Pricing and Hedging Financial Derivatives: A Guide for Practitioners

Pricing and Hedging Financial Derivatives: A Guide for Practitioners

by Irene Perdomo, Leonardo Marroni
Released December 2013
Publisher(s): Wiley
ISBN: 9781119953715

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Book description

The only guide focusing entirely on practical approaches to pricing and hedging derivatives

One valuable lesson of the financial crisis was that derivatives and risk practitioners don't really understand the products they're dealing with. Written by a practitioner for practitioners, this book delivers the kind of knowledge and skills traders and finance professionals need to fully understand derivatives and price and hedge them effectively. Most derivatives books are written by academics and are long on theory and short on the day-to-day realities of derivatives trading. Of the few practical guides available, very few of those cover pricing and hedging—two critical topics for traders. What matters to practitioners is what happens on the trading floor—information only seasoned practitioners such as authors Marroni and Perdomo can impart.

  • Lays out proven derivatives pricing and hedging strategies and techniques for equities, FX, fixed income and commodities, as well as multi-assets and cross-assets

  • Provides expert guidance on the development of structured products, supplemented with a range of practical examples

  • Packed with real-life examples covering everything from option payout with delta hedging, to Monte Carlo procedures to common structured products payoffs

  • The Companion Website features all of the examples from the book in Excel complete with source code

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    Table of contents

    1. Cover Page
    2. Title Page
    3. Copyright
    4. Contents
    5. Preface
    6. Acknowledgements
    7. Chapter 1: An Introduction to the Major Asset Classes
      1. 1.1 EQUITIES
      2. 1.2 COMMODITIES
      3. 1.3 FIXED INCOME
      4. 1.4 FOREIGN EXCHANGE
      5. SUMMARY
    8. Chapter 2: Derivatives: Forwards, Futures and Swaps
      1. 2.1 DERIVATIVES
      2. 2.2 FORWARD CONTRACTS
      3. 2.3 FUTURES CONTRACTS
      4. 2.4 CALCULATING IMPLIED FORWARD PRICES AND VALUING EXISTING FORWARD CONTRACTS
      5. 2.5 PRICING FUTURES CONTRACTS
      6. 2.6 SWAPS
      7. SUMMARY
    9. Chapter 3: Derivatives: Options and Related Strategies
      1. 3.1 CALL OPTIONS
      2. 3.2 PUT OPTIONS
      3. 3.3 BOUNDARY CONDITIONS FOR CALL AND PUT OPTIONS PRICES
      4. 3.4 PUT–CALL PARITY
      5. 3.5 SWAPTIONS
      6. 3.6 OPTIONS STRATEGIES
      7. SUMMARY
    10. Chapter 4: Binomial Option Pricing
      1. 4.1 ONE-PERIOD BINOMIAL TREE: REPLICATION APPROACH
      2. 4.2 RISK-NEUTRAL VALUATION
      3. 4.3 TWO-PERIOD BINOMIAL TREE: VALUING BACK DOWN THE TREE
      4. 4.4 THE BINOMIAL TREE: A GENERALIZATION
      5. 4.5 EARLY EXERCISE AND AMERICAN OPTIONS
      6. 4.6 VOLATILITY CALIBRATION
      7. SUMMARY
    11. Chapter 5: The Fundamentals of Option Pricing
      1. 5.1 INTRINSIC VALUE AND TIME VALUE OF AN OPTION
      2. 5.2 WHAT IS VOLATILITY AND WHY DOES IT MATTER?
      3. 5.3 MEASUREMENT OF REALIZED VOLATILITY AND CORRELATION
      4. 5.4 OPTION PRICING IN THE BLACK–SCHOLES FRAMEWORK
      5. 5.5 THE OPTION DELTA AND THE REPLICATION OF THE OPTION PAYOFF
      6. 5.6 OPTION REPLICATION
      7. 5.7 OPTION REPLICATION, RISK-NEUTRAL VALUATION AND DELTA HEDGING REVISITED
      8. 5.8 OPTIONS ON DIVIDEND PAYING ASSETS
      9. 5.9 OPTIONS ON FUTURES: THE BLACK MODEL
      10. 5.10 MONTE CARLO PRICING
      11. 5.11 OTHER PRICING TECHNIQUES
      12. 5.12 PRICING TECHNIQUES SUMMARY
      13. 5.13 THE EXCEL SPREADSHEET “OPTION REPLICATION”
      14. SUMMARY
    12. Chapter 6: Implied Volatility and the Greeks
      1. 6.1 IMPLIED VOLATILITY
      2. 6.2 THE GREEKS
      3. 6.3 DELTA AND ITS DYNAMICS
      4. 6.4 GAMMA AND ITS DYNAMICS
      5. 6.5 VEGA AND ITS DYNAMICS
      6. 6.6 THETA AND ITS DYNAMICS
      7. 6.7 RHO
      8. 6.8 OPTION TRADING
      9. 6.9 SOME ADDITIONAL REMARKS (IN Q&A FORMAT)
      10. 6.10 AN EXAMPLE OF THE BEHAVIOUR OF IMPLIED VOLATILITY: EUR/USD RATE AND S&P 500 IN 2010–2012
      11. SUMMARY
    13. Chapter 7: Volatility Smile and the Greeks of Option Strategies
      1. 7.1 THE VOLATILITY SMILE – WHY IS THE IMPLIED VOLATILITY NOT FLAT ACROSS DIFFERENT STRIKES?
      2. 7.2 THE “STICKY DELTA” AND “STICKY STRIKE” APPROACHES TO DESCRIBING VOLATILITY SMILE
      3. 7.3 THE VOLATILITY TERM STRUCTURE – WHY IS THE IMPLIED VOLATILITY NOT FLAT ACROSS DIFFERENT EXPIRIES?
      4. 7.4 THE VOLATILITY SURFACE – COMBINING SMILE AND TERM STRUCTURE
      5. 7.5 ANALYSING THE GREEKS OF COMMON OPTION STRATEGIES
      6. 7.6 SOME ADDITIONAL REMARKS ON STRADDLES, RISK REVERSALS AND BUTTERFLIES
      7. 7.7 VEGA HEDGING IS NOT JUST SIMPLY OFFSETTING OVERALL VEGA EXPOSURE
      8. 7.8 HEDGING VOLATILITY RISK: A BRIEF INTRODUCTION OF THE VANNA–VOLGA APPROACH
      9. 7.9 THE VOLATILITY SMILE – ONE STEP FURTHER
      10. 7.10 PRICING EXOTIC OPTIONS 10
      11. 7.11 DIFFERENT TYPES OF VOLATILITY
      12. SUMMARY
    14. Chapter 8: Exotic Derivatives
      1. 8.1 EXOTIC DERIVATIVES WITH FIXED PAYOFFS
      2. 8.2 OTHER COMMON EXOTIC DERIVATIVES
      3. 8.3 EUROPEAN DIGITAL OPTIONS: PRICING AND GREEKS
      4. 8.4 OTHER EXOTIC OPTIONS: PRICING AND GREEKS
      5. SUMMARY
    15. Chapter 9: Multi-Asset Derivatives
      1. 9.1 BASKET OPTIONS
      2. 9.2 BEST-OF AND WORST-OF OPTIONS
      3. 9.3 QUANTO DERIVATIVES
      4. 9.4 “COMPO” DERIVATIVES
      5. SUMMARY
    16. Chapter 10: Structured Products
      1. 10.1 DEFINITION
      2. 10.2 COMMON FEATURES
      3. 10.3 PRINCIPAL PROTECTION
      4. 10.4 THE BENEFIT TO THE ISSUER
      5. 10.5 REDEMPTION AMOUNTS AND PARTICIPATION
      6. 10.6 PRINCIPAL AT RISK: EMBEDDING A SHORT OPTION
      7. 10.7 MORE COMPLICATED PAYOFFS
      8. 10.8 AUTO-CALLABLE NOTE: PRICING AND RISK PROFILE
      9. 10.9 ONE STEP FORWARD: THE WORST-OF DIGITAL NOTE
      10. 10.10 A REAL-LIFE EXAMPLE OF STRUCTURED PRODUCT
      11. 10.11 LIQUIDITY AND EXCHANGE-TRADED NOTES (ETNs)
      12. SUMMARY
    17. Index

    Product information

    • Title: Pricing and Hedging Financial Derivatives: A Guide for Practitioners
    • Author(s): Irene Perdomo, Leonardo Marroni
    • Release date: December 2013
    • Publisher(s): Wiley
    • ISBN: 9781119953715