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| Preface | |
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| Introduction | |
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| Forward Contracts | |
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| Futures Contracts | |
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| Options | |
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| Other Derivatives | |
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| Types of Traders | |
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| Those Big Losses | |
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| Futures Markets and the Use of Futures for Hedging | |
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| Trading Futures Contracts | |
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| Specification of the Futures Contract | |
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| Operation of Margins | |
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| Newspaper Quotes | |
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| Convergence of Futures Price to Spot Price | |
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| Settlement | |
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| Regulation | |
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| Hedging Using Futures | |
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| Optimal Hedge Ratio | |
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| Rolling the Hedge Forward | |
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| Accounting and Tax | |
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| Forward and Futures Prices | |
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| Some Preliminaries | |
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| The Forward Price for an Investment Asset | |
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| The Effect of Known Income | |
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| The Effect of a Known Dividend Yield | |
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| Value of a Forward Contract | |
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| Forward Prices versus Futures Prices | |
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| Stock Index Futures | |
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| Foreign Currencies | |
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| Futures on Commodities | |
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| The Cost of Carry | |
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| Delivery Options | |
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| Futures Prices and the Expected Future Spot Price | |
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| Assets Providing Dividend Yields | |
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| Proof That Forward and Futures Prices Are Equal When Interest Rates Are Constant | |
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| Interest Rates and Duration | |
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| Types of Rates | |
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| Zero Rates | |
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| Bond Pricing | |
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| Determining Zero Rates | |
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| Forward Rates | |
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| Forward-Rate Agreements | |
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| Theories of the Term Structure | |
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| Day Count Conventions | |
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| Quotations | |
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| Interest Rate Futures | |
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| Treasury Bond Futures | |
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| Eurodollar Futures | |
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| Duration | |
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| Duration-Based Hedging Strategies | |
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| Limitations of Duration | |
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| Swaps | |
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| Mechanics of Interest Rate Swaps | |
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| The Comparative Advantage Argument | |
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| Valuation of Interest Rate Swaps | |
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| Currency Swaps | |
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| Valuation of Currency Swaps | |
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| Other Swaps | |
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| Credit Risk | |
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| Construction of Zero-Coupon LIBOR Curve | |
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| Options Markets | |
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| Underlying Assets | |
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| Specification of Stock Options | |
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| Newspaper Quotes | |
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| Trading | |
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| Commissions | |
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| Margins | |
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| The Options Clearing Corporation | |
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| Regulation | |
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| Taxation | |
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| Warrants, Executive Stock Options, and Convertibles | |
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| Properties of Stock Option Prices | |
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| Factors Affecting Option Prices | |
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| Assumptions and Notation | |
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| Upper and Lower Bounds for Option Prices | |
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| Put--Call Parity | |
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| Early Exercise: Calls on a Non-Dividend-Paying Stock | |
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| Early Exercise: Puts on a Non-Dividend-Paying Stock | |
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| Relationship Between American Put and Call Prices | |
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| The Effect of Dividends | |
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| Empirical Research | |
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| Trading Strategies Involving Options | |
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| Strategies Involving a Single Option and a Stock | |
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| Spreads | |
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| Combinations | |
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| Other Payoffs | |
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| Introduction to Binomial Trees | |
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| A One-Step Binomial Model | |
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| Risk-Neutral Valuation | |
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| Two-Step Binomial Trees | |
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| A Put Option Example | |
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| American Options | |
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| Delta | |
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| Matching Volatility with u and d | |
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| Binomial Trees in Practice | |
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| Model of the Behavior of Stock Prices | |
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| The Markov Property | |
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| Continuous Time Stochastic Processes | |
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| The Process for Stock Prices | |
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| Review of the Model | |
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| The Parameters | |
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| Ito's Lemma | |
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| Derivation of Ito's Lemma | |
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| The Black--Scholes Model | |
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| Lognormal Property of Stock Prices | |
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| The Distribution of the Rate of Return | |
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| Volatility | |
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| Concepts Underlying the Black--Scholes--Merton Differential Equation | |
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| Derivation of the Black--Scholes--Merton Differential Equation | |
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| Risk-Neutral Valuation | |
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| Black--Scholes Pricing Formulas | |
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| Cumulative Normal Distribution Function | |
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| Warrants Issued by a Company on Its Own Stock | |
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| Implied Volatilities | |
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| The Causes of Volatility | |
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| Dividends | |
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| Proof of Black--Scholes--Merton Formula | |
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| Exact Procedure for Calculating Values of American Calls on Dividend-Paying Stocks | |
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| Calculation of Cumulative Probability in Bivariate Normal Distribution | |
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| Options on Stock Indices, Currencies, and Futures | |
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| Results for a Stock Paying a Continuous Dividend Yield | |
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| Option Pricing Formulas | |
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| Options on Stock Indices | |
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| Currency Options | |
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| Futures Options | |
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| Valuation of Futures Options Using Binomial Trees | |
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| A Futures Price as a Stock Paying a Continuous Dividend Yield | |
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| Black's Model for Valuing Futures Options | |
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| Comparison of Futures Option and Spot Option Prices | |
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| Derivation of Differential Equation Satisfied by a Derivative Dependent on a Stock Providing a Continuous Dividend Yield | |
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| Derivation of Differential Equation Satisfied by a Derivative Dependent on a Futures Price | |
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| The Greek Letters | |
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| Example | |
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| Naked and Covered Positions | |
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| A Stop-Loss Strategy | |
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| Delta Hedging | |
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| Theta | |
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| Gamma | |
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| Relationship among Delta, Theta, and Gamma | |
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| Vega | |
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| Rho | |
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| Hedging in Practice | |
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| Scenario Analysis | |
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| Portfolio Insurance | |
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| Stock Market Volatility | |
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| Taylor Series Expansions and Hedge Parameters | |
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| Value at Risk | |
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| Daily Volatilities | |
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| Calculation of VaR in Simple Situations | |
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| A Linear Model | |
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| How Interest Rates Are Handled | |
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| When the Linear Model Can Be Used | |
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| A Quadratic Model | |
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| Monte Carlo Simulation | |
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| Historical Simulation | |
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| Stress Testing and Back-Testing | |
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| Principal Components Analysis | |
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| Use of the Cornish-Fisher Expansion to Estimate VaR | |
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| Estimating Volatilities and Correlations | |
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| Estimating Volatility | |
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| The Exponentially Weighted Moving Average Model | |
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| The GARCH (1,1) Model | |
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| Choosing Between the Models | |
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| Maximum Likelihood Methods | |
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| Using GARCH (1,1) to Forecast Future Volatility | |
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| Correlations | |
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| Numerical Procedures | |
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| Binomial Trees | |
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| Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts | |
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| Binomial Model for a Dividend-Paying Stock | |
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| Extensions of the Basic Tree Approach | |
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| Alternative Procedures for Constructing Trees | |
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| Monte Carlo Simulation | |
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| Variance Reduction Procedures | |
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| Finite Difference Methods | |
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| Analytic Approximation to American Option Prices | |
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| Analytic Approximation to American Option Prices | |
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| Volatility Smiles and Alternatives to Black-Scholes | |
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| Preliminaries | |
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| Foreign Currency Options | |
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| Equity Options | |
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| The Volatility Term Structure | |
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| Volatility Matrices | |
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| Relaxing the Assumptions in Black-Scholes | |
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| Alternative Models for Stock Options | |
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| Pricing Models Involving Jumps | |
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| Stochastic Volatility Models | |
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| Empirical Research | |
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| Pricing Formulas for Alternative Models | |
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| Exotic Options | |
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| Types of Exotic Options | |
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| Path-Dependent Derivatives | |
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| Lookback Options | |
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| Barrier Options | |
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| Options on Two Correlated Assets | |
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| Implied Trees | |
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| Hedging Issues | |
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| Static Options Replication | |
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| Calculation of the First Two Moments of Arithmetic Averages and Baskets | |
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| Extensions of the Theoretical Framework for Pricing Derivatives: Martingales and Measures | |
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| The Market Price of Risk | |
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| Derivitives Dependent on Several State Variables | |
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| Derivatives Dependent on Commodity Prices | |
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| Martingales and Measures | |
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| Alternative Choices for the Numeraire | |
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| Extension to Multiple Independent Factors | |
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| Applications | |
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| Change of Numeraire | |
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| Quantos | |
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| Siegel's Paradox | |
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| Generalization of Ito's Lemma | |
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| Derivation of the General Differential Equation Satisfied by Derivatives | |
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| Interest Rate Derivatives: The Standard Market Models | |
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| Black's Model | |
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| Bond Options | |
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| Interest Rate Caps | |
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| European Swap Options | |
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| Generalizations | |
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| Convexity Adjustments | |
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| Timing Adjustments | |
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| When Is an Adjustment Necessary? | |
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| Accrual Swaps | |
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| Spread Options | |
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| Hedging Interest Rate Derivatives | |
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| Proof of the Convexity Adjustment Formula | |
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| Interest Rate Derivatives: Models of the Short Rate | |
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| Equilibrium Models | |
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| One-Factor Equilibrium Model | |
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| The Rendleman and Bartter Model | |
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| The Vasicek Model | |
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| The Cox, Ingersoll, and Ross Model | |
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| Two-Factor Equilibrium Models | |
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| No-Arbitrage Models | |
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| The Ho and Lee Model | |
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| The Hull and White Model | |
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| Options on Coupon-Bearing Bonds | |
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| Interest Rate Trees | |
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| A General Tree-Building Procedure | |
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| Nonstationary Models | |
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| Calibration | |
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| Hedging Using a One-Factor Model | |
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| Forward Rates and Futures Rates | |
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| Interest Rate Derivatives: More Advanced Models | |
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| Two-Factor Models of the Short Rate | |
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| The Heath, Jarrow, and Morton Approach | |
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| The LIBOR Market Model | |
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| Mortgage-Backed Securities | |
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| The A(t, T), [sigma][rho] and [thetas](t) Functions in the Two-Factor Hull-White Model | |
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| Credit Risk | |
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| The Probability of Default and Expected Losses | |
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| Adjusting the Prices of Derivatives to Reflect Counterparty Default Risk | |
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| Credit Value at Risk | |
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| Credit Derivatives | |
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| Valuation of Convertible Bonds | |
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| Manipulation of the Matrices of Credit Rating Changes | |
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| Glossary of Notation | |
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| Glossary of Terms | |
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| DerivaGem Software | |
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| Major Exchanges Trading Futures and Options | |
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| Table for N(x) when x [less than or equal] 0 | |
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| Table for N(x) when x [greater than or equal] 0 | |
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| Author Index | |
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| Subject Index | |