Equity Hybrid Derivatives
Wiley Finance Editions
1. Edition February 2007
336 Pages, Hardcover
Practical Approach Book
Short Description
Written by the quantitative research team of Deutsche Bank, the world leader in innovative equity derivative transactions, this book acquaints readers with leading-edge thinking in modeling, valuing, and hedging for this market, which is increasingly being utilized for active investment strategies by hedge funds. Equity Hybrid Derivatives offers a balanced, integrated presentation of theory and practice in equity derivative markets, with an emphasis on understanding new techniques for analyzing volatility and credit derivative transactions linked to equity. In every instance, theory is illustrated with an emphasis on demonstrating its practical application.
Praise for Equity Hybrid Derivatives
"Hybrids represent the fastest growing segment in the derivatives business. Written by perhaps the finest quant shop in the world, this book presents the state of the art in modeling equity hybrid derivatives."
--Peter Carr, PhD, Head of Quantitative Financial Research Bloomberg L.P., New York, and Director of the Masters in Math Finance Program, Courant Institute, New York University
"This is a unique book. It is a deep and sophisticated treatment of equity hybrids: the products, the models, the mathematics, and the numerics. Anyone with a serious interest in the market will need this book."
--Dr. Nick Webber, Director of the Financial Options Research Centre, University of Warwick
"The Quantitative Products Group of Deutsche Bank continues the study of the latest generation of equity derivatives with the same talent as in its previous books. The market has integrated a wide range of new asset classes such as realized volatility, hedge fund strategy, or hybrid structures in fixed income-equity and equity-credit, which are now booming. These hybrid products have also generated new numerical problems both for PDEs or Monte Carlo methods. To offer both a concise presentation of the risk analysis and a comprehensive overview of the pricing and hedging methodology of these complex exotic structures was a great challenge; I must say that I am very impressed by the result."
--Professor Nicole El-Karoui, Ecole Polytechnique Paris
"This is an excellent book on equity hybrid derivatives, written from the practitioner's point of view by a leading quant team. It provides a comprehensive overview of state-of-the-art methodology combined with cutting-edge research in mathematical finance. The book is a most valuable read both for academics and practitioners."
--Professor Alexander Schied, Berlin University of Technology
PART ONE: Modeling Volatility.
CHAPTER 1: Theory.
1.1 Concepts of Equity Modeling.
1.2 Implied Volatility.
1.3 Fitting the Market.
1.4 Theory of Replication.
CHAPTER 2: Applications.
2.1 Classic Equity Models.
2.2 Variance Swaps, Entropy Swaps, Gamma Swaps.
2.3 Variance Swap Market Models.
PART TWO: Equity Interest Rate Hybrids.
CHAPTER 3: Short-Rate Models.
3.1 Introduction.
3.2 Ornstein-Uhlenbeck Models.
3.3 Calibrating to the Yield Curve.
3.4 Calibrating the Volatility.
3.5 Pricing Hybrids.
3.6 Appendix: Least-Squares Minimization.
CHAPTER 4: Hybrid Products.
4.1 The Effects of Assuming Stochastic Rates.
4.2 Conditional Trigger Swaps.
4.3 Target Redemption Notes.
4.4 Convertible Bonds.
4.5 Exchangeable Bonds.
CHAPTER 5: Constant Proportion Portfolio Insurance.
5.1 Introduction to Portfolio Insurance.
5.2 Classical CPPI.
5.3 Restricted CPPI.
5.4 Options on CPPI.
5.5 Nonstandard CPPIs.
5.6 CPPI as an Underlying.
5.7 Other Issues Related to the CPPI.
5.8 Appendixes.
PART THREE: Equity Credit Hybrids.
CHAPTER 6: Credit Modeling.
6.1 Introduction.
6.2 Background on Credit Modeling.
6.3 Modeling Equity Credit Hybrids.
6.4 Pricing.
6.5 Calibration.
6.6 Introduction of Discontinuities.
6.7 Equity Default Swaps.
6.8 Conclusion.
PART FOUR: Advanced Pricing Techniques.
CHAPTER 7: Copulas Applied to Derivatives Pricing.
7.1 Introduction.
7.2 Theoretical Background of Copulas.
7.3 Factor Copula Framework.
7.4 Applications to Derivatives Pricing.
7.5 Conclusion.
CHAPTER 8: Forward PDEs and Local Volatility Calibration.
8.1 Introduction.
8.2 Forward PDEs.
8.3 Pure Equity Case.
8.4 Local Volatility with Stochastic Interest Rates.
8.5 Calibrating the Local Volatility.
8.6 Special Case: Vasicek Plus a Term Structure of Equity Volatilities.
CHAPTER 9: Numerical Solution of Multifactor Pricing Problems Using Lagrange-Galerkin with Duality Methods.
9.1 Introduction.
9.2 The Modeling Framework: A General D-factor Model.
9.3 Numerical Solution of Partial Differential Inequalities (Variational Inequalities).
9.4 Numerical Solution of Partial Differential Equations (Variational Equalities): Classical Lagrange-Galerkin Method.
9.5 Higher-Order Lagrange-Galerkin Methods.
9.6 Application to Pricing of Convertible Bonds.
9.7 Appendix: Lagrange Triangular Finite Elements.
CHAPTER 10: American Monte Carlo.
10.1 Introduction.
10.2 Broadie and Glasserman.
10.3 Regularly Spaced Restarts.
10.4 The Longstaff and Schwartz Algorithm.
10.5 Accuracy and Bias.
10.6 Parameterizing the Exercise Boundary.
Bibliography.
Index.
ANA BERMÚDEZ, PhD, is an Associate in Quantitative Products at Deutsche Bank AG. Her work focuses on numerical methods for partial differential equations. She holds a PhD in applied mathematics.
HANS BUEHLER, PhD, is a Director in Quantitative Products at Deutsche Bank AG. His work focuses on volatility modeling. He holds a PhD in stochastic analysis.
ANDREW FERRARIS, DPhil, is a Managing Director in Quantitative Products at Deutsche Bank AG. His work focuses on applying advanced numerical methods to finance. He holds a DPhil in experimental particle physics.
CHRISTOPHER JORDINSON, PhD, is a Vice President in Quantitative Products at Deutsche Bank AG. His work focuses on calibration and equity interest rate hybrid models. He holds a PhD in astrophysics.
AZIZ LAMNOUAR, DEA, is a Vice President in Quantitative Products at Deutsche Bank AG. His work focuses on credit and credit-hybrid modeling. He holds a DEA in stochastics and finance.