Modelling Fixed Income Securities and Interest Rate Options,Second Edition / Edition 2

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This book teaches the basics of fixed-income securities in a way that, unlike competitive texts, requires a minimum of prerequisites. While other books focus heavily on institutional details of the bond market, all of which could easily be learned “on the job,” Jarrow is more concerned with presenting a coherent theoretical framework for understanding all basic models. His unified approach—the Heath Jarrow Morton model—under which all other models are presented as special cases, enhances understanding while avoiding repetition. The author’s pricing model is widely used in today’s securities industry.

In this revised edition, the author has added new chapters to enrich coverage, and has modified the order of chapters slightly to smooth the progression of material from simple to complex. Online material will be available with the text, replacing the diskette included in the first edition; lecture notes for instructors will be available on PowerPoint slides. MathWorks has provided a free online, limited version of the MATLAB’s financial derivatives toolbox, with which users of the book can apply the theory presented in each chapter.

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Editorial Reviews

From the Publisher
Review of the First Edition
"Interest-rate risk management is generally perceived as one of the most technical areas in modern finance. The sheer number of different, rather cumbersome and somewhat abstract, models that exist to price and hedge interest-rate-sensitive claims, has intimidated all but the most determined academicians and practitioners. This unfortunate perception of the subject will be reversed for most who read Robert A. Jarrow's new book . . . [in which] he has packaged his knowledge and insight into a form that anyone can understand. . . . It is a book targeted to the advanced MBA student, the Ph.D. student, and the technical Wall Street crowd. Each audience should be pleased with it. . . . It is the best book in the interest-rate pricing area."—Journal of Finance

"The Second Edition is written in a style that makes it invaluable to a wide audience. For the specialist, it provides a clear and concise discussion of virtually every aspect of fixed income modeling—from model construction through to implementation and estimation. For the newcomer, it provides a 'from the ground up' approach with an introduction to traded securities, theory, modeling and application."—Andrew Jeffrey, Yale School of Management

"One feature of the revised edition that I find particularly appealing to instructors and students is that each chapter starts with an example demonstrating the new concepts in the chapter. This is very useful for MBA students. The revision is carefully written and well organized, with an emphasis on risk management."—Zsuzsanna Fluck, Department of Finance, Eli Broad Graduate School of Management, Michigan State University

Bringing a risk management approach to the study of fixed-income securities and interest rate options, this book applies a binomial option-pricing methodology to study the pricing and hedging of fixed- income securities and interest rate options. After introducing the basic background material, it describes the economic theory underlying the HJM model, applies that theory to specific applications, examines implementation and estimations issues, and considers extensions and rate models. Jarrow teaches investment management at Cornell University. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9780804744386
  • Publisher: Stanford University Press
  • Publication date: 7/28/2002
  • Edition description: 2
  • Edition number: 2
  • Pages: 368
  • Sales rank: 1,347,932
  • Product dimensions: 6.13 (w) x 9.25 (h) x 0.80 (d)

Meet the Author

Robert Jarrow is the Ronald P. and Susan E. Lynch Professor of Investment Management at the Johnson Graduate School of Management, Cornell University. He is also a managing director and the director of research at Kamakura Corporation. He was the 1997 IAFE/SunGard Financial Engineer of the year. He is a graduate of Duke University, Dartmouth College and the Massachusetts Institute of Technology, and an IAFE Senior Fellow. Professor Jarrow is renowned for his pioneering work on the Heath-Jarrow-Morton model for pricing interest rate derivatives and on the Jarrow-Turnbull model for pricing credit risk. His current research interests include the pricing of exotic interest rate options and credit derivatives as well as investment management theory. His publications include four books—Options Pricing, Finance Theory, Modeling Fixed-Income Securities and Interest Rate Options (second edition), and Derivative Securities (second edition)—as well as more than eighty publications in leading finance and economic journals. Professor Jarrow is the managing editor of Mathematical Finance and a co-editor of The Journal of Derivatives. He is also an associate editor of the Review of Derivatives Research, Journal of Fixed Income, The Financial Review, The Journal of Risk, The International Journal of Bonds, and The Review of Futures Markets, and an advisory editor for Asia-Pacific Financial Markets. He serves on the boards of directors of several firms.

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Table of Contents

Preface to the Second Edition
Prologue 1
1 Traded Securities 13
2 The Classical Approach 25
3 The Term Structure of Interest Rates 41
4 The Evolution of the Term Structure of Interest Rates 57
5 The Expectations Hypothesis 85
6 Trading Strategies, Arbitrage Opportunities, and Complete Markets 99
7 Bond Trading Strategies - An Example 117
8 Bond Trading Strategies - Theory 132
9 Interest Rate Derivatives Valuation - Theory 156
10 Coupon Bonds 175
11 Options on Bonds 188
12 Forwards and Futures 211
13 Swaps, Caps, Floors, and Swaptions 231
14 Interest Rate Exotics 257
15 Continuous-Time Limits 275
16 Parameter Estimation 302
17 Spot Rate Models 327
18 Extensions 338
Index 341
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