An Introduction to Algorithmic Finance, Algorithmic Trading and Blockchain

Cover
An Introduction to Algorithmic Finance, Algorithmic Trading and Blockchain
An Introduction to Algorithmic Finance, Algorithmic Trading and Blockchain
Copyright
Dedication
Contents
Preface
I - Derivatives, Options and Stochastic Dominance
	1. Background and Preliminaries
	2. Valuation of Cash Flows and Fixed Income Securities: An Abridged Analysis
		2.1 Introduction
		2.2 Net Present Value
		2.3 Bond as a Fixed Income Security
	3. A Brief Analytical Exposition of Markets for Options
		3.1 Introduction
		3.2 Payoff and Profit Functions of Some Standard Options
		3.3 Options as Hedging Strategies
		3.4 Forward and Futures Contracts
	4. The Binomial Model: A Simplified Analysis
		4.1 Introduction
		4.2 Formal Framework
		4.3 Valuation of Options in the Cox–Ross–Rubinstein Model
	5. Brownian Motion, Itô Lemma and the Black–Scholes–Merton Model
		5.1 Introduction
		5.2 Preliminaries
		5.3 Itô Lemma, Distribution of Stock Price and Price of a Forward Contract
		5.4 The Black–Scholes–Merton Partial Differential Equation
		5.5 Black–Scholes–Merton Pricing Formulae
		5.6 The Greek Letters
	6. Exotic Options: An Illustrative Presentation
		6.1 Introduction
		6.2 Asian Options
		6.3 Binary or Digital Options
		6.4 Barrier Options
	7. An Abbreviated Theoretical Treatment of Stochastic Dominance Relations
		7.1 Introduction
		7.2 First-order Stochastic Dominance
		7.3 Second-order Stochastic Dominance
II - Algorithmic Issues
	8. Option Pricing Using Finite Difference Method
		8.1 Crank-Nicolson Method
			8.1.1 Finite difference mesh
		8.2 American Options
			8.2.1 Finite Difference Formulation
	9. Option Pricing Using Monte Carlo Methods
		9.1 Simulation of Wiener Process
		9.2 Simulating Itô Stochastic Differential Equation
		9.3 Valuing European Options
		9.4 Valuing American Options
		9.5 Monte Carlo Integration
	10. Determining Stochastic Dominance Relations
	11. Trading: Background Notions and Market Microstructure
		11.1 Trading Systems
		11.2 Some Relevant Notions
		11.3 Order Book
		11.4 Order
		11.5 Order Matching Algorithms
		11.6 Algorithmic Trading
		11.7 Efficient Market Hypothesis
	12. Algorithmic Trading Strategies
		12.1 Time Weighted Average Price
		12.2 Volume Weighted Average Price
		12.3 Percentage of Volume
		12.4 Participation of Weighted Price
		12.5 Bertsimas–Lo Dynamic Programming Strategy
		12.6 Implementation Shortfall
		12.7 Almgren–Chriss Efficient Trading Frontier
			12.7.1 Linear Impact Functions
	13. Portfolio Optimisation
		13.1 Markowitz Portfolio Optimisation
			13.1.1 Inclusion of a Risk-free Asset
			13.1.2 Capital Asset Pricing Model
			13.1.3 Further Issues
		13.2 Kelly Criterion
		13.3 Universal Portfolios
	14. Measures of Risk
		14.1 VaR and CVaR
		14.2 Sharpe Ratio
		14.3 Copula
			14.3.1 Portfolio Risk
			14.3.2 Tail Dependence and Tail Correlation
	15. High-frequency Trading
		15.1 Market Making
		15.2 Exploiting Limit Order Book
		15.3 Mean Reversion and Pairs Trading
		15.4 Arbitrage
			15.4.1 Put–call Parity
			15.4.2 Covered Interest Rate Parity
		15.5 Market Manipulation
III - Blockchain and Cryptocurrency
	16. Background Concepts for Blockchain
		16.1 Cryptography
			16.1.1 Cryptographic Hash Function
			16.1.2 Hash Function as a Random Oracle
			16.1.3 Digital Signature Schemes
		16.2 Distributed Computing
			16.2.1 Peer-to-Peer Network
			16.2.2 Gossip Protocol
			16.2.3 Byzantine Agreement
			16.2.4 Consensus Protocol
	17. Introduction to Blockchain
		17.1 Transactions
		17.2 Blocks of Transactions
		17.3 Public Ledger as a Blockchain
		17.4 Distributed Public Ledger
		17.5 Permissionless versus Permissioned Blockchain
	18. Cryptocurrency: Basics
		18.1 Owner
		18.2 Transactions
		18.3 Cryptocurrency Addresses
		18.4 Recapitulation
		18.5 Creation of a Block via Proof of Work
		18.6 Block Reward and Creation of Cryptocurrency
		18.7 Hash Rate
		18.8 Updating the Difficulty Parameter
		18.9 Controlling the Rate of Money Creation
		18.10 Choosing between Competing Blocks
		18.11 Confirmation of Transaction
		18.12 No Double Spending
		18.13 The 51% Attack
	19. Cryptocurrency: Further Issues
		19.1 Mining Pools
		19.2 Change of Rules
		19.3 Forks
		19.4 Value of a Cryptocurrency
		19.5 Cryptocurrency Exchange
		19.6 Cryptocurrency Community
		19.7 Stablecoin
		19.8 Criticisms of Cryptocurrencies
		19.9 Government Regulations
		19.10 Central Bank–issued Digital Currency
		19.11 Lightning Network
		19.12 Sidechain
		19.13 Proof of Stake
	20. Examples of Cryptocurrencies
		20.1 Bitcoin
		20.2 Ethereum and Smart Contracts
		20.3 Ripple and Payment Systems
	21. Applications of Blockchain
		21.1 Fintech Applications
		21.2 Logistics Management
		21.3 Supply Chain Management
		21.4 Governance
References
Index