Market Risk Analysis, Pricing, Hedging and Trading Financial Instruments

Written by leading market risk academic, Professor Carol Alexander, Pricing, Hedging and Trading Financial Instruments forms part three of the Market Risk Analysis four-volume set. This book is an in-depth, practical, and accessible guide to the models used for pricing and the strategies employed for hedging financial instruments and to the markets in which they trade.

It provides a comprehensive, rigorous, and accessible introduction to bonds, swaps, futures, forwards, and options, including variance swaps, volatility indices and their futures and options, stochastic volatility models, and modelling the implied and local volatility surfaces.

Altogether, the Market Risk Analysis four-volume set illustrates virtually every concept or formula with a practical, numerical example or a longer, empirical case study. Across all four volumes, there are approximately 300 numerical and empirical examples, 400 graphs, and figures, and 30 case studies, many of which are contained in interactive Excel spreadsheets available from the accompanying CD-ROM. Empirical examples and case studies specific to this volume include:

• Duration-Convexity approximation to bond portfolios, and portfolio immunisation;
• Pricing floaters and vanilla, basis and variance swaps;
• Coupon stripping and yield curve fitting;
• Proxy hedging, and hedging international securities and energy futures portfolios;
• Pricing models for European exotics, including barriers, Asians, look-backs, choosers, capped, contingent, power, quanto, compo, exchange, ‘best-of’ and spread options;
• Libor model calibration;
• Dynamic models for implied volatility based on principal component analysis;
• Calibration of stochastic volatility models (Matlab code);
• Simulations from stochastic volatility and jump models;
• Duration, PV01, and volatility invariant cash flow mappings;
• Delta-gamma-theta-vega mappings for options portfolios;
• Volatility beta mapping to volatility indices.