Derivatives and Internal Models

Front Matter....Pages i-xviii
Front Matter....Pages 1-1
Introduction....Pages 3-6
Fundamental Risk Factors of Financial Markets....Pages 7-47
Financial Instruments: A System of Derivatives and Underlyings....Pages 48-62
Front Matter....Pages 63-63
Overview of the Assumptions....Pages 65-67
Present Value Methods, Yields, and Traditional Risk Measures....Pages 68-83
Arbitrage....Pages 84-93
The Black-Scholes Differential Equation....Pages 94-108
Integral Forms and Analytic Solutions in the Black-Scholes World....Pages 109-120
Numerical Solutions Using Finite Differences....Pages 121-160
Binomial and Trinomial Trees....Pages 161-183
Monte Carlo Simulations....Pages 184-198
Hedging....Pages 199-223
Martingales and Numeraires....Pages 224-253
Interest Rates and Term Structure Models....Pages 254-312
Front Matter....Pages 313-313
Spot Transactions on Interest Rates....Pages 315-342
Forward Transactions on Interest Rates....Pages 343-356
Plain Vanilla Options....Pages 357-377
Exotic Options....Pages 378-403
Front Matter....Pages 405-405
Fundamental Risk Concepts....Pages 407-429
The Variance — Covariance Method....Pages 430-461
Front Matter....Pages 405-405
Simulation Methods....Pages 462-469
Interest Rate Risk and Cash Flows....Pages 470-490
Example of a VaR Computation....Pages 491-495
Backtesting: Checking the Applied Methods....Pages 496-504
Front Matter....Pages 505-505
Classical Portfolio Management....Pages 507-534
Attributes and their Characteristic Portfolios....Pages 535-551
Active Management and Benchmarking....Pages 552-571
Front Matter....Pages 573-573
Interest Rate Term Structures....Pages 575-589
Volatility....Pages 590-614
Market Parameter from Historical Times Series....Pages 615-633
Time Series Modeling....Pages 634-655
Forecasting With time Series Models....Pages 656-670
Principal Component Analysis....Pages 671-681
Pre-Treatment of Time Series and Assessment of Models....Pages 682-698
Back Matter....Pages 699-755