Market Risk Analysis, Volume III, Pricing, Hedging and Trading Financial Instruments
All together, the Market Risk Analysis four volume set illustrates virtually every concept or formula with a practical, numerical example or a longer, empirical case study. Across all four volumes there are approximately 300 numerical and empirical examples, 400 graphs and figures and 30 case studies many of which are contained in interactive Excel spreadsheets available from the the accompanying CD-ROM . Empirical examples and case studies specific to this volume include:
- Duration-Convexity approximation to bond portfolios, and portfolio immunization;
- Pricing floaters and vanilla, basis and variance swaps;
- Coupon stripping and yield curve fitting;
- Proxy hedging, and hedging international securities and energy futures portfolios;
- Pricing models for European exotics, including barriers, Asians, look-backs, choosers, capped, contingent, power, quanto, compo, exchange, ‘best-of’ and spread options;
- Libor model calibration;
- Dynamic models for implied volatility based on principal component analysis;
- Calibration of stochastic volatility models (Matlab code);
- Simulations from stochastic volatility and jump models;
- Duration, PV01 and volatility invariant cash flow mappings;
- Delta-gamma-theta-vega mappings for options portfolios;
- Volatility beta mapping to volatility indices.
List of Tables.
List of Examples.
Preface to Volume III.
III.1 Bonds and Swaps.
III.1.2 Interest Rates.
III.1.3 Categorization of Bonds.
III.1.4 Characteristics of Bonds and Interest Rates.
III.1.5 Duration and Convexity.
III.1.6 Bonds with Semi-Annual and Floating Coupons.
III.1.7 Forward Rate Agreements and Interest Rate Swaps.
III.1.8 Present Value of Basis Point.
III.1.9 Yield Curve Fitting.
III.1.10 Convertible Bonds.
III.1.10.1 Characteristics of Convertible Bonds.
III.1.10.2 Survey of Pricing Models for Convertible Bonds.
III.1.11 Summary and Conclusions.
III.2 Futures and Forwards.
III.2.2 Characteristics of Futures and Forwards.
III.2.3 Theoretical Relationships between Spot, Forward and Futures.
III.2.4 The Basis.
III.2.5 Hedging with Forwards and Futures.
III.2.6 Hedging in Practice.
III.2.7 Using Futures for Short Term Hedging.
III.2.8 Summary and Conclusions.
III.3.3 Characteristics of Vanilla Options.
III.3.4 Hedging Options.
III.3.5 Trading Options.
III.3.6 The Black–Scholes–Merton Model.
III.3.7 The Black–Scholes–Merton Greeks.
III.3.8 Interest Rate Options.
III.3.9 Pricing Exotic Options.
III.3.10 Summary and Conclusions.
III.4.2 Implied Volatility.
III.4.3 Local Volatility.
III.4.4 Modelling the Dynamics of Implied Volatility.
III.4.5 Stochastic Volatility Models.
III.4.6 Scale Invariance and Hedging.
III.4.7 Trading Volatility.
III.4.8 Summary and Conclusion.
III.5 Portfolio Mapping.
III.5.2 Risk Factors and Risk Factor Sensitivities.
III.5.3 Cash Flow Mapping.
III.5.4 Applications of Cash Flow Mapping to Market Risk Management.
III.5.5 Mapping an Options Portfolio to Price Risk Factors.
III.5.6 Mapping Implied Volatility.
III.5.7 Case Study: Volatility Risk in FTSE 100 Options.
III.5.8 Summary and Conclusions.