web Pricing Servers

Model Integration into Risk Management and Booking Systems

Web Applications and Dynamic Web Pages

9. Portfolio and Hedging Simulation

Algorithm and Software Design

Example: Discrete Hedging and Volatility Misspecification

Example: Hedging a Heston Market

Example: Constant Proportion Portfolio Insurance

Server Integration

 

 

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