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Market Risk Analysis, Pricing, Hedging and Trading Financial Instruments

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ISBN-10: 0470997893

ISBN-13: 9780470997895

Edition: 2008

Authors: Carol Alexander

List price: $131.00
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Volume III: MODELLING FINANCIAL INSTRUMENTS As a set these books are a radical update and revision of Market Models: a Guide to Financial Data Analysis. They provide a rigorous explanation of the key theoretical ideas that market model developers are faced with, in practical, clear terms. Developers are faced with many decisions, about the pricing, the data, the statistical methodology and the calibration and testing of the model prior to implementation therefore these books help risk managers, quantitative traders and investment analysts make the right decisions. The emphasis throughout is in understanding concepts and implementing solutions, assisted by the use of real-world examples…    
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Book details

List price: $131.00
Copyright year: 2008
Publisher: John Wiley & Sons, Incorporated
Publication date: 6/9/2008
Binding: Hardcover
Pages: 416
Size: 6.60" wide x 9.70" long x 1.30" tall
Weight: 1.936
Language: English

List of Figures
List of Tables
List of Examples
Preface to Volume III
Bonds and Swaps
Interest Rates
Continuously Compounded Spot and Forward Rates
Discretely Compounded Spot Rates
Translation between Discrete Rates and Continuous Rates
Spot and Forward Rates with Discrete Compounding
Categorization of Bonds
Categorization by Issuer
Categorization by Coupon and Maturity
Characteristics of Bonds and Interest Rates
Present Value, Price and Yield
Relationship between Price and Yield
Yield Curves
Behaviour of Market Interest Rates
Characteristics of Spot and Forward Term Structures
Duration and Convexity
Macaulay Duration
Modified Duration
Duration and Convexity of a Bond Portfolio
Duration-Convexity Approximations to Bond Price Change
Immunizing Bond Portfolios
Bonds with Semi-Annual and Floating Coupons
Semi-Annual and Quarterly Coupons
Floating Rate Notes
Other Floaters
Forward Rate Agreements and Interest Rate Swaps
Forward Rate Agreements
Interest Rate Swaps
Cash Flows on Vanilla Swaps
Cross-Currency Swaps
Other Swaps
Present Value of Basis Point
PV01 and Value Duration
Approximations to PV01
Understanding Interest Rate Risk
Yield Curve Fitting
Calibration Instruments
Parametric Models
Case Study: Statistical Properties of Forward LIBOR Rates
Convertible Bonds
Characteristics of Convertible Bonds
Survey of Pricing Models for Convertible Bonds
Summary and Conclusions
Futures and Forwards
Characteristics of Futures and Forwards
Interest Rate and Swap Futures
Bond Futures
Currency Futures and Forwards
Energy and Commodity Futures
Stock Futures and Index Futures
Exchange Traded Funds and ETF Futures
New Futures Markets
Theoretical Relationships between Spot, Forward and Futures
No Arbitrage Pricing
Accounting for Dividends
Dividend Risk and Interest Rate Risk
Currency Forwards and the Interest Rate Differential
No Arbitrage Prices for Forwards on Bonds
Commodity Forwards, Carry Costs and Convenience Yields
Fair Values of Futures and Spot
The Basis
No Arbitrage Range
Correlation between Spot and Futures Returns
Introducing Basis Risk
Basis Risk in Commodity Markets
Hedging with Forwards and Futures
Traditional 'Insurance' Approach
Mean-Variance Approach
Understanding the Minimum Variance Hedge Ratio
Position Risk
Proxy Hedging
Basket Hedging
Performance Measures for Hedged Portfolios
Hedging in Practice
Hedging Forex Risk
Hedging International Stock Portfolios
Case Study: Hedging an Energy Futures Portfolio
Hedging Bond Portfolios
Using Futures for Short Term Hedging
Regression Based Minimum Variance Hedge Ratios
Academic Literature on Minimum Variance Hedging
Short Term Hedging in Liquid Markets
Summary and Conclusions
Arithmetic and Geometric Brownian Motion
Risk Neutral Valuation
Numeraire and Measure
Market Prices and Model Prices
Parameters and Calibration
Option Pricing: Review of the Binomial Model
Characteristics of Vanilla Options
Elementary Options
Put-Call Parity
American Options
Early Exercise Boundary
Pricing American Options
Hedging Options
Delta Hedging
Other Greeks
Position Greeks
Delta-Gamma Hedging
Delta-Gamma-Vega Hedging
Trading Options
Bull Strategies
Bear Strategies
Other Spread Strategies
Volatility Strategies
Replication of P&L Profiles
The Black-Scholes-Merton Model
Black-Scholes-Merton PDE
Is the Underlying the Spot or the Futures Contract?
Black-Scholes-Merton Pricing Formula
Interpretation of the Black-Scholes-Merton Formula
Implied Volatility
Adjusting BSM Prices for Stochastic Volatility
The Black-Scholes-Merton Greeks
Theta and Rho
Vega, Vanna and Volga
Static Hedges for Standard European Options
Interest Rate Options
Caplets and Floorlets
Caps, Floors and their Implied Volatilities
European Swaptions
Short Rate Models
Case Study: Application of PCA to LIBOR Model Calibration
Pricing Exotic Options
Pay-offs to Exotic Options
Exchange Options and Best/Worst of Two Asset Options
Spread Options
Currency Protected Options
Power Options
Chooser Options and Contingent Options
Compound Options
Capped Options and Ladder Options
Look-Back and Look-Forward Options
Barrier Options
Asian Options
Summary and Conclusions
Implied Volatility
'Backing Out' Implied Volatility from a Market Price
Equity Index Volatility Skew
Smiles and Skews in Other Markets
Term Structures of Implied Volatilities
Implied Volatility Surfaces
Cap and Caplet Volatilities
Swaption Volatilities
Local Volatility
Forward Volatility
Dupire's Equation
Parametric Models of Local Volatility
Lognormal Mixture Diffusion
Modelling the Dynamics of Implied Volatility
Sticky Models
Case Study I: Principal Component Analysis of Implied Volatilities
Case Study II: Modelling the ATM Volatility-Index Relationship
Case Study III: Modelling the Skew Sensitivities
Applications of Implied Volatility Dynamics to Hedging Options
Stochastic Volatility Models
Stochastic Volatility PDE
Properties of Stochastic Volatility
Model Implied Volatility Surface
Model Local Volatility Surface
Heston Model
GARCH Diffusions
CEV and SABR Models
Jumps in Prices and in Stochastic Volatility
Scale Invariance and Hedging
Scale Invariance and Change of Numeraire
Definition of Scale Invariance
Scale Invariance and Homogeneity
Model Free Price Hedge Ratios
Minimum Variance Hedging
Minimum Variance Hedge Ratios in Specific Models
Empirical Results
Trading Volatility
Variance Swaps and Volatility Swaps
Trading Forward Volatility
Variance Risk Premium
Construction of a Volatility Index
Effect of the Skew
Term Structures of Volatility Indices
Vix and Other Volatility Indices
Volatility Index Futures
Options on Volatility Indices
Using Realized Volatility Forecasts to Trade Volatility
Summary and Conclusion
Portfolio Mapping
Risk Factors and Risk Factor Sensitivities
Interest Rate Sensitive Portfolios
Equity Portfolios
International Exposures
Commodity Portfolios
Options Portfolios
Orthogonalization of Risk Factors
Nominal versus Percentage Risk Factors and Sensitivities
Cash Flow Mapping
Present Value Invariant and Duration Invariant Maps
PV01 Invariant Cash Flow Maps
Volatility Invariant Maps
Complex Cash Flow Maps
Applications of Cash Flow Mapping to Market Risk Management
Risk Management of Interest Rate Sensitive Portfolios
Mapping Portfolios of Commodity Futures
Mapping an Options Portfolio to Price Risk Factors
Taylor Expansions
Value Delta and Value Gamma
Delta-Gamma Approximation: Single Underlying
Effect of Gamma on Portfolio Risk
Price Beta Mapping
Delta-Gamma Approximation: Several Underlyings
Including Time and Interest Rates Sensitivities
Mapping Implied Volatility
Vega Risk in Options Portfolios
Second Order Approximations: Vanna and Volga
Vega Bucketing
Volatility Beta Mapping
Case Study: Volatility Risk in FTSE 100 Options
Estimating the Volatility Betas
Model Risk of Volatility Mapping
Mapping to Term Structures of Volatility Indices
Using PCA with Volatility Betas
Summary and Conclusions