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Advanced Equity Derivatives: Volatility and Correlation

Book Description

In Advanced Equity Derivatives: Volatility and Correlation, Sébastien Bossu reviews and explains the advanced concepts used for pricing and hedging equity exotic derivatives. Designed for financial modelers, option traders and sophisticated investors, the content covers the most important theoretical and practical extensions of the Black-Scholes model.

Each chapter includes numerous illustrations and a short selection of problems, covering key topics such as implied volatility surface models, pricing with implied distributions, local volatility models, volatility derivatives, correlation measures, correlation trading, local correlation models and stochastic correlation.

The author has a dual professional and academic background, making Advanced Equity Derivatives: Volatility and Correlation the perfect reference for quantitative researchers and mathematically savvy finance professionals looking to acquire an in-depth understanding of equity exotic derivatives pricing and hedging.

Table of Contents

  1. Cover
  2. Series Page
  3. Title Page
  4. Copyright
  5. Dedication
  6. Foreword
  7. Preface
  8. Acknowledgments
  9. Chapter 1: Exotic Derivatives
    1. 1.1 Single-Asset Exotics
    2. 1.2 Multi-Asset Exotics
    3. 1.3 Structured Products
    4. References
    5. Problems
  10. Chapter 2: The Implied Volatility Surface
    1. 2.1 The Implied Volatility Smile and Its Consequences
    2. 2.2 Interpolation and Extrapolation
    3. 2.3 Implied Volatility Surface Properties
    4. 2.4 Implied Volatility Surface Models
    5. References and Bibliography
    6. Problems
  11. Chapter 3: Implied Distributions
    1. 3.1 Butterfly Spreads and the Implied Distribution
    2. 3.2 European Payoff Pricing and Replication
    3. 3.3 Pricing Methods for European Payoffs
    4. 3.4 Greeks
    5. References
    6. Problems
  12. Chapter 4: Local Volatility and Beyond
    1. 4.1 Local Volatility Trees
    2. 4.2 Local Volatility in Continuous Time
    3. 4.3 Calculating Local Volatilities
    4. 4.4 Stochastic Volatility
    5. References
    6. Problems
  13. Chapter 5: Volatility Derivatives
    1. 5.1 Volatility Trading
    2. 5.2 Variance Swaps
    3. 5.3 Realized Volatility Derivatives
    4. 5.4 Implied Volatility Derivatives
    5. Problems
  14. Chapter 6: Introducing Correlation
    1. 6.1 Measuring Correlation
    2. 6.2 Correlation Matrices
    3. 6.3 Correlation Average
    4. 6.4 Black-Scholes with Constant Correlation
    5. 6.5 Local Volatility with Constant Correlation
    6. References
    7. Problems
  15. Chapter 7: Correlation Trading
    1. 7.1 Dispersion Trading
    2. 7.2 Correlation Swaps
    3. Problems
  16. Chapter 8: Local Correlation
    1. 8.1 The Implied Correlation Smile and Its Consequences
    2. 8.2 Local Volatility with Local Correlation
    3. 8.3 Dynamic Local Correlation Models
    4. 8.4 Limitations
    5. References
    6. Problems
  17. Chapter 9: Stochastic Correlation
    1. 9.1 Stochastic Single Correlation
    2. 9.2 Stochastic Average Correlation
    3. 9.3 Stochastic Correlation Matrix
    4. References
    5. Problems
    6. Appendix 9.A: Sufficient Condition for Lower Bound Unattainability
    7. Appendix 9.B: Necessary Condition for Upper Bound Unattainability
  18. Appendix A: Probability Review
    1. A.1 Standard Probability Theory
    2. A.2 Random Variables, Distribution, and Independence
    3. A.3 Conditioning
    4. A.4 Random Processes and Stochastic Calculus
  19. Appendix B: Linear Algebra Review
    1. B.1 Euclidean Spaces
    2. B.2 Square Matrix Decompositions
  20. Solutions Manual
    1. Chapter 1: Exotic Derivatives
    2. Chapter 2: The Implied Volatility Surface
    3. Chapter 3: Implied Distributions
    4. Chapter 4: Local Volatility and Beyond
    5. Chapter 5: Volatility Derivatives
    6. Chapter 6: Introducing Correlation
    7. Chapter 8: Local Correlation
    8. Chapter 9: Stochastic Correlation
  21. Author's Note
  22. About the Author
  23. Index
  24. End User License Agreement