In Volatility and Correlation 2nd edition: The
Perfect Hedger and the Fox, Rebonato looks at derivatives
pricing from the angle of volatility and correlation. With both
practical and theoretical applications, this is a thorough update
of the highly successful Volatility & Correlation
– with over 80% new or fully reworked material and is
a must have both for practitioners and for students.
The new and updated material includes a critical examination of
the 'perfect-replication’ approach to derivatives
pricing, with special attention given to exotic options; a thorough
analysis of the role of quadratic variation in derivatives pricing
and hedging; a discussion of the informational efficiency of
markets in commonly-used calibration and hedging practices.
Treatment of new models including Variance Gamma, displaced
diffusion, stochastic volatility for interest-rate smiles and
equity/FX options.
The book is split into four parts. Part I deals with a Black
world without smiles, sets out the author’s
'philosophical’ approach and covers deterministic
volatility. Part II looks at smiles in equity and FX worlds. It
begins with a review of relevant empirical information about
smiles, and provides coverage of local-stochastic-volatility,
general-stochastic-volatility, jump-diffusion and Variance-Gamma
processes. Part II concludes with an important chapter that
discusses if and to what extent one can dispense with an explicit
specification of a model, and can directly prescribe the dynamics
of the smile surface.
Part III focusses on interest rates when the volatility is
deterministic. Part IV extends this setting in order to account for
smiles in a financially motivated and computationally tractable
manner. In this final part the author deals with CEV processes,
with diffusive stochastic volatility and with Markov-chain
processes.
Praise for the First Edition:
'In this book, Dr Rebonato brings his penetrating eye to
bear on option pricing and hedging…. The book is a must-read
for those who already know the basics of options and are looking
for an edge in applying the more sophisticated approaches that have
recently been developed.’
–Professor Ian Cooper, London Business School
'Volatility and correlation are at the very core of all
option pricing and hedging. In this book, Riccardo Rebonato
presents the subject in his characteristically elegant and simple
fashion…A rare combination of intellectual insight and
practical common sense.’
–Anthony Neuberger, London Business School
Spis treści
Preface xxi
0.1 Why a Second Edition? xxi
0.2 What This Book Is Not About xxiii
0.3 Structure of the Book xxiv
0.4 The New Subtitle xxiv
Acknowledgements xxvii
I Foundations 1
1 Theory and Practice of Option Modelling 3
2 Option Replication 31
3 The Building Blocks 75
4 Variance and Mean Reversion in the Real and the Risk-Adjusted Worlds 101
5 Instantaneous and Terminal Correlation 141
II Smiles – Equity and FX 165
6 Pricing Options in the Presence of Smiles 167
7 Empirical Facts About Smiles 201
8 General Features of Smile-Modelling Approaches 237
9 The Input Data: Fitting an Exogenous Smile Surface 249
10 Quadratic Variation and Smiles 293
11 Local-Volatility Models: the Derman-and-Kani Approach 319
12 Extracting the Local Volatility from Option Prices 345
13 Stochastic-Volatility Processes 389
14 Jump-Diffusion Processes 439
15 Variance-Gamma 511
16 Displaced Diffusions and Generalizations 529
17 No-Arbitrage Restrictions on the Dynamics of Smile Surfaces 563
III Interest Rates – Deterministic Volatilities 601
18 Mean Reversion in Interest-Rate Models 603
19 Volatility and Correlation in the LIBOR Market Model 625
20 Calibration Strategies for the LIBOR Market Model 639
21 Specifying the Instantaneous Volatility of Forward Rates 667
22 Specifying the Instantaneous Correlation Among Forward Rates 687
IV Interest Rates – Smiles 701
23 How to Model Interest-Rate Smiles 703
24 (CEV) Processes in the Context of the LMM 729
25 Stochastic-Volatility Extensions of the LMM 751
26 The Dynamics of the Swaption Matrix 765
27 Stochastic-Volatility Extension of the LMM: Two-Regime Instantaneous Volatility 783
Bibliography 805
Index 813
O autorze
Riccardo Rebonato is Head of Group Market Risk for the Royal
Bank of Scotland Group, and Head of The Royal Bank of Scotland
Group Quantitative Research Centre. He is also a Visiting Lecturer
at Oxford University for the Mathematical Finance Diploma and MSc.
He holds Doctorates in Nuclear Engineering and Science of
Materials/Solid State Physics. He sits on the Board of Directors of
ISDA and on the Board of Trustees of GARP.
Prior to joining the Royal Bank of Scotland, he was Head of Complex
Derivatives Trading Europe and Head of Derivatives Research at
Barclays Capital (BZW), where he worked for nine years.
Before that he was a Research Fellow in Physics at Corpus Christi
College, Oxford, UK. He is the author of three books, Modern
Pricing of Interest-Rate Derivatives, Volatility and
Correlation in Option Pricing and Interest-Rate Option
Models. He has published several papers on finance in academic
journals, and is on the editorial board of several journals. He is
a regular speaker at conferences worldwide.
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