Book Description
The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced.
The old sections devoted to the smile issue in the LIBOR market model have been enlarged into several new chapters. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered.
The fast-growing interest for hybrid products has led to new chapters. A special focus here is devoted to the pricing of inflation-linked derivatives.
The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.
Customer Reviews:
Best book on interest rate models.......2002-12-14
This is the best book available on interest rate models. Very detailed. Much more focused and readable than Rebonato's book. More pragmatic and explicit than Musiela and Rutkowski. Not as theoretical as Hunt and Kennedy. James and Webber also looks very good, but I'm not that familiar with it. All other books have only bits and pieces on interest rates.
The best book I have read on the subject.......2002-05-06
With all the due respect to the other authors I would say that if one is interested in a good theoretical book whihc is also good on the implementation side then the book of Brigo and Mercurion is definetly the best book I have ever read on the subject.
Anyone interested in implementing the LMM/BGM/MSS model in practice is well advised to read it.
I would just say that this is certainly a must have in the field.
New stuff and nice overview: hard to beat!.......2002-01-17
In the late nineties I went through Brigo's innovative work on stochastic nonlinear filtering with differential geometry techniques. I was favorably impressed by results and style, particularly in his dissertation and in his 'geometry in present day science' very readable overview. Interesting results are found and nicely told with accurate - but not pointlessly complicated - advanced mathematics for the problems at hand, I reasoned.
I've followed a similar path from control to finance, and having worked with interest rate models, I couldn't help but order this Brigo-Mercurio book. I had high expectations 'cause these two guys are working in a bank on the real thing.
Sure enough I'm not disappointed.
1-factor models are handled with great care, a ton of formulas and recipes are given. I've never seen this kind of analysis of pricing with Gaussian 1-f models. The new upgrade of the CIR model is interesting and accurate. "CIR++" is now my favorite 1-f model. I like the treatment of lognormal 1-f models and the explanation of Monte Carlo and trees -- the flow-chart for Bermudan swaptions is crystal clear! Plots of market implied structures and volatility calibration are useful additions.
The chapter on 2-f extensions has one of the best discussions on volatility, and two tons of useful formulas/recipes. Two dimensional trees!
The HJM chapter size is OK. I agree - the useful models embedded in HJM are short rate models and market models.
Market models - these three chapters alone are worth the book. You'll find yourself nodding as you read the guided tour. They make it look easy all the time. The exposition is focused, clear, intuitive, detailed. There's also new stuff, just check the calibration discussion! Smile modeling begins with a brilliant tour and ends with Brigo-Mercurio's new approach - the mixing dynamics - deserving a whole chapter if expanded.
The detailed explanation on products is a much welcome original addition. Cross currency derivatives!
Quotes - as in Brigo's old work - are a pleasant diversion while reading. The 500 and more pages are a treat given the competitive price.
Still there's room for improvements - more "CIR2++"! Something on 3-f models. Historical estimation of the correlation matrix and low-rank optimized approximations. Expand smile modeling! More hedging. Something on structured products. Cross currency libor model. chapter 9 - other interest rate models - sounds out of place and can be suppressed for other things.
This book rings true and has useful teachings for students, academics and practitioners. Although it requires some background in stochastic calculus, it's hard to beat on the pricing front. Kudos to Brigo and Mercurio! It only harms there aren't enough books like this.
Nicely written overview of interest rate models.......2001-12-15
This recent book, written by two Italian "quants" Mercurio & Brigo, gives a nice and accessible overview of interest rate models which is a compromise between the practitioner viewpoint, expressed for ex. in Rebonato's book "Interet Rate option models"
and the theoretical viewpoint such as the one in Musiela & Rutkowski.
The authors, themselves PhDs in quantitative finance/ applied maths, wrote this book while working as quants in an Italian bank and this first hand contact with the market gave them a
practical view on the subject which markes this book very interesting.
The book contains a "rational" catalogue of models used in practice ( as opposed to models which are impossible to implement!).
In contrast with academic books on interest rate modeling which deal with HJM formulation, there is a lot of emphasis here on LIBOR and Swap market models
(BGM -Jamshidian models) which reflects the current market practice. This is a positive point since there are not many books with details on implementing and using these "market models".
Part II: Interest rate models in practice is particularly useful because it deals with implementation and calibration which, as any practitioner knows, are important and usually delicate issues.
However calibration issues are dealt with somewhat lightly, especially recent developments on modeling cap/swaption smiles
are not included here.
This book can also be used for a graduate level/PhD course on interest rate models.
There are a lot of numerical examples in the book and mathematics is kept to the necessary level while keeping the
approach both rigorous and understandable.
Overall, it is one of the best books written on the subject.
I highly recommend it to PhD students, quants and researchers interested in this field.
Well written and useful book.......2001-11-04
In my humble opinion, this is the best book on Interest Rate modeling out there. The writing style is clear and focused and the appendices are fantastic. The book is rigorous but someone with some background in Stochastic Calculus will find it easy to follow. If you need refresher, dont worry the authors have you covered, see the appendix on Stochastic Calculus. Not an introductory book. Very exciting book.
Book Description
The credit derivatives market is booming and, for the first time, expanding into the banking sector which previously has had very little exposure to quantitative modeling. This phenomenon has forced a large number of professionals to confront this issue for the first time. Credit Derivatives Pricing Models provides an extremely comprehensive overview of the most current areas in credit risk modeling as applied to the pricing of credit derivatives. As one of the first books to uniquely focus on pricing, this title is also an excellent complement to other books on the application of credit derivatives. Based on proven techniques that have been tested time and again, this comprehensive resource provides readers with the knowledge and guidance to effectively use credit derivatives pricing models. Filled with relevant examples that are applied to real-world pricing problems, Credit Derivatives Pricing Models paves a clear path for a better understanding of this complex issue.
Dr. Philipp J. Schönbucher is a professor at the Swiss Federal Institute of Technology (ETH), Zurich, and has degrees in mathematics from Oxford University and a PhD in economics from Bonn University. He has taught various training courses organized by ICM and CIFT, and lectured at risk conferences for practitioners on credit derivatives pricing, credit risk modeling, and implementation.
Customer Reviews:
read this before going for it.......2007-04-25
The book covers the basics of credit risk modeling and derivative pricing (both structural and intensity type of models), explained in a clear style with enough detail to enable implementation (a rarity in financial literature!). Basics of the theory of stochastic processes and risk-neutral pricing are also covered. Calibration methods for the models are clearly explained. Due to the limited scope, some topics are given only cursory coverage (Copula function methods, role of interest-rates models etc.), but even then, enough references are provided. A very useful, concisely written tome!
Very bad presentation. I was bored to death before I finished the first 20 pages.......2007-04-16
The author should rewrite this book. The presentation and organisation are terrible. Often you will see formulas come out without an explanation.
Would definitely not recommend it.
Grab any papers wrote by the market-practitioners, you will find they are much easier for you to understand the concepts of various credit derivatives models than the book could.
BTW, I wrote a negative review in amazon.co.uk, but was deleted twice.
Great but Incomplete Tech for Quantitative Credit Traders / Analysts.......2006-12-06
Schonbucher's book has major strengths:
1) the bredth and un-biased approach to a broard range of methods for pricing and identifying (pseudo-)arbitrage opportunities including approaches based on reduced form / intensity models, structural/statistical/Merton-like models, and credit rating based approachs to modeling and trading credit.
2) The emphasis on implementation issues -- issues and problems bootstrapping and fitting credit curves, impact of product and market specific risk premium in credit spread than inflated market-implied default probabilities -- is very good and his chapters on modeling market-implied recovery assumptions and recovery modeling are also very good.
The major drawbacks are that is
1) It is sufficiently mathematical, but not strong enough in explaining the mathematics, such that anyone who can undedrstand the book probably already has a good handle on the space.
2) It spends a good deal of time on interesting but only marginally relevant modeling approachs (like the credit rating discussions and modeling counter-party risk) but misses key opportunities (like cash-cds convexity and basis trading) that many need for their day jobs.
3) Recent innovations like recovery products, loan and preferred CDS, and greater liquidity in basket and coorelation products either post-date the text or are not covered well enough to be of practical use.
That said, it is still one of the two four and five texts I have seen in the space (if you are considering the book also look at Geoff Chaplin's excellent text. Many people rave about Credit Derivatives by George C. Chacko et al. but I haven't yet read this, so don't have an opinion other than people I have high regard for like the book a lot.)
excellent book but hard to understand.......2006-11-11
The book is written by a Professor in a insightful way.
The reader needs to be well prepared in knowledge, and be ready for frustration.
Excellent intermediate book.......2005-10-20
The book is a look at credit risk through the glasses of mathematics, and is not a beginner's book. It is a bit dry in the beginning, yet after that I discovered lots of valuable intuitive explanations. While it does require a certain level of probability knowledge, the author walks you through most necessary steps for the presented models. The book covers almost everything needed for an intermediate course on credit modelling. The lack of numerical implementation menthods took the last star.
Book Description
The Das Swaps & Financial Derivatives Library – Third Edition Revised is the successor to Swaps & Financial Derivatives, which was first published in 1989 (as Swap Financing). A second edition was published in 1994 (as Swaps & Financial Derivatives – Second Edition (in most of the world) and Swaps & Derivative Financing – Second Edition (in the USA). The changes in the market since the publication of the second edition have necessitated this third edition.
The Das Swaps & Financial Derivatives Library – Third Edition Revised is a four-volume set that incorporates extensive new material in all sections to update existing areas of coverage. In addition, several new chapters covering areas of market development have been included. This has resulted in a significant expansion in the size of the text. The four volumes in this set are:
Derivative Products & Pricing
Risk Management
Structured Products Volume 1: Exotic Options, Interest Rates & Currency
Structured Products Volume 2: Equity, Commodity, Credit & New Markets
Average customer rating:
- An excellent crash course in OOP
- Benchmark book on Computational Finance
- Full of OOP Wisdom!
- depends what you are looking at
- From particular to general: design patterns in c++
|
C++ Design Patterns and Derivatives Pricing (Mathematics, Finance and Risk)
Mark S. Joshi
Manufacturer: Cambridge University Press
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ASIN: 0521832357 |
Book Description
Combining mathematical finance with C++ and object-oriented programming (00P), M. Joshi demonstrates the relevance and use of OOP in financial mathematics by describing how to use price derivatives to obtain reusable and extensible code. A large part of the book is devoted to designing reusable components which are then combined to build a Monte Carlo pricer for exotic equity derivatives. Readers knowing the basics of C++ and mathematical finance, but are unclear how to use OOP to implement models, will welcome this analysis.
Customer Reviews:
An excellent crash course in OOP.......2007-10-04
Do not be put off by the rich price/page-count multiple: it will take a lot of time and work to go through the book's 200 pages, and you won't regret the effort. You may be interested to know that Mark Joshi has devoted a section of his site to the book, complete with a forum for readers. Two warnings on what this book is not:
(1) It is not one's introduction to C++; you risk a brain aneurysm trying to learn C++ on the go.
(2) It's not a collection of ready-to-use code. (The reviewer complaining about lack of coverage of IR models misses the point completely).
Instead, it sets out to demonstrate why you need OOP, and does that in the context of a single, progressively expanding, exercise.
Benchmark book on Computational Finance.......2006-06-26
Mark has produced a marvel. The book introduces practical C++ programming with such spontaneity. The author sets the pitch beautifully with a step-by-step introduction of the need of advanced computing. It handholds reader as it expands from basic oops programming to designs and patterns in computing while mentioning rare tips on efficiency requirements when pricing derivatives versus robust programming.
The book is elegantly written with precise explanations and very concise (and very practical). It comes with the code as well.
As the other reviewer pointed out, the book has written for specific purpose and the focus is not diluted throughout (for example, it did not expand on quantitative issues which could have taken the book out of bounds which is a very big plus point). Even though the book is concise, it would require quite a lot of time to get the best out of it, because it is very dense on issues.
A must have book for anyone who is interested in Computational Finance (Quantitative Analyst/Developers, Financial Engineers, and Risk Managers). It filled a very big gap in this arena.
And this is written by a Practitioner Quant. Very well done Mark.
Full of OOP Wisdom!.......2005-10-15
In terms of programming concepts and OOP design for financial engineering, this book has no equals. We have Daniel Duffy's Financial Instrument Pricing Using C++, but it takes a different approach (i.e. generic programming based in STL). All through the book, the author introduces improvements sequentially and doesn't start from the best design from the outset in order to demonstrate the flaws of a less general/useful/reusable program. In this sense, this is mainly a conceptual book, not an example book. For example, it deals with and develops vanilla-option pricing using Monte Carlo simulation over the first five chapters. A reader looking for a cookbook that gives programs to implement a large number of financial-derivative models would be well-advised to look elsewhere (e.g. Justin London's Modeling Derivatives in C++). However, someone looking for OOP wisdom would be generously rewarded for buying this book.
depends what you are looking at.......2005-10-13
This small book (192 pages) is pretty expensive but if it brings you a lot it is OK.
It depends what you are looking at:
If you want a book "how to write a clean C++ program", this book is for you. The authors enhance the formal (and correct) writing you should have when coding.
If you are interested in understand and solve the various problems you encounter implementing derivatives with numerous examples, it is not the good book for you. There are few programs so few examples and solutions. Moreover I have to dig in his classes to understand them. I would have preferred static functions, even if I have to do a little work to implement them in my library.
However from my point of view, the biggest reproach to this book is that it does not treat the interest rate derivatives at all, which is really problematic.
So it was not really interesting. The Clewlow was much better for me.
From particular to general: design patterns in c++.......2005-08-23
In principle, it seems that this book is a very specialized one: design patterns in derivatives pricing. However, Mark Joshi has been able to give ideas that are generalizable to many other fields. For example, I have developed a trading simulator in c++ using several of the ideas of the book. The ideas in the book are so general, that very often one can do simply a copy and paste and just change the names of the classes and variables.
The only complaint to the writer is that he does not supply the answers to the questions of the book. This is standard practice in academia (and there is a good reason for it), but this book is designed mainly for practitioners, that probably do not have too much time to solve difficult questions.
The writer is widely known in forums like nuclearphynance and wilmott for his deep comments about derivatives pricing.
Disclosure: I only know Mark Joshi because I have sent him an email with some questions about the book. He very kindly has replied to me. I do not have any other kind of relation with him.
Book Description
Stochastic Calculus for Finance evolved from the first ten years of the Carnegie Mellon Professional Master's program in Computational Finance. The content of this book has been used successfully with students whose mathematics background consists of calculus and calculus-based probability. The text gives both precise statements of results, plausibility arguments, and even some proofs, but more importantly intuitive explanations developed and refine through classroom experience with this material are provided. The book includes a self-contained treatment of the probability theory needed for stochastic calculus, including Brownian motion and its properties. Advanced topics include foreign exchange models, forward measures, and jump-diffusion processes.
This book is being published in two volumes. The first volume presents the binomial asset-pricing model primarily as a vehicle for introducing in the simple setting the concepts needed for the continuous-time theory in the second volume.
Chapter summaries and detailed illustrations are included. Classroom tested exercises conclude every chapter. Some of these extend the theory and others are drawn from practical problems in quantitative finance.
Advanced undergraduates and Masters level students in mathematical finance and financial engineering will find this book useful.
Steven E. Shreve is Co-Founder of the Carnegie Mellon MS Program in Computational Finance and winner of the Carnegie Mellon Doherty Prize for sustained contributions to education.
Customer Reviews:
Good book.......2007-10-01
I agree that most concepts are clearly explained....emphasis on *most*. OK, I'll nitpick. And I admit I'm nitpicking. For example, the proof of Jensen's inequality (which he oddly dives into without defining convex functions), is rather non-intuitive, and seems to be more an appeal to the accompanying picture rather than a proof. The proof given under the Wikipedia entry for "Jensen's Inequality" is much clearer, and makes much more sense, at least to my way of thinking. Other than the occassional gaffe such as this, it is a highly readable, informative, and dare I say enjoyable text!
Nice book.......2007-03-08
I think its a very good book for fundamental concepts in stocastic calculus.
Good for finanical mathematics graduates.......2007-01-10
clear explanations on binomial models for European and American options. Abstract concepts also included such as change of measures, martingales, stopping times. Proofs in book assumed no knowledge on sigma fields or measure theory.
Very good to understand the basics of pricing-theory........2006-03-04
This book is great book about theory. Using a simple binomial tree as asset evolution model, all key notions are introduced. Neutral-risk probabilities come up in a simple, natural way, and I never found such a clear explanation of the the change of measure and its meaning in finances. Examples help to understand every ussue.
The only case in which you should not buy it: if you are looking for real-market instruments and techniques.
Interesting Read.......2006-02-17
I found this book to be a very interesting and fun read. A very helpful introduction to binomimal models and basic stopping time principals. It also provides a great refresher to Martingale principals. If you are having trouble with Shreve's volume II then have a look at this book first.
Book Description
A groundbreaking collection on currency derivatives, including pricing theory and hedging applications.
"David DeRosa has assembled an outstanding collection of works on foreign exchange derivatives. It surely will become required reading for both students and option traders."-Mark B. Garman President, Financial Engineering Associates, Inc. Emeritus Professor, University of California, Berkeley.
"A comprehensive selection of the major references in currency option pricing."-Nassim Taleb. Senior trading advisor, Paribas Author, Dynamic Hedging: Managing Vanilla and Exotic Options.
"A useful compilation of articles on currency derivatives, going from the essential to the esoteric."-Philippe Jorion Professor of Finance, University of California, Irvine Author, Value at Risk: The New Benchmark for Controlling Market Risk.
Every investment practitioner knows of the enormous impact that the Black-Scholes option pricing model has had on investment and derivatives markets. The success of the theory in understanding options on equity, equity index, and fixed- income markets is common knowledge. Yet, comparatively few professionals are aware that the theory's greatest successes may have been in the derivatives market for foreign exchange. Perhaps this is not surprising because the foreign exchange market is a professional trading arena that is closed virtually to all but institutional participants. Nevertheless, the world's currency markets have proven to be an almost ideal testing and development ground for new derivative instruments.
This book contains many of the most important scientific papers that collectively constitute the core of modern currency derivatives theory. What is remarkable is that each and every one of these papers has found its place in the real world of currency derivatives trading. As such, the contributing authors to this volume can properly claim to have been codevelopers of this new derivatives market, having worked in de facto partnership with the professional traders in the dealing rooms of London, New York, Tokyo, and Singapore.
The articles in this book span the entire currency derivatives field: forward and futures contracts, vanilla currency puts and calls, models for American exercise currency options, options on currencies with bounded exchange rate regimes, currency futures options, the term and strike structure of implied volatility, jump and stochastic volatility option pricing models, barrier options, Asian options, and various sorts of quanto options.
Customer Reviews:
Excellent choice of papers!.......2001-08-18
DeRosa has picked excellent papers. If one reads the papers in detail, the currency derivatives literature, as well as related derivatives literature, becomes very easy to understand.
Comprehensive.......1999-06-19
This book presents highly technical papers on diverse topics from variuous academics. It would be very helpful to anyone looking to understand theoretical aspects of FX derivatives. Since most papers are written by different authors, notation is not consistent. In addition, academics do not always write like Hemingway. Nevertheless, the book covers everyhting from vanillas to exotics very well.
Book Description
Interest rate swaps--used globally by both corporate finance departments and investment firms to control interest payments, manage debt, and enhance investment portfolios--constitute a growing 1.9 trillion market. Now, financial personnel, swap traders, corporate treasurers, and professional cash managers can turn to this clear, authoritative guide to master all the methodologies used in the international swap market. Written for anyone whose work is touched by swap market activity, the guide uses diagramming techniques to first explain what swaps are, and how and why they are traded. It then addresses more sophisticated financial transactions, such as rate setting, analysis of swap desks, market-to-market, speculating, and financial statements. Readers will find detailed coverage of more than two dozen derivative products, including spreadlocks, swaptions, caps, and flows, and learn how swap trading works in foreign currencies and interest rates. Critical light is also shed on questions regulators are currently raising about the security and future of the swaps markets.
Customer Reviews:
Me thinks some reviewers protest too much.......2004-07-11
This book has been damned for being too simplistic, therefore consign it to the trash cart, or so we are expected to do. But given the relative novelty of these financial products simplicity in the best sense of word could be seen as a virtue in any work dealing with this topic. So, why the evident annoyance from some. Could it be that this work dissolves some of the mystery involved, and threatens some closed shop in these markets ?
Outdated and Shallow.......1999-09-02
The book easily shows its age in its focus on standards and issues which have long ago fallen by the wayside in this dynamic market. Far worse is that the book is preciously short on quantitative and analytic methods, and long on third-grade-teacher types of admonishments. I read the whole book becasue I paid for it, there are better, more up-to-date volumes out there. Could possibly be re-named "Swaps for English Majors", although, English majors as a group might correctly be upset at this association.
Book Description
Exotic and hybrid options are today's hottest risk management tools. in this information-packed, essential guidebook. Bhansali provides readers with hands-on techniques and strategies for structuring and managing a portfolio containing exotic options; a discussion of correlation and its vital link to pricing options; and invaluable computer code for pricing.
Customer Reviews:
Pricing And Managing Exotic And Hybrid Options.......2001-06-23
One of the best books on this topic. It is a very practical book for someone with practical background. No sigma algebra to confuse you, and you do not have to know Girsanov to understand the quanto effect. You just focus on those tough issues you are running into everyday: correlations, long dated FX, cross Gamma hedging, strategic risk management for an exotic book, transaction cost in illiquide market, and so on. In addition, last paragraph of the book is the every reason make me think why this book stands out among these many books.
Excellent reference book for structured derivatives!.......2001-04-17
I find this book extremely useful in my job. It covers almost all aspects of exotic and hybrid instruments: the real life examples, theory behind the pricing models, implementation using different numerical methods, hedging and risk management issues, a good appendix on the basic math stuff and even a sample VBA code to do multivariate MC. Most importantly, the author took a practitioner's point of view, which makes the materials much easier to be understood and applied. However, I did encounter quite a few errors inside some of the formulas. Just name a few, Eq 3.15 and 3.18 on pg 53, Eq 3.142 on pg 98 and Eq H.61 on pg 336. However, none of them is serious (more like a typo to me). In addition, I think it is more important to get the idea right. You can always double check the formula against any math reference book. Overall, I feel it is an excellent reference book for anyone with a serious interest in structured derivatives.
Book Description
This book presents a cogent description of the main methodologies used in derivatives pricing. Starting with a summary of the elements of Stochastic Calculus, Quantitative Methods in Derivatives Pricing develops the fundamental tools of financial engineering, such as scenario generation, simulation for European instruments, simulation for American instruments, and finite differences in an intuitive and practical manner, with an abundance of practical examples and case studies. Intended primarily as an introductory graduate textbook in computational finance, this book will also serve as a reference for practitioners seeking basic information on alternative pricing methodologies.
Domingo Tavella is President of Octanti Associates, a consulting firm in risk management and financial systems design. He is the founder and chief editor of the Journal of Computational Finance and has pioneered the application of advanced numerical techniques in pricing and risk analysis in the financial and insurance industries. Tavella coauthored Pricing Financial Instruments: The Finite Difference Method. He holds a PhD in aeronautical engineering from Stanford University and an MBA in finance from the University of California at Berkeley.
Customer Reviews:
Computational finance: Tavella.......2005-03-27
Badly written/errors/typos all over.
Reviews/praise (on back cover) are meaningless & misleading.
The proof is in the reading!.......2002-08-14
Over 100 students in Berkeley's Master's in Financial Engineering Program have so far successfully mastered state-of-the-art derivatives pricing using the material in this textbook. In "The proof of the pudding is in the eating" test, this book earns an A+.
John O'Brien, Executive Director MFE Program, U.C. Berkeley
Excellent Reference for Computational Finance.......2002-08-09
This is an excellent introduction book on computational finance. It covers Monte Carlo simulation for pricing and scenario generations and finite difference methods very well. I really like the part on Monte Carlo simulation with various variance reduction techniques such as Brownian Bridge.
The author not only presents the methodologies, but he also tells the readers their limitations. This book is also a good resource for basics of stochastic processes most commonly needed in practice. I think the book is beneficial both to practitioners and students who really wants to consider financial engineering as a career.
Excellent resource.......2002-08-06
Whether you're a practitioner or a student, this text is great. It is succinctly written, covering everything from fundamental theories then leading into practical applications. While it is not for the mentally flaccid, if your sharp enough, you'll find it very useful.
A book for the mathematically inclined.......2002-07-15
The book covers pricing of derivatives and the underlying computational methods. This broad range of topics covers aspects like stochastic calculus, risk neutral pricing and computational methods. The communication of this broad range of topics is a challenge and the book might be fine tuned to better teach the reader besides the intuition of the methods, the detailed implementation. It is suitable for people with a very strong mathematics and programming background, but is a tough read if one wants to learn these subjects. In order to become a good how -to book, the examples provided need to be expanded and ideally worked out in a more detailed fashion. One great add on might be to have a disk with sample code, that shows how the different methods work and how to implement them.
Positive is:
- Good section on stochastic calculus
- Good introduction to risk free pricing
Areas for improvement
- Expand examples
- Better quality check to avoid typos, that are especially annoying in formulas
- If this book is to be used as a textbook or for self study, practice examples with solutions would be great, as the reader can then work through these to internalize the material and in addition check if he has fully understood the material
Overall I can only recommend the book to people with strong liking of a mathematical treatment of a subject, strong programming skills and little need for detailed examples. It does not go into sufficient detail on how to implement the different simulation strategies into code (provides only "pseudo code") to teach the computational aspects.
Book Description
In recent years, interest-rate modeling has developed rapidly in terms of both practice and theory. The academic and practitioners' communities, however, have not always communicated as productively as would have been desirable. As a result, their research programs have often developed with little constructive interference. In this book, Riccardo Rebonato draws on his academic and professional experience, straddling both sides of the divide to bring together and build on what theory and trading have to offer.
Rebonato begins by presenting the conceptual foundations for the application of the LIBOR market model to the pricing of interest-rate derivatives. Next he treats in great detail the calibration of this model to market prices, asking how possible and advisable it is to enforce a simultaneous fitting to several market observables. He does so with an eye not only to mathematical feasibility but also to financial justification, while devoting special scrutiny to the implications of market incompleteness.
Much of the book concerns an original extension of the LIBOR market model, devised to account for implied volatility smiles. This is done by introducing a stochastic-volatility, displaced-diffusion version of the model. The emphasis again is on the financial justification and on the computational feasibility of the proposed solution to the smile problem. This book is must reading for quantitative researchers in financial houses, sophisticated practitioners in the derivatives area, and students of finance.
Customer Reviews:
why bother.......2003-02-14
It's hard to believe a reviewer with such a myopic view of Derivatives pricing could go through the whole book, understood it and found time to rate it. Mindblowing waste of time !
Few hundreds years ago, he would have recommended burning the Madmen claiming the earth was round.
Anyway, while Derivatives Pricing achieves little for the welfare of mankind, the recent need for assets based on ever complex market scenarios calls for a more refined pricing methodology. There no supply and demand here, only customers who want hedge/trade/tradge assets /liabilities and traders who need to make sure their firms don't go burst when market move.
The author answers that demand by formatting and publishing his papers.
rebonato does it again.......2003-01-18
My avid reading kept jostling out superb hot ideas from this book. Rebonato carries out a comprehensive survey of the LIBOR market model. He tackles historical background, calibration, and effective implementation. The later chapters also cover extensions to the LIBOR market model to take account of smile and skew. In particular, there is extensive discussion of the cutting-edge Joshi-Rebonato stochastic-vol, displaced-diffusion LIBOR market model.
If you are working on the pricing of exotic interest rate derivatives, this book is a must buy.
Such pearls of wisdom.......2003-01-09
I am not qualified to write a review of this book, but neither is the above author as his "review" is nothing more than an uninformed assault on modern finance.
In fact, I submit, that said reviewer knows nothing of finance whatsoever.
(Since this book happens to be well regarded, I'll give it a five)
A theoretical substitute for supply and demand.......2002-12-20
A complicated body of mathematical theory, developed over a period of about 30 years, addresses the question: how should derivative X be valued if we know certain parameters, especially the volatility of the price of its underlying asset?
But why exactly does the question need answering? After all, the price of X, like that of its underlying, is determined by the point at which the demand for X is equal to the supply of X. One doesn't need a computer for that, one just needs a liquid marketplace. I can look up the price of a share of Microsoft's equity in my daily newspaper. I'm not tempted to develop a body of theory to figure it out, when I can flip through a few pages and find it.
Nowadays, I can also look up the price of a standardized option to buy Microsoft in the newspaper. In 1973, when people like Fischer Black began developing this body of theory, that was not yet the case.
This brings us to the point of my little sermon. The purpose of this body of theory is to produce a price figure in cases where there is not a liquid market for X. The theories answer the question a portfolio manager must often ask himself: if I were able to find a buyer for X, how much could I charge for it?
This book has its moments, but in general I believe this body of theory accomplishes less than its adepts believe. The imagery of a God-like Newton on the dust jacket indicates, I submit, some of the pretentiousness that gets into their ivory towers.
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