ESCP Europe

"The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives."

Preface --- Abbreviations and notation --- PART I. BASIC DEFINITIONS AND NO ARBITRAGE --- 1. Definitions and notation --- 2. No-arbitrage pricing and numeraire change --- PART II. FROM SHORT RATE MODELS TO HJM --- 3. One-factor short-rate models --- 4. Two-factor short-rate models --- 5. The Heath-Jarrow-Morton (HJM) framework --- PART III. MARKET MODELS --- 6. The LIBOR and Swap market models (LFM and LSM) --- 7. Cases of calibration of the LIBOR market model --- 8. Monte Carlo tests for LFM analytical approximations --- PART IV. THE VOLATILITY SMILE --- 9. Including the smile in the LFM --- 10. Local-volatility models --- 11. Stochastic-volatility models --- 12. Uncertain-parameter models --- PART V. EXAMPLES OF MARKET PAYOFFS --- 13. Pricing derivatives on a single interest-rate curve --- 14. Pricing derivatives on two interest-rate curves --- PART VI. INFLATION --- 15. Pricing of inflation-indexed derivatives --- 16. Inflation-indexed swaps --- 17. Inflation-indexed caplets/floorlets --- 18. Calibration to market data --- 19. Introducing Stochastic volatility --- 20. Pricing hybrids with an inflation component --- PART VII. CREDIT --- 21. Introduction and pricing under counterparty risk --- 22. Intensity models --- 23. CDS options market models --- PART VIII. APPENDICES --- A. Other interest-rate models --- B. Pricing equity derivatives under stochastic rates --- C. A crash intro to stochastic differential equations and poisson processes --- D. A useful calculation --- E. A second useful calculation --- F. Approximating diffusions with trees --- G. Trivia and frequently asked questions --- H. Talking to traders --- References..