Neftci Principles of Financial Engineering

2. Auflage 2008
ISBN: 978-0-08-091997-3
Verlag: Elsevier Science & Techn.
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 696 Seiten

Principles of Financial Engineering, Second Edition, is a highly acclaimed text on the fast-paced and complex subject of financial engineering. This updated edition describes the 'engineering' elements of financial engineering instead of the mathematics underlying it. It shows you how to use financial tools to accomplish a goal rather than describing the tools themselves. It lays emphasis on the engineering aspects of derivatives (how to create them) rather than their pricing (how they act) in relation to other instruments, the financial markets, and financial market practices. This volume explains ways to create financial tools and how the tools work together to achieve specific goals. Applications are illustrated using real-world examples. It presents three new chapters on financial engineering in topics ranging from commodity markets to financial engineering applications in hedge fund strategies, correlation swaps, structural models of default, capital structure arbitrage, contingent convertibles, and how to incorporate counterparty risk into derivatives pricing. Poised midway between intuition, actual events, and financial mathematics, this book can be used to solve problems in risk management, taxation, regulation, and above all, pricing. This latest edition of Principles of Financial Engineering is ideal for financial engineers, quantitative analysts in banks and investment houses, and other financial industry professionals. It is also highly recommended to graduate students in financial engineering and financial mathematics programs. * The Second Edition presents 5 new chapters on structured product engineering, credit markets and instruments, and principle protection techniques, among other topics
* Additions, clarifications, and illustrations throughout the volume show these instruments at work instead of explaining how they should act
* The Solutions Manual enhances the text by presenting additional cases and solutions to exercises

Professor Neftci completed his Ph.D. at the University of Minnesota and was head of the FAME Certificate program in Switzerland. He taught at the Graduate School, City University of New York; ICMA Centre, University of Reading; and at the University of Lausanne. He was also a Visiting Professor in the Finance Department at Hong Kong University of Science and Technology. Known his books and articles, he was a regular columnist for CBN daily, the most influential financial newspaper in China.

Autoren/Hrsg.

Neftci, Salih N.

Inhaltsverzeichnis

1;Front Cover;1
2;Principles of Financial Engineering;4
3;Copyright Page;5
4;Contents;8
5;Preface;16
6;CHAPTER 1. Introduction;18
6.1;1. A Unique Instrument;18
6.2;2. A Money Market Problem;25
6.3;3. A Taxation Example;28
6.4;4. Some Caveats for What Is to Follow;31
6.5;5. Trading Volatility;32
6.6;6. Conclusions;35
6.7;Suggested Reading;36
6.8;Case Study;37
7;CHAPTER 2. An Introduction to Some Concepts and Definitions;40
7.1;1. Introduction;40
7.2;2. Markets;40
7.3;3. Players;44
7.4;4. The Mechanics of Deals;44
7.5;5. Market Conventions;47
7.6;6. Instruments;54
7.7;7. Positions;54
7.8;8. The Syndication Process;58
7.9;9. Conclusions;59
7.10;Suggested Reading;59
7.11;Appendix 2-1: The Hedge Fund Industry;59
7.12;Exercises;63
8;CHAPTER 3. Cash Flow Engineering and Forward Contracts;64
8.1;1. Introduction;64
8.2;2. What Is a Synthetic?;64
8.3;3. Forward Contracts;68
8.4;4. Currency Forwards;71
8.5;5. Synthetics and Pricing;76
8.6;6. A Contractual Equation;76
8.7;7. Applications;77
8.8;8. A “Better” Synthetic;83
8.9;9. Futures;87
8.10;10. Conventions for Forwards;92
8.11;11. Conclusions;93
8.12;Suggested Reading;94
8.13;Exercises;95
8.14;Case Study;97
9;CHAPTER 4. Engineering Simple Interest Rate Derivatives;100
9.1;1. Introduction;100
9.2;2. Libor and Other Benchmarks;101
9.3;3. Forward Loans;102
9.4;4. Forward Rate Agreements;109
9.5;5. Futures: Eurocurrency Contracts;113
9.6;6. Real-World Complications;117
9.7;7. Forward Rates and Term Structure;119
9.8;8. Conventions;120
9.9;9. A Digression: Strips;121
9.10;10. Conclusions;122
9.11;Suggested Reading;122
9.12;Exercises;123
10;CHAPTER 5. Introduction to Swap Engineering;126
10.1;1. The Swap Logic;126
10.2;2. Applications;129
10.3;3. The Instrument: Swaps;134
10.4;4. Types of Swaps;137
10.5;5. Engineering Interest Rate Swaps;146
10.6;6. Uses of Swaps;154
10.7;7. Mechanics of Swapping New Issues;159
10.8;8. Some Conventions;165
10.9;9. Currency Swaps versus FX Swaps;165
10.10;10. Additional Terminology;167
10.11;11. Conclusions;168
10.12;Suggested Reading;168
10.13;Exercises;169
11;CHAPTER 6. Repo Market Strategies in Financial Engineering;174
11.1;1. Introduction;174
11.2;2. What Is Repo?;175
11.3;3. Types of Repo;177
11.4;4. Equity Repos;182
11.5;5. Repo Market Strategies;182
11.6;6. Synthetics Using Repos;188
11.7;7. Conclusions;190
11.8;Suggested Reading;190
11.9;Exercises;191
11.10;Case Study;192
12;CHAPTER 7. Dynamic Replication Methods and Synthetics;194
12.1;1. Introduction;194
12.2;2. An Example;195
12.3;3. A Review of Static Replication;195
12.4;4. “Ad Hoc” Synthetics;200
12.5;5. Principles of Dynamic Replication;203
12.6;6. Some Important Conditions;214
12.7;7. Real-Life Complications;215
12.8;8. Conclusions;217
12.9;Suggested Reading;217
12.10;Exercises;218
13;CHAPTER 8. Mechanics of Options;220
13.1;1. Introduction;220
13.2;2. What Is an Option?;221
13.3;3. Options: Definition and Notation;222
13.4;4. Options as Volatility Instruments;228
13.5;5. Tools for Options;238
13.6;6. The Greeks and Their Uses;245
13.7;7. Real-Life Complications;257
13.8;8. Conclusion: What Is an Option?;258
13.9;Suggested Reading;258
13.10;Appendix 8-1;259
13.11;Appendix 8-2;261
13.12;Exercises;263
14;CHAPTER 9. Engineering Convexity Positions;266
14.1;1. Introduction;266
14.2;2. A Puzzle;267
14.3;3. Bond Convexity Trades;267
14.4;4. Sources of Convexity;279
14.5;5. A Special Instrument: Quantos;284
14.6;6. Conclusions;289
14.7;Suggested Reading;289
14.8;Exercises;290
14.9;Case Study;292
15;CHAPTER 10. Options Engineering with Applications;294
15.1;1. Introduction;294
15.2;2. Option Strategies;297
15.3;3. Volatility-Based Strategies;308
15.4;4. Exotics;313
15.5;5. Quoting Conventions;324
15.6;6. Real-World Complications;326
15.7;7. Conclusions;327
15.8;Suggested Reading;327
15.9;Exercises;328
16;CHAPTER 11. Pricing Tools in Financial Engineering;332
16.1;1. Introduction;332
16.2;2. Summary of Pricing Approaches;333
16.3;3. The Framework;334
16.4;4. An Application;339
16.5;5. Implications of the Fundamental Theorem;345
16.6;6. Arbitrage-Free Dynamics;351
16.7;7. Which Pricing Method to Choose?;355
16.8;8. Conclusions;356
16.9;Suggested Reading;356
16.10;Appendix 11-1;357
16.11;Exercises;359
17;CHAPTER 12. Some Applications of the Fundamental Theorem;362
17.1;1. Introduction;362
17.2;2. Application 1: The Monte Carlo Approach;363
17.3;3. Application 2: Calibration;371
17.4;4. Application 3: Quantos;380
17.5;5. Conclusions;387
17.6;Suggested Reading;387
17.7;Exercises;388
18;CHAPTER 13. Fixed-Income Engineering;390
18.1;1. Introduction;390
18.2;2. A Framework for Swaps;391
18.3;3. Term Structure Modeling;400
18.4;4. Term Structure Dynamics;402
18.5;5. Measure Change Technology;411
18.6;6. An Application;416
18.7;7. In-Arrears Swaps and Convexity;421
18.8;8. Cross-Currency Swaps;425
18.9;9. Differential (Quanto) Swaps;426
18.10;10. Conclusions;426
18.11;Suggested Reading;427
18.12;Appendix 13-1: Practical Yield Curve Calculations;428
18.13;Exercises;431
19;CHAPTER 14. Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading;432
19.1;1. Introduction;432
19.2;2. Volatility Positions;433
19.3;3. Invariance of Volatility Payoffs;434
19.4;4. Pure Volatility Positions;441
19.5;5. Volatility Swaps;444
19.6;6. Some Uses of the Contract;449
19.7;7. Which Volatility?;450
19.8;8. Conclusions;451
19.9;Suggested Reading;452
19.10;Exercises;453
20;CHAPTER 15. Volatility as an Asset Class and the Smile;456
20.1;1. Introduction to Volatility as an Asset Class;456
20.2;2. Volatility as Funding;457
20.3;3. Smile;459
20.4;4. Dirac Delta Functions;459
20.5;5. Application to Option Payoffs;461
20.6;6. Breeden-Litzenberger Simplified;463
20.7;7. A Characterization of Option Prices as Gamma Gains;467
20.8;8. Introduction to the Smile;468
20.9;9. Preliminaries;469
20.10;10. A First Look at the Smile;470
20.11;11. What Is the Volatility Smile?;471
20.12;12. Smile Dynamics;479
20.13;13. How to Explain the Smile;479
20.14;14. The Relevance of the Smile;486
20.15;15. Trading the Smile;487
20.16;16. Pricing with a Smile;487
20.17;17. Exotic Options and the Smile;488
20.18;18. Conclusions;492
20.19;Suggested Reading;492
20.20;Exercises;493
21;CHAPTER 16. Credit Markets: CDS Engineering;496
21.1;1. Introduction;496
21.2;2. Terminology and Definitions;497
21.3;3. Credit Default Swaps;499
21.4;4. Real-World Complications;509
21.5;5. CDS Analytics;511
21.6;6. Default Probability Arithmetic;512
21.7;7. Structured Credit Products;517
21.8;8. Total Return Swaps;521
21.9;9. Conclusions;522
21.10;Suggested Reading;522
21.11;Exercises;524
21.12;Case Study;527
22;CHAPTER 17. Essentials of Structured Product Engineering;530
22.1;1. Introduction;530
22.2;2. Purposes of Structured Products;531
22.3;3. Structured Fixed-Income Products;543
22.4;4. Some Prototypes;550
22.5;5. Conclusions;560
22.6;Suggested Reading;561
22.7;Exercises;562
23;CHAPTER 18. Credit Indices and Their Tranches;564
23.1;1. Introduction;564
23.2;2. Credit Indices;564
23.3;3. Introduction to ABS and CDO;565
23.4;4. A Setup for Credit Indices;567
23.5;5. Index Arbitrage;570
23.6;6. Tranches: Standard and Bespoke;572
23.7;7. Tranche Modeling and Pricing;573
23.8;8. The Roll and the Implications;577
23.9;9. Credit versus Default Loss Distributions;579
23.10;10. An Important Generalization;580
23.11;11. New Index Markets;583
23.12;12. Conclusions;585
23.13;Suggested Reading;585
23.14;Appendix 18-1;586
23.15;Exercises;587
24;CHAPTER 19. Default Correlation Pricing and Trading;588
24.1;1. Introduction;588
24.2;2. Some History;589
24.3;3. Two Simple Examples;589
24.4;4. The Model;592
24.5;5. Default Correlation and Trading;596
24.6;6. Delta Hedging and Correlation Trading;597
24.7;7. Real-World Complications;602
24.8;8. Conclusions;604
24.9;Suggested Reading;604
24.10;Appendix 19-1;605
24.11;Exercises;607
24.12;Case Study;608
25;CHAPTER 20. Principal Protection Techniques;612
25.1;1. Introduction;612
25.2;2. The Classical Case;613
25.3;3. The CPPI;614
25.4;4. Modeling the CPPI Dynamics;616
25.5;5. An Application: CPPI and Equity Tranches;618
25.6;6. A Variant: The DPPI;621
25.7;7. Real-World Complications;622
25.8;8. Conclusions;623
25.9;Suggested Reading;623
25.10;Exercises;624
26;CHAPTER 21. Caps/Floors and Swaptions with an Application to Mortgages;628
26.1;1. Introduction;628
26.2;2. The Mortgage Market;629
26.3;3. Swaptions;635
26.4;4. Pricing Swaptions;637
26.5;5. Mortgage-Based Securities;642
26.6;6. Caps and Floors;643
26.7;7. Conclusions;648
26.8;Suggested Reading;648
26.9;Exercises;649
26.10;Case Study;651
27;CHAPTER 22. Engineering of Equity Instruments: Pricing and Replication;654
27.1;1. Introduction;654
27.2;2. What Is Equity?;655
27.3;3. Engineering Equity Products;661
27.4;4. Financial Engineering of Securitization;671
27.5;5. Conclusions;674
27.6;Suggested Reading;674
27.7;Exercises;675
27.8;Case Study;676
28;References;680
29;Index;684