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E-raamat: Quantitative Analysis, Derivatives Modeling, And Trading Strategies: In The Presence Of Counterparty Credit Risk For The Fixed-income Market

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(Morgan Stanley & Co. Inc., Usa), (Westport Financial, Llc, Usa)
  • Formaat: 520 pages
  • Ilmumisaeg: 23-Jan-2007
  • Kirjastus: World Scientific Publishing Co Pte Ltd
  • Keel: eng
  • ISBN-13: 9789814494243
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Quantitative Analysis, Derivatives Modeling, And Trading Strategies: In The Presence Of Counterparty Credit Risk For The Fixed-income MarketSuurem pilt
  • Formaat: 520 pages
  • Ilmumisaeg: 23-Jan-2007
  • Kirjastus: World Scientific Publishing Co Pte Ltd
  • Keel: eng
  • ISBN-13: 9789814494243
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This book addresses selected practical applications and recent developments in the areas of quantitative financial modeling in derivatives instruments, some of which are from the authors' own research and practice. It is written from the viewpoint of financial engineers or practitioners, and, as such, it puts more emphasis on the practical applications of financial mathematics in the real market than the mathematics itself with precise (and tedious) technical conditions. It attempts to combine economic insights with mathematics and modeling so as to help the reader to develop intuitions.Among the modeling and the numerical techniques presented are the practical applications of the martingale theories, such as martingale model factory and martingale resampling and interpolation. In addition, the book addresses the counterparty credit risk modeling, pricing, and arbitraging strategies from the perspective of a front office functionality and a revenue center (rather than merely a risk management functionality), which are relatively recent developments and are of increasing importance. It also discusses various trading structuring strategies and touches upon some popular credit/IR/FX hybrid products, such as PRDC, TARN, Snowballs, Snowbears, CCDS, and credit extinguishers.While the primary scope of this book is the fixed-income market (with further focus on the interest rate market), many of the methodologies presented also apply to other financial markets, such as the credit, equity, foreign exchange, and commodity markets.

Arvustused

"This state of the art text emphasizes various contemporary topics in fixed income derivatives from a practitioner's perspective. The combination of martingale technology with the author's expert practical knowledge contributes hugely to the book's success. For those who desire timely reporting straight from the trenches, this book is a must." Peter Carr, PhD Head of Quantitative Financial Research, Bloomberg LP Director of the Masters in Math Finance Program, Courant Institute, NYU "It is quite obvious that the authors have significant practical experience in sophisticated quantitative analysis and derivatives modeling. This real world focus has resulted in a text that not only provides clear presentations on modeling, pricing and hedging derivatives products, somewhat typical in standard financial engineering books, but also provides more advanced material that is usually found only in research publications. In addition, the authors provide readers with keen insight into how different models are needed for different circumstances. This book has innovative ideas, state of the art applications, and contains a wealth of valuable information that will interest academics, applied quantitative derivatives modelers, and traders." Peter Ritchken Kenneth Walter Haber Professor, Department of Banking and Finance Weatherhead School of Management, Case Western Reserve University

Preface vii
PART I THEORY AND APPLICATIONS OF DERIVATIVES MODELING
1(386)
Introduction to Counterparty Credit Risk
3(34)
Credit Charge, Credit Benefit, and Credit Premium
8(6)
Credit Cost, Accrued Funding Cost, and Accrued Funding Benefit
14(3)
Trading Strategies and Opportunities
17(11)
Comparison with Bond Credit Risk
28(2)
Prevailing Strategies for Counterparty Credit Risk Management
30(3)
Wrong-way and Right-way Exposures or Trades
33(2)
Introduction to Modeling and Pricing of Counterparty Credit Risk
35(2)
Martingale Arbitrage Pricing in Real Market
37(86)
Basics of Arbitrage
38(7)
Arbitrage Opportunity and Arbitrage Pricing
38(4)
Self Financing Trading Strategies and Arbitrage
42(3)
Subtleties in Arbitrage Pricing in Real Market
45(16)
Counterparty Credit Risk
45(1)
The Risk-free Interest Rate
45(4)
Bid/Ask Spread
49(2)
Un-hedgeable Variables
51(2)
Primary Model Calibration and Secondary Model Calibration
53(3)
Models for Pricing, Models for Hedging, and Hedging Calibratio
56(4)
Incomplete Market and Completing the Market
60(1)
Arbitrage Models and Non-arbitrage Models
61(5)
Arbitrage Models and Non-arbitrage Models
61(2)
Financial Market Participants and Financial Activities
63(3)
Trading Opportunities and Strategies
66(23)
Simple Bonds and IR Swaps
68(4)
Callable Bonds and Cancelable IR Swaps
72(1)
Examples of Practical Complications
73(1)
Structured Notes and Exotic Derivatives
74(5)
IR/FX Hybrid Notes and Derivatives
79(3)
Asset Swaps and Repackaging
82(1)
Credit Hybrid Derivatives
82(2)
Capital Structure Arbitrage
84(2)
Quasi-arbitrage Opportunities
86(1)
Why Should Derivatives Instruments Exist
87(2)
Martingale Arbitrage Modeling
89(33)
Harrison-Pliska Martingale No-arbitrage Theorem
89(2)
Martingale Derivatives Pricing in a Binomial Economy
91(5)
Harrison-Pliska Martingale No-arbitrage Theorem for Assets with Intermediate Cashflows or Income
96(1)
Foundation for Arbitrage Pricing
97(1)
Examples of Martingales and Equivalent Martingale Measures
98(3)
Martingale Representation and SDE for Derivatives Pricing
101(8)
Change of Probability Measure and Importance Sampling
109(4)
PDE for Derivatives Pricing and P & L Decomposition
113(5)
SABR Stochastic Volatility Model
118(1)
An Example of Martingale Modeling in Real Market
119(3)
Problems
122(1)
The Black-Scholes Framework and Extensions
123(30)
More on Martingale Models
123(19)
Single State Variable and Single Numeraire
124(9)
Single State Variable and Multiple Numeraires
133(9)
Black's Model
142(1)
Put-Call Parity Revised
143(4)
Replication Model
147(2)
Impact of Volatility Skews and Smiles on Hedge Ratios and Hedging Strategies
149(3)
Other Extensions of Black-Scholes Framework
152(1)
Martingale Resampling and Interpolation
153(59)
Martingale Interpolation
159(5)
Brownian Bridge Interpolation
164(3)
Moment Matching in One-factor Case
167(11)
Quadratic Resampling
168(1)
Moment Matching for All Odd Moments and Kurtosis
168(4)
Moment Matching for Higher Order Moments
172(2)
Conditional Quadratic Resampling
174(4)
Moment Matching in Multi-factor Case
178(2)
Martingale Resampling
180(23)
Unconditional Martingale Resampling at the State Variable Level
181(11)
Conditional Martingale Resampling at the State Variable Level
192(5)
Brownian Bridge Resampling at the State Variable Level
197(1)
Martingale Control Variate at the Underlying Instrument Level
198(2)
Martingale Resampling at the Derivatives Price Level
200(2)
Application to Secondary Model Calibration
202(1)
Other Applications of Martingale Resampling
203(7)
Modeling of Multiple Indices
204(1)
JLT Risk Neutralization of Credit Rating Transition Process
205(3)
Calibration of Credit Spread Processes
208(2)
Risk Neutralization of Mortgage Prepayment Model
210(1)
Accuracy and Precision Tests
210(1)
Examples of Numerical Results
210(2)
Introduction to Interest Rate Term Structure Modeling
212(6)
Interest Rate Models Classification
212(1)
Short Rate Models
213(2)
Gaussian Short Rate Models
214(1)
Lognormal Short Rate Models
215(1)
Constant Elasticity of Variance Models
215(1)
Affine Models and Quadratic Models
215(1)
What Interest Rate Models Should One Use?
216(2)
The Heath-Jarrow-Morton Framework
218(31)
The Heath-Jarrow-Morton Model
218(6)
The Ritchken-Sankarasubramanian Model
224(4)
The Inui-Kijima Model
228(6)
Overview of Numerical Implementations of the RS and the IK Model
234(8)
Recombining Trinomial Tree Technique
234(5)
Adaptive Recombining Trinomial Tree Technique
239(2)
Overview of Applications of the Adaptive Trinomial Tree Technique to the RS Model and the IK Model
241(1)
Appendix
242(7)
Closed-form Solutions for the RS Model
242(4)
Closed-form Solutions for the IK Model
246(3)
The Interest Rate Market Model
249(78)
BGM Model versus HJM Model
250(2)
The Brace-Gatarek-Musiela Original Approach
252(4)
Comparison Between HJM and BGM Models
256(2)
Jamshidian's Approach
258(1)
Martingale Approach
259(14)
The LIBOR Market Model and the Black Formula for Caps/Floors
259(7)
The Swap Market Model and the Black Formula for European Swaptions
266(7)
Overview of Simultaneous and Globally Consistent Pricing and Hedging
273(10)
Simultaneous Consistent Pricing Through Approximation
275(4)
More on Simultaneous Consistent Pricing
279(4)
More on the Martingale or Full-dimensional LIBOR Market Model
283(4)
Modeling Interest Rate Volatility Skew and Smile
287(5)
CEV and LCEV Models for Modeling the Volatility Skew
288(2)
Examples of Volatility Skew for Caplets and Swaptions
290(2)
The Nonexploding Bushy Tree Technique
292(20)
Construction of a Nonexploding Bushy Tree
294(3)
Modeling Stochastic Processes on a Nonexploding Bushy Tree
297(4)
Application of Martingale Control Variate Technique
301(2)
Numerical Results
303(9)
General Framework for Multi-factor Modeling for Hybrid Market
312(2)
Stochastic Volatility BGM Models
314(2)
Examples of Stochastic Volatility BGM Model Results
316(1)
Appendix
317(10)
More Numerical Results Obtained With the NBT Technique
317(2)
Sufficient Conditions for Convergence
319(4)
Application of Girsanov's Change of Measure Theorem to Derivation of the Martingale or Full-dimensional LIBOR Market Model
323(4)
Credit Risk Modeling and Pricing
327(60)
Pricing Simple Defaultable Instruments
328(6)
Default Contingent Instruments
334(1)
A Simple Markov Chain Model
335(6)
Modeling Correlated Default Event Processes with a Factor Model
341(7)
Modeling Correlated Default Time Processes with the Copula Approach
348(2)
Recovery Rate Modeling
350(1)
Risky Market Model for Credit Spread Modeling
351(8)
Joint Credit Spread and Default Modeling
359(3)
Counterparty Credit Risk Pricing in OTC Derivatives
362(16)
Credit Charge Calculation
365(1)
Expected and Potential Exposures and Expected Shortfall
366(2)
Credit Benefit Calculation
368(1)
Collateral or Margin Agreement
369(1)
Net Credit Charge and Funding Spread Calculation
370(2)
Martingale Relationships in Credit Charge Calculations
372(2)
Closed-form Solutions and Approximations
374(4)
Framework for Counterparty Credit Risk Modeling and Pricing
378(9)
Centralized Market Process Modeling and Scenario Generation Engine
380(1)
Exposure or MTM Modeling Engine
380(2)
New Trade and Real-time Exposure or MTM Modeling Engine
382(1)
Counterparty Credit Process Modeling and Scenario Generation Engine
383(1)
Portfolio Effect Handling and Aggregation Engine
383(1)
Counterparty Credit Risk Pricing Engine
384(1)
Sensitivity and Scenario Analysis Engine
384(1)
Unexpected Risk Modeling Engine
385(2)
PART II INTEREST RATE MARKET FUNDAMENTALS AND PROPRIETARY TRADING STRATEGIES
387(92)
Simple Interest Rate Products
389(8)
Treasury Issues
389(2)
Treasury Bills
389(1)
Treasury Notes and Bonds
390(1)
Futures Contracts
391(3)
Euro-dollars and LIBOR
392(1)
Euro-dollar Futures
392(1)
Note and Bond Futures
393(1)
Interest Rate Derivatives
394(1)
Interest Rate Swaps
394(2)
Plain Vanilla Interest Rate Swap
394(1)
Forward Swap
395(1)
Basis Swap
395(1)
Constant Maturity Swap
395(1)
Swaption
395(1)
Bond Options
396(1)
OTC Options
396(1)
Yield Curve Modeling
397(14)
Introduction
397(1)
The Bootstrap Method
398(1)
Orthogonal Exponential Spline Model
399(7)
Exponential Basis Functions
400(3)
Maximum Likelihood Estimates for Spline Coefficients
403(2)
Implementation of the Spline Model
405(1)
Summary
406(1)
Swap Curve
406(5)
Constructing Euro-dollar Strip Curve
407(1)
Convexity Adjustment
408(3)
Two-Factor Risk Model
411(23)
PCA and TFRM Methodologies
411(2)
Principal Components Analysis
413(5)
Two-factor Risk Model Specification
418(3)
Empirical Validation
421(2)
Applications
423(4)
Level-hedged Bullet/Barbell Trades
423(1)
Two-factor Portfolio Hedging Strategy
423(3)
Bond Indices with Level and Curve Risk Profile
426(1)
Adjusted Durations
427(6)
β-Adjusted Duration
430(2)
Hedging the Extremely Long End
432(1)
Future Directions
433(1)
The Holy Grail --- Two-Factor Interest Rate Arbitrage
434(6)
Profit, Loss, and Financing Costs
434(1)
Two-factor Arbitrage
435(2)
Trading Strategy
437(3)
Yield Decomposition Model
440(10)
Volatility Adjusted Duration
441(1)
Dollar Value of Convexity
442(1)
Expected Total Rate of Return
443(1)
Measurement of Risk Premium
444(1)
Expectation Curve
445(2)
Expected FED Funds Rate
447(1)
Yield Decomposition Analysis
447(1)
Discussion
448(2)
Inflation Linked Instruments Modeling
450(11)
Inflation Swaps
451(1)
Functions and Applications
452(3)
Asset/Liability Management
453(1)
Inflation Swaps as Hedging and Trading Instruments
453(1)
Investment Alternatives
453(1)
Inflation Linked Debt Issuance
454(1)
Complementary to Interest Rate Swaps
454(1)
Inflation Swap Level
455(1)
Real Rate Swap Curve
456(1)
Zero-coupon Inflation Swap Curve Valuation Methods
457(1)
Risk Measures and Hedging
458(2)
Prospect of the Inflation Swap Business
460(1)
Interest Rate Proprietary Trading Strategies
461(18)
Rich/Cheap Trade
462(2)
Rich/Cheap Analysis
464(4)
Yield Curve Sector Rich/Cheap Analysis
464(2)
Rich/Cheap Analysis for Notes and Bonds
466(2)
Bond/Swap Trade
468(1)
Curvature Trade
469(1)
Spread Trade
470(2)
Box Trade
472(1)
OAT Floater Trade
472(1)
Cash/Futures Trade
473(1)
A Generic Convergence Trading Strategy
473(3)
Other Factors Related to Trading Strategy
476(3)
Transaction Cost
476(1)
Higher Risk and Highly Profitable Trades
477(1)
Bet Big When All Components Line Up
478(1)
Human Judgment
478(1)
References 479(12)
Index 491
Yi Tang is currently with Goldman, Sachs & Co., Inc. as the head of a Strategies Group in FICC. Previously, he was with Bear, Stearns & Co., Inc. as a Managing Director / Principal in the F.A.S.T Department and the head of a Quant group responsible for part of the interest rate derivatives modeling and part of the IR/Credit hybrid derivatives modeling. Prior to that, he was a Vice Present in a Quant group at Goldman, Sachs & Co, Inc. He also worked as a Quantitative Financial Analyst at Cambix and Rubicon Financial Systems, Inc. Before switching to the field of Quantitative Finance, he worked as an Adjunct Assistant Professor of Physics and a Postdoc researcher at UCLA, and as a Senior Scientist and a Project Manager at Princeton Electronic Systems, Inc. with extensive collaborations with Sarnoff Corporation, formerly RCA. Yi has been an invited speaker at several conferences/seminars on Quantitative Finance. He received his PhD in Physics from University of California at Los Angeles (UCLA) in 1992. Bin Li currently is the Chairman of the Board of Directors and CEO of Westport Financial LLC. Bin is an internationally well-known researcher and practitioner in the finance industry. Prior to co-founding Westport Financial LLC in October 1998, Bin was Executive Director, Head of Quantitative Trading Strategies at Warburg Dillon Read, the investment banking division of the United Bank of Switzerland. From 1993 to 1997, Bin was a Vice President at Merrill Lynch, headed the Quantitative Analysis Group. Bin has been an invited speaker at many conferences/workshops on Quantitative Finance. Bin received his PhD in Physics from New York University in 1992.
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