Derivatives, risk management & value

19.1. Numerical analysis and simulation techniques : an introduction to finite difference methods. 19.2. Application to European options on non-dividend paying stocks. 19.3. Valuation of American options with a composite volatility. 19.4. Simulation methods : Monte-Carlo method. ch. 20. Numerical methods and partial differential equations for European and American derivatives with complete and incomplete information. 20.1. Valuation of American calls on dividend-paying stocks. 20.2. American puts on dividend-paying stocks. 20.3. Numerical procedures in the presence of information costs : applications. 20.4. Convertible bonds. 20.5. Two-factor interest rate models and bond pricing within information uncertainty. 20.6. CBs pricing within information uncertainty -- pt. VIII. Exotic derivatives. ch. 21. Risk management : exotics and second-generation options. 21.1. Exchange options. 21.2. Forward-start options. 21.3. Pay-later options. 21.4. Simple chooser options. 21.5. Complex choosers. 21.6. Compound options. 21.7. Options on the maximum (minimum). 21.8. Extendible options. 21.9. Equity-linked foreign exchange options and quantos. 21.10. Binary barrier options. 21.11. Lookback options. ch. 22. Value at risk, credit risk, and credit derivatives. 22.1. VaR and riskmetrics : definitions and basic concepts. 22.2. Statistical and probability foundation of VaR. 22.3. A more advanced approach to VaR. 22.4. Credit valuation and the creditmetrics approach. 22.5. Default and credit-quality migration in the creditmetrics approach. 22.6. Credit-quality correlations. 22.7. Portfolio management of default risk in the Kealhofer, McQuown and Vasicek (KMV) approach. 22.8. Credit derivatives : definitions and main concepts. 22.9. The rating agencies models and the proprietary models.

This book covers fundamental concepts in financial markets and asset pricing such as hedging, arbitrage, speculation in different markets, classical models for pricing of simple and complex derivatives, mathematical foundations, managing and monitoring portfolios of derivatives in real time, etc. It explains different applications of these concepts using real world examples. The book also covers topics like financial markets and instruments, option pricing models, option pricing theory, exotic derivatives, second generation options, etc. Written in a simple manner and amply supported by real world examples, questions and exercises, the book will be of interest to students, academics and practitioners alike.

Pt. I. Financial markets and financial instruments : basic concepts and strategies. ch. 1. Financial markets, financial instruments, and financial crisis. 1.1. Trading characteristics of commodity contracts : the case of oil. 1.2. Description of markets and instruments : the case of the International Petroleum Exchange. 1.3. Characteristics of crude oils and properties of petroleum products. 1.4. Description of markets and trading instruments : the case of cocoa. 1.5. Trading characteristics of options : the case of equity options. 1.6. Trading characteristics of options : the case of options on currency forwards and futures. 1.7. Trading characteristics of options : the case of bonds and bond options markets. 1.8. Simple and complex financial instruments. 1.9. The reasons of financial innovations. 1.10. Derivatives markets in the world : stock options, index options, interest rate and commodity options and futures markets. ch. 2. Risk management, derivatives markets and trading strategies. 2.1. Introduction to commodity markets : the case of oil. 2.2. Pricing models. 2.3. Trading motives : hedging, speculation, and arbitrage. 2.4. The main bounds on option prices. 2.5. Simple trading strategies for options and their underlying assets. 2.6. Some option combinations. 2.7. Option spreads. 2.8. Butterfly strategies. 2.9. Condor strategies. 2.10. Ratio spreads. 2.11. Some combinations of options with bonds and stocks. 2.12. Conversions and reversals. 2.13. Case study : selling calls (without holding the stocks/as an alternative to short selling stocks/the idea of selling calls is also an alternative to buying puts). 2.14. Buying calls on EMA. ch. 3. Trading options and their underlying asset : risk management in discrete time. 3.1. Basic strategies and synthetic positions. 3.2. Combined strategies. 3.3. How traders use option pricing models : parameter estimation. 3.4. Summary -- pt. II. Pricing derivatives and their underlying assets in a discrete-time setting. ch. 4. Option pricing : the discrete-time approach for stock options. 4.1. The CRR model for equity options. 4.2. The binomial model and the distributions to the underlying assets. ch. 5. Credit risks, pricing bonds, interest rate instruments, and the term structure of interest rates. 5.1. Time value of money and the mathematics of bonds. 5.2. Pricing bonds. 5.3. Computation of the yield or the internal rate of return. 5.4. Price volatility measures : duration and convexity. 5.5. The yield curve and the theories of interest rates. 5.6. The YTM and the theories of the term structure of interest rates. 5.7. Spot rates and forward interest rates. 5.8. Issuing and redeeming bonds. 5.9. Mortgage-backed securities : the monthly mortgage payments for a level-payment fixed-rate mortgage. 5.10. Interest rate swaps. ch. 6. Extensions of simple binomial option pricing models to interest rates and credit risk. 6.1. The Rendleman and Bartter model (for details, refer to Bellalah et al., 1998) for interest-rate sensitive instruments. 6.2. Ho and Lee model for interest rates and bond options. 6.3. Binomial interest-rate trees and the log-normal random walk. 6.4. The Black-Derman-Toy model (BDT). 6.5. Trinomial interest-rate trees and the pricing of bonds. ch. 7. Derivatives and path-dependent derivatives : extensions and generalizations of the lattice approach by accounting for information costs and illiquidity. 7.1. The standard lattice approach for equity options : the standard analysis. 7.2. A simple extension to account for information uncertainty in the valuation of futures and options. 7.3. The binomial model and the risk neutrality : some important details. 7.4. The hull and white trinomial model for interest rate options. 7.5. Pricing path-dependent interest rate contingent claims using a lattice -- pt. III. Option pricing in a continuous-time setting : basic models, extensions and applications. ch. 8. European option pricing models : the precursors of the Black-Scholes-Merton theory and holes during market turbulence. 8.1. Precursors to the Black-Scholes model. 8.2. How the Black-Scholes option formula is obtained. 8.3. Financial theory and the Black-Scholes-Merton theory. 8.4. The Black-Scholes model. 8.5. The Black model for commodity contracts. 8.6. Application of the CAPM model to forward and futures contracts. 8.7. The holes in the Black-Scholes-Merton theory and the financial crisis. ch. 9. Simple extensions and applications of the Black-Scholes type models in valuation and risk management. 9.1. Applications of the Black-Scholes model. 9.2. Applications of the Black's model. 9.3. The extension to foreign currencies : the Garman and Kohlhagen model and its applications. 9.4. The extension to other commodities : the Merton, Barone-Adesi and Whaley model, and its applications. 9.5. The real world and the Black-Scholes type models. ch. 10. Applications of option pricing models to the monitoring and the management of portfolios of derivatives in the real world. 10.1. Option-price sensitivities : some specific examples. 10.2. Monitoring and managing an option position in real time. 10.3. The characteristics of volatility spreads -- pt. IV. Mathematical foundations of option pricing models in a continuous-time setting : basic concepts and extensions. ch. 11. The dynamics of asset prices and the role of information : analysis and applications in asset and risk management. 11.1. Continuous time processes for asset price dynamics. 11.2. Ito's Lemma and its applications. 11.3. Taylor series, Ito's theorem and the replication argument. 11.4. Forward and backward equations. 11.5. The main concepts in bond markets and the general arbitrage principle. 11.6. Discrete hedging and option pricing. ch. 12. Risk management : applications to the pricing of assets and derivatives in complete markets. 12.1. Characterization of complete markets. 12.2. Pricing derivative assets : the case of stock options. 12.3. Pricing derivative assets : the case of bond options and interest rate options. 12.4. Asset pricing in complete markets : changing numeraire and time. 12.5. Valuation in an extended Black and Scholes economy in the presence of information costs. ch. 13. Simple extensions and generalizations of the Black-Scholes type models in the presence of information costs. 13.1. Differential equation for a derivative security on a spot asset in the presence of a continuous dividend yield and information costs. 13.2. The valuation of securities dependent on several variables in the presence of incomplete information : a general method. 13.3. The general differential equation for the pricing of derivatives. 13.4. Extension of the risk-neutral argument in the presence of information costs. 13.5. Extension to commodity futures prices within incomplete information -- pt. V. Extensions of option pricing theory to American options and interest rate instruments in a continuous-time setting : dividends, coupons and stochastic interest rates. ch. 14. Extension of asset and risk management in the presence of American options : dividends, early exercise, and information uncertainty. 14.1. The valuation of American options : the general problem. 14.2. Valuation of American commodity options and futures options with continuous distributions. 14.3. Valuation of American commodity and futures options with continuous distributions within information uncertainty. 14.4. Valuation of American options with discrete cash-distributions. 14.5. Valuation of American options with discrete cash distributions within information uncertainty. 14.6. The valuation equations for standard and compound options with information costs. ch. 15. Risk management of bonds and interest rate sensitive instruments in the presence of stochastic interest rates and information uncertainty : theory and tests. 15.1. The valuation of bond options and interest rate options. 15.2. A simple non-parametric approach to bond futures option pricing. 15.3. One-factor interest rate modeling and the pricing of bonds : the general case. 15.4. Fixed income instruments as a weighted portfolio of power options. 15.5. Merton's model for equity options in the presence of stochastic interest rates : two-factor models. 15.6. Some models for the pricing of bond options. ch. 16. Models of interest rates, interest-rate sensitive instruments, and the pricing of bonds : theory and tests. 16.1. Interest rates and interest-rate sensitive instruments. 16.2. Interest rates and the pricing of bonds. 16.3. Interest rate processes and the pricing of bonds and options. 16.4. The relative merits of the competing models. 16.5. A comparative analysis of term structure estimation models. 16.6. Term premium estimates from zero-coupon bonds : new evidence on the expectations hypothesis. 16.7. Distributional properties of spot and forward interest rates : USD, DEM, GBP, and JPY -- pt. VI. Generalization of option pricing models and stochastic volatility. ch. 17. Extreme market movements, risk and asset management : generalization to jump processes, stochastic volatilities, and information costs. 17.1. The jump-diffusion and the constant elasticity of variance models. 17.2. On jumps, hedging and information costs. 17.3. On the smile effect and market imperfections in the presence of jumps and incomplete information. 17.4. Implied volatility and option pricing models : the model and simulation results. ch. 18. Risk management during abnormal market conditions : further generalization to jump processes, stochastic volatilities, and information costs. 18.1. Option pricing in the presence of a stochastic volatility. 18.2. Generalization of some models with stochastic volatility and information costs. 18.3. The volatility smiles : some standard results. 18.4. Empirical results regarding information costs and option pricing -- pt. VII. Option pricing models and numerical analysis. ch. 19. Risk management, numerical methods and option pricing.

Includes bibliographical references and index.