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

Preface

Acknowledegments

Chapter 1 An Introduction To The Major Asset Classes

1.1 Equities

1.2 Commodities

1.3 Fixed Income

1.4 Foreign Exchange

Summary

Chapter 2 Derivatives: Forward, Futures And Swaps

2.1 Derivatives

2.2 Forward Contracts

2.3 Futures Contracts

2.4 Calculating Implied Forward Prices And Valuing Existing Forward Contracts

2.5 Pricing Futures Contracts

2.6 Swaps

Summary

Chapter 3 Derivatives: Options And Related Strategies

3.1 Call Options

3.2 Put Options

3.3 Boundary Conditions For Call And Put Options Prices

3.4 Put-Call Parity

3.5 Swaptions

3.6 Options Strategies

Summary

Chapter 4 Binomial Option Pricing

4.1 One-Period Binomial Tree: Replication Approach

4.2 Risk Neutral Valuation

4.3 Two-Period Binomial Tree: Valuing Back Down The Tree

4.4 The Binomial Tree: A Generalisation

4.5 Early Exercise And American Options

4.6 Volatility Calibration

Summary

Chapter 5 The Fundamentals Of Option Pricing

5.1 Intrinsic Value And Time Value Of An Option

5.2 What Is Volatility And Why Does It Matter?

5.3 Measurement Of Realised Volatility And Correlation

5.4 Option Pricing In The Black–Scholes Framework

5.5 The Option Delta And The Replication Of The Option Payoff

5.6 Option Replication

5.7 Option Replication, Risk-Neutral Valuation And Delta-Hedging Revisited

5.8 Options On Dividend Paying Assets

5.9 Options On Futures: The Black Model

5.10 Monte Carlo Pricing

5.11 Other Pricing Techniques

5.12 Pricing Techniques Summary

5.13 The Excel Spreadsheet “Option Replication”

Summary

Chapter 6 Implied Volatility And The Greeks

6.1 Implied Volatility

6.2 The Greeks

6.3 Delta And Its Dynamic

6.4 Gamma And Its Dynamic

6.5 Vega And Its Dynamic

6.6 Theta And Its Dynamic

6.7 Rho

6.8 Option Trading

6.9 Some Additional Remarks (In Q&A Format)

6.10 An Example Of The Behaviour Of Implied Volatility: Eur/Usd Rate And S&P 500 In 2010 - 2012

Summary

Chapter 7 Volatility Smile And The Greeks Of Option Strategies

7.1 The Volatility Smile – Why Is The Implied Volatility Not Flat Across Different Strikes?

7.2 The ‘Sticky Delta’ And ‘Sticky Strike’ Approaches To Describing Volatility Smile

7.3 The Volatility Term Structure – Why Is The Implied Volatility Not Flat Across Different Expiries?

7.4 The Volatility Surface – Combining Smile And Term Structure

7.5 Analysing The Greeks Of Common Option Strategies

7.6 Some Additional Remarks Of Straddles, Risk Reversals And Butterflies

7.7 Vega-Hedging Is Not Just Simply Offsetting Overall Vega Exposure

7.8 Hedging Volatility Risk: A Brief Introduction Of The Vanna – Volga Approach

7.9 The Volatility Smile – One Step Further

7.10 Pricing Exotic Options

7.11 Different Types Of Volatility

Summary

Chapter 8 Exotic Derivatives

8.1 Exotic Derivatives With Fixed Payoffs

8.2 Other Common Exotic Derivatives

8.3 European Digital Options: Pricing And Greeks

8.4 Other Exotic Options: Pricing And Greeks

Summary

Chapter 9 Multi-Asset Derivatives

9.1 Basket Options

9.2 Best-Of And Worst-Of Options

9.3 Quanto Derivatives

9.4 “Compo” Derivatives

Summary

Chapter 10 Structured Products

10.1 Definition

10.2 Common Features

10.3 Principal Protection

10.4 The Benefit To The Issuer

10.5 Redemption Amounts And Participation

10.6 Principal At Risk: Embedding A Short Option

10.7 More Complicated Payoffs

10.8 Auto-Callable Note: Pricing And Risk Profile

10.9 One Step Forward: The Worst Of Digital Note

10.10 A Real-Life Example Of Structured Product

10.11 Liquidity And Exchange Traded Notes (Etns)

Summary

References

Index