Financial Derivatives in Theory and Practice

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9780470863596: Financial Derivatives in Theory and Practice

The term Financial Derivative is a very broad term which has come to mean any financial transaction whose value depends on the underlying value of the asset concerned. Sophisticated statistical modelling of derivatives enables practitioners in the banking industry to reduce financial risk and ultimately increase profits made from these transactions.

The book originally published in March 2000 to widespread acclaim. This revised edition has been updated with minor corrections and new references, and now includes a chapter of exercises and solutions, enabling use as a course text.

  • Comprehensive introduction to the theory and practice of financial derivatives.
  • Discusses and elaborates on the theory of interest rate derivatives, an area of increasing interest.
  • Divided into two self-contained parts ? the first concentrating on the theory of stochastic calculus, and the second describes in detail the pricing of a number of different derivatives in practice.
  • Written by well respected academics with experience in the banking industry.

A valuable text for practitioners in research departments of all banking and finance sectors. Academic researchers and graduate students working in mathematical finance.

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From the Inside Flap:

"A masterful work which explains clearly and precisely the mathematics and the practicalities of derivative pricing. Written by two leading experts from academia and industry, this is a rigorous description of the cutting edge of both research and practice. The excellent in-depth coverage of the interest-rate markets includes the application of basic theory coupled with descriptions of real-world products, convexity effects, and state of the art modelling. A very valuable book, which is destined to be a key reference for bankers and researchers" Martin Baxter, Nomura International, London, UK (co-author of the best-selling Financial Calculus) "This work strikes an excellent balance between theory and applications, between rigor and accessibility. The early chapters develop mathematical tools lucidly and with a clear focus on the important issues. Later chapters apply these tools to a broad range of problems and models in mathematical finance. The book is rich in links between theory and industry practice, and covers many topics not easily found elsewhere. It is a valuable and authoritative resource for both students and experts." Paul Glasserman, Graduate School of Business, Columbia University, USA "This book achieves two main goals. First, it provides an excellent and highly comprehensive account of martingale theory and Itô’s stochastic calculus, which underpin arbitrage pricing theory. Secondly, it offers a thorough analysis of the fundamental ideas of modern financial modelling, with special emphasis on the concepts related to the valuation and hedging of interest-rate sensitive derivatives. The exceptional strength of the book lies in the fact that the authors never lose their perspective on the practical aspects of the theory. Hunt and Kennedy, who are themselves renowned experts in this area, have set a new high standard for future texts on term structure modelling." Marek Rutkowski, Financial Mathematics Centre, Warsaw University of Technology, Poland Contents Part I: Theory

  1. Single-period option pricing
  2. Brownian motion
  3. Martingales
  4. Stochastic integration
  5. Girsanov and martingale representation
  6. Stochastic differential equations
  7. Option pricing in continuous time
  8. Dynamic term structure models
Part II: Practice
  1. Modelling in practice
  2. Basic instruments and terminology
  3. Pricing standard market derivatives
  4. Futures contracts Orientation: Pricing exotic European derivatives
  5. Terminal swap-rate models
  6. Convexity corrections
  7. Implied interest rate pricing models
  8. Multi-currency terminal swap-rate models Orientation: Pricing exotic American and path-dependent derivatives
  9. Short-rate models
  10. Market models
  11. Markov-functional modelling
Appendices

From the Back Cover:

Originally published in 2000, Financial Derivatives in Theory and Practice is a complete, rigorous and readable account of the mathematics underlying derivative pricing and a guide to applying these ideas to solve real pricing problems. It is aimed at practitioners and researchers who wish to understand the latest finance literature and develop their own pricing models. The authors’ combination of strong theoretical knowledge and extensive market experience make this book particularly relevant for those interested in real world applications of mathematical finance.

This revised edition has been updated with minor corrections, and now includes a dedicated chapter of exercises and solutions. The balance of rigor and readability makes the book an ideal textbook for masters and postgraduate students of mathematical finance, stochastic calculus and derivatives pricing.

  • Detailed coverage of interest rate derivatives, from 'vanilla' instruments through to many of the more exotic products currently being traded.
  • Overview of popular term structure models along with their relationships to each other (including Heath-Jarrow-Morton, short rate models and the latest market models).
  • Explanation of numeraires as a modelling and pricing tool.
  • Pricing models for constant maturity swaps and other convexity products.
  • Models and efficient algorithms for path-dependent and Bermudan swaptions.
  • Insights into how to go about pricing products beyond those treated in the text.
  • Accessible yet rigorous treatment of the stochastic calculus required for option pricing.
  • A chapter of exercises and solutions enabling use as a course text or for self-study.

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