Derivatives and Internal Models
Modern Risk Management
- 2019
- Buch
- Verfasst von
- Hans-Peter Deutsch
- Dr. Mark W. Beinker
- Buchreihe
- Finance and Capital Markets Series
- Verlag
- Springer International Publishing
Über dieses Buch
Now in its fifth edition, Derivatives and Internal Models provides a comprehensive and thorough introduction to derivative pricing, risk management and portfolio optimization, covering all relevant topics with enough hands-on, depth of detail to enable readers to develop their own pricing and risk tools.
The book provides insight into modern market risk quantification methods such as variance-covariance, historical simulation, Monte Carlo, hedge ratios, etc., including time series analysis and statistical concepts such as GARCH Models or Chi-Square-distributions. It shows how optimal trading decisions can be deduced once risk has been quantified by introducing risk-adjusted performance measures and a complete presentation of modern quantitative portfolio optimization. Furthermore, all the important modern derivatives and their pricing methods are presented; from basic discounted cash flow methods to Black-Scholes, binomial trees, differential equations, finite difference schemes, Monte Carlo methods, Martingales and Numeraires, terms structure models, etc.
The fifth edition of this classic finance book has been comprehensively reviewed. New chapters/content cover multicurve bootstrapping, the valuation and hedging of credit default risk that is inherently incorporated in every derivative—both of which are direct and permanent consequences of the financial crises with a large impact on our understanding of modern derivative valuation.
The book will be accompanied by downloadable Excel spread sheets, which demonstrate how the theoretical concepts explained in the book can be turned into valuable algorithms and applications and will serve as an excellent starting point for the reader’s own bespoke solutions for valuation and risk management systems.
Inhaltsverzeichnis
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Frontmatter
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Fundamentals
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Frontmatter
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1. Introduction
Hans-Peter Deutsch, Mark W. BeinkerAbstractThe explosive development of derivative financial instruments continues to provide new possibilities and increasing flexibility to manage finance and risk in a way specifically tailored to the needs of individual investors or firms. -
2. Fundamental Risk Factors of Financial Markets
Hans-Peter Deutsch, Mark W. BeinkerAbstractThe fundamental risk factors in financial markets are the market parameters which determine the price of the financial instruments being traded. -
3. Financial Instruments: A System of Derivatives and Underlyings
Hans-Peter Deutsch, Mark W. BeinkerAbstractAs mentioned in the introduction, trading can be defined as an agreement between two parties in which one of the two consciously accepts a financial risk in return for the receipt of a specified payment or at least the expectation of such a payment at same future time from the counterparty.
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Methods
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Frontmatter
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4. Overview of the Assumptions
Hans-Peter Deutsch, Mark W. BeinkerAbstractTo apply the common methods for pricing and risk management we need to make assumptions which are necessary for the construction of the associated models. -
Chapter 5. Present Value Methods, Yields and Traditional Risk Measures
Hans-Peter Deutsch, Mark W. BeinkerAbstractPresent value methods determine the value of a financial instrument by discounting all future cash flows resulting from the instrument. -
6. Arbitrage
Hans-Peter Deutsch, Mark W. BeinkerAbstractArbitrage considerations alone are sufficient for deriving relations such as the put-call parity or determining forward prices. -
7. The Black-Scholes Differential Equation
Hans-Peter Deutsch, Mark W. BeinkerAbstractHaving used arbitrage considerations to derive various properties of derivatives, in particular of option prices (upper and lower bounds, parities, etc.), we now demonstrate how such arbitrage arguments, with the help of results from stochastic analysis, namely Ito’s formula 2.22, can be used to derive the famous Black-Scholes equation. -
8. Integral Forms and Analytic Solutions in the Black-Scholes World
Hans-Peter Deutsch, Mark W. BeinkerAbstractIn addition to Assumptions 1, 2, 3, 4, 5 and 6 from Chap. 4 required to set up the differential equation in Chap. 7, we will now further simplify our model by assuming that the parameters involved (interest rates, dividend yields, volatility) are constant (Assumptions 9, 11 and thus 7 from Chap. 4) despite the fact that these assumptions are quite unrealistic. -
9. Binomial and Trinomial Trees
Hans-Peter Deutsch, Mark W. BeinkerAbstractBinomial and trinomial trees are very intuitive and comparatively easy to implement tools to calculate prices and sensitivity parameters of derivatives while avoiding direct reference to the fundamental differential equations governing the price of the instrument. -
10. Numerical Solutions Using Finite Differences
Hans-Peter Deutsch, Mark W. BeinkerAbstractOne of the best known and widely used numerical methods to solve partial differential equations in finance and elsewhere is the finite difference method. -
11. Monte Carlo Simulations
Hans-Peter Deutsch, Mark W. BeinkerAbstractHaving recognized the fact that prices of financial instruments can be calculated as discounted future expectations (with respect to a risk-neutral probability measure), the idea of calculating such expectations by simulating the (stochastic) evolution of the underlyings several times and subsequently averaging the results somehow is not far removed. -
12. Hedging
Hans-Peter Deutsch, Mark W. BeinkerAbstractThe replication of derivatives with a portfolio consisting of underlyings and a bank account as, for example, in Eq. 9.3, can be used to hedge the derivative’s risk resulting from the stochastic movement of its underlying (or conversely a derivative could be used to hedge such a portfolio). -
13. Martingales and Numeraires
Hans-Peter Deutsch, Mark W. BeinkerAbstractThe most important and profound concept that the reader may have gained from the material presented in this book so far is that of risk neutrality, which can be summarized as follows: Today’s price of a (tradable) financial instrument is equal to the discounted expectation of its future price if this expectation is calculated with respect to the risk-neutral probability measure. -
14. Interest Rates and Term Structure Models
Hans-Peter Deutsch, Mark W. BeinkerAbstractSo far, with only few exceptions (e.g. Sect. 8.3.3), we have considered interest rates as being deterministic or even constant. This directly contradicts to the simple existence of interest rate options.
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- Titel
- Derivatives and Internal Models
- Verfasst von
-
Hans-Peter Deutsch
Dr. Mark W. Beinker
- Copyright-Jahr
- 2019
- Electronic ISBN
- 978-3-030-22899-6
- Print ISBN
- 978-3-030-22898-9
- DOI
- https://doi.org/10.1007/978-3-030-22899-6
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