Volatility and Correlation: The Perfect Hedger and the Fox

The new edition of Volatility and Correlation has been thoroughly updated and expanded with over 80% new or reworked material, reflecting the changes and developments that have taken place in the field. The new and updated material includes: empirical and theoretical analysis of the smile dynamics; examination of the perfect–replication model in relation to exotic options; treatment of additional important models, namely, Variance Gamma, displaced diffusion, CEV, stochastic volatility for interest–rate smiles and equity/FX options; questioning of the informational efficiency of markets in commonly–used calibration and hedging practices.
The book is split into four sections. Part I deals with a deterministic–volatility Black world (no smiles), and sets out the author′s ′philosophical′ approach to option pricing. Part II deals with smiles in the equity and FX worlds. Beginning with a review of relevant empirical information about smiles, this part 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 process–based model, and can directly prescribe the dynamics of the smile surface. Part III focuses on interest rates, and part IV extends the setting used for the deterministic–volatility LIBOR market model in order to account for interest–rate smiles in a financially–motivated and computationally–tractable manner. In this final part the author deals, in increasing levels of complexity, with CEV processes, with diffusive stochastic volatility and with Markov–chain processes.
Covering FX, equity and interest–rate products, Volatility and Correlation is a blend of theoretical and practical material and is designed for traders, risk managers, financial professionals and students.
‘The second edition is even more comprehensive than the first, and ideally suited to quantitatively oriented traders and risk managers. Rebonato has a knack for distilling the essence from a wide range of complex option pricing models.’ Darrell Duffie, Stanford University, USA
‘The author has greatly extended the first edition of this book, whose main merit remains its courage to deal with relevant issues for practitioners. Rather than concentrating on fictional problems stemming from the need to give financial ground to one’s favourite theories, the author moves from problems posed by the market. At times a colloquial stance is privileged over mathematical rigor and formalism, allowing a larger public to benefit from this book.’ Damiano Brigo, Head of Credit Models, Banca IMI, author of Interest Rate Models: Theory and Practice.
‘This book is about equity, FX and interest–rate option pricing at its best. It combines rigorous theory with practical knowledge of markets and models. Riccardo Rebonato uses his technical mastery to make the theory clear, and his wealth of experience to give insights into applications. Whatever your level of knowledge of these markets, you will learn from him.’ Ian Cooper, Professor of Finance, London Business School
‘In this book, Riccardo Rebonato discloses his invaluable expertise, shedding light over the gloomy path of modern model selection for pricing and hedging derivatives. Both practitioners and academics will benefit from his teachings and advice.’ Fabio Mercurio, Head of Financial Models, Banca IMI, Milan, Italy

Spis treści:
Why a Second Edition.
What This Book Is Not About.
The New Sub–Title. I Foundations.
1 Theory and Practice of Option Modelling.
2 Option Replication.
3 The Building Blocks.
4 Variance and Mean Reversion in th e Real and the Risk–Adjusted Worlds.
5 Instantaneous and Terminal Correlation.
II Smiles – Equity and FX.
6 Pricing Options in the Presence of Smiles.
7 Empirical Facts about Smiles.
8 General Features of Smile–Modelling Approaches.
9 The Input Data: Fitting an Exogenous Smile Surface.
10 Quadratic Variation and Smiles.
11 Local–Volatility Models: the Derman–and–Kani Approach.
12 Extracting the Local Volatility from Option Prices.
13 Stochastic–Volatility Processes.
14 Jump–Diffusion Processes.
15 Variance–Gamma.
16 Displaced Diffusions and Generalizations.
17 No–Arbitrage Restrictions on the Dynamics of Smile Surfaces.
III Interest Rates – Deterministic Volatilities.
18 Mean Reversion in Interest–Rate Models.
19 Volatility and Correlation in the LIBOR Market Model.
20 Calibration Strategies for the LIBOR Market Model.
21 Specifying the Instantaneous Volatility of Forward Rates.
22 Specifying the Instantaneous Correlation Among Forward Rates.
IV Interest Rates – Smiles.
23 How To Model Interest–Rate Smiles.
24 Constant–Elasticity–of–Variance (CEV) Processes in the Context of the LMM.
25 Stochastic–Volatility Extensions of the LIBOR Market Model.
26 The Dynamics of the Swaption Matrix.
27 Stochastic–Volatility Extension of the LMM: Two–Regime Instantaneous Volatility.
Bibliography.
Index.

Nota biograficzna:
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 join ing 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.

Okładka tylna:
The new edition of Volatility and Correlation has been thoroughly updated and expanded with over 80% new or reworked material, reflecting the changes and developments that have taken place in the field. The new and updated material includes: empirical and theoretical analysis of the smile dynamics; examination of the perfect–replication model in relation to exotic options; treatment of additional important models, namely, Variance Gamma, displaced diffusion, CEV, stochastic volatility for interest–rate smiles and equity/FX options; questioning of the informational efficiency of markets in commonly–used calibration and hedging practices.
The book is split into four sections. Part I deals with a deterministic–volatility Black world (no smiles), and sets out the author′s ′philosophical′ approach to option pricing. Part II deals with smiles in the equity and FX worlds. Beginning with a review of relevant empirical information about smiles, this part 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 process–based model, and can