Book Description
Five new chapters, numerous additions to existing chapters, and an expanded collection of questions and exercises make this Second Edition an essential part of everyone's library. Between defining swaps on its first page and presenting a case study on its last, Neftci's introduction to financial engineering shows readers how to create financial assets in static and dynamic environments. Poised among intuition, actual events, and financial mathematics, this book can be used to solve problems in risk management, taxation, regulation, and above all, pricing.* The Second Edition presents 5 new chapters on structured product engineering, credit markets and instruments, and principle protection techniques, among other topics
* Additions, clarifications, and illustrations throughout the volume show these instruments at work instead of explaining how they should act
* The Solutions Manual enhances the text by presenting additional cases and solutions to exercises
Table of Contents
 Cover Image
 Table of Contents
 Title
 Copyright
 Dedication
 Preface
 Chapter 1. Introduction
 Chapter 2. An Introduction to Some Concepts and Definitions

Chapter 3. Cash Flow Engineering and Forward Contracts
 1. Introduction
 2. What Is a Synthetic?
 3. Forward Contracts
 4. Currency Forwards
 5. Synthetics and Pricing
 6. A Contractual Equation
 7. Applications
 8. A “Better” Synthetic
 9. Futures
 10. Conventions for Forwards
 11. Conclusions
 Suggested Reading
 Exercises
 CASE STUDY: HKMA and the Hedge Funds, 1998
 Hedge Funds Still Bet the Currency’s Peg Goes
 Chapter 4. Engineering Simple Interest Rate Derivatives
 Chapter 5. Introduction to Swap Engineering
 Chapter 6. Repo Market Strategies in Financial Engineering
 Chapter 7. Dynamic Replication Methods and Synthetics
 Chapter 8. Mechanics of Options
 Chapter 9. Engineering Convexity Positions
 Chapter 10. Options Engineering with Applications
 Chapter 11. Pricing Tools in Financial Engineering
 Chapter 12. Some Applications of the Fundamental Theorem

Chapter 13. FixedIncome Engineering
 1. Introduction
 2. A Framework for Swaps
 3. Term Structure Modeling
 4. Term Structure Dynamics
 5. Measure Change Technology
 6. An Application
 7. InArrears Swaps and Convexity
 8. CrossCurrency Swaps
 9. Differential (Quanto) Swaps
 10. Conclusions
 Suggested Reading
 APPENDIX 131 Practical Yield Curve Calculations
 1. Par Yield Curve
 2. ZeroCoupon Yield Curve
 3. ZeroCoupon Curve from Coupon Bonds
 Exercises
 Chapter 14. Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading

Chapter 15. Volatility as an Asset Class and the Smile
 1. Introduction to Volatility as an Asset Class
 2. Volatility as Funding
 3. Smile
 4. Dirac Delta Functions
 5. Application to Option Payoffs
 6. BreedenLitzenberger Simplified
 7. A Characterization of Option Prices as Gamma Gains
 8. Introduction to the Smile
 9. Preliminaries
 10. A First Look at the Smile
 11. What Is the Volatility Smile?
 12. Smile Dynamics
 13. How to Explain the Smile
 14. The Relevance of the Smile
 15. Trading the Smile
 16. Pricing with a Smile
 17. Exotic Options and the Smile
 18. Conclusions
 Suggested Reading
 Exercises
 Chapter 16. Credit Markets: CDS Engineering
 Chapter 17. Essentials of Structured Product Engineering

Chapter 18. Credit Indices and Their Tranches
 1. Introduction
 2. Credit Indices
 3. Introduction to ABS and CDO
 4. A Setup for Credit Indices
 5. Index Arbitrage
 6. Tranches: Standard and Bespoke
 7. Tranche Modeling and Pricing
 8. The Roll and the Implications
 9. Credit versus Default Loss Distributions
 10. An Important Generalization
 11. New Index Markets
 12. Conclusions
 Suggested Reading
 Appendix 181: A History of Credit Indices
 Exercises
 Chapter 19. Default Correlation Pricing and Trading
 Chapter 20. Principal Protection Techniques
 Chapter 21. Caps/Floors and Swaptions with an Application to Mortgages
 Chapter 22. Engineering of Equity Instruments: Pricing and Replication
 References
 Index
Product Information
 Title: Principles of Financial Engineering, 2nd Edition
 Author(s):
 Release date: December 2008
 Publisher(s): Academic Press
 ISBN: 9780080919973