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Volatility and Correlation: In the Pricing of Equity, FX, and Interest-Rate Options

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"What is at stake is not some obscure academic point, but lies at the very heart of option pricing, and will inform the users' decisions insofar as their choice of pricing model is concerned." From the Introduction In his new book, Riccardo Rebonato introduces financial professionals to the practical and subtle use of the concepts of volatility (the degree of randomness in a price movement) and correlation (the relationship between the changes in value of two financial assets) in the pricing of complex options. By explaining this approach in ...
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Overview

"What is at stake is not some obscure academic point, but lies at the very heart of option pricing, and will inform the users' decisions insofar as their choice of pricing model is concerned." From the Introduction In his new book, Riccardo Rebonato introduces financial professionals to the practical and subtle use of the concepts of volatility (the degree of randomness in a price movement) and correlation (the relationship between the changes in value of two financial assets) in the pricing of complex options. By explaining this approach in clear and accessible terms, the author provides traders, risk managers, financial professionals and students with the tools to undertake an effective investigation of option pricing models both at the qualitative and the quantitative level. "In this book Dr Rebonato brings his penetrating eye to bear on option pricing and hedging. In his usual intuitive style he critically examines a variety of approaches to equity, currency and interest-rate options. The book is full of practical insights that reflect a wealth of experience in applying these models. The book is a 'must read' for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed." Professor Ian Cooper, London Business School "This book is a blend of the theoretical, the practical, and the abstract, but always staying in contact with reality. I don't agree with everything in it, but it taught me a thing or two. Read it carefully and thoroughly." Paul Wilmott, author of Derivatives "Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion. He rightly emphasises the financial and economic assumptions which underpin the models, and gives salutary warnings against models which overfit the current structure of prices but which perform poorly in predicting future behaviour. A rare combination of intellectual insight and practical common sense." Anthony Neuberger, Associate Professor, Institute of Finance and Accounting, London Business School
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Editorial Reviews

From the Publisher
"In this book Dr Rebonato brings his penetrating eye to bear on option pricing and hedging. In his usual intuitive style he critically examine a variety of approaches to equity, currency and interest-rate options. This book is full of practical insights that reflect a wealth of experience in applying these models. The book is a 'must read' for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.", Professor Ian Cooper, , London Business School#"This book is a blend of the theoretical, the practical, and the abstract, but always staying in contact with reality. I don't agree with everything in it, but it taught me a thing or two. Read it carefully and thoroughly.", Paul Wilmott, , Derivatives#"Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion. He rightly emphasises the financial and economic assumptions which underpin the models, and gives salutary warnings against models which overfit the current structure of prices but which perform poorly in predicting future behaviour. A rare combination of intellectual insight and practical common sense.

Selected 3D graphs from the book are reproduced in colour at ftp.wiley.co.uk/pub/books/rebonato", Anthony Neuberger, Associate Professor, Institute of Finance and Accounting, London Business School#

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Product Details

  • ISBN-13: 9780471899983
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 12/17/1999
  • Series: Wiley Series in Financial Engineering Series , #15
  • Edition number: 1
  • Pages: 360
  • Product dimensions: 6.26 (w) x 9.39 (h) x 1.03 (d)

Meet the Author

Dr Riccardo Rebonato is Head of Group Market Risk for the NatWest Group, London, UK. He holds Doctorates in Nuclear Engineering and Science of Materials/Solid State Physics. He has recently been appointed Lecturer in Mathematical Finance at Oxford University. Prior to joining NatWest, he was, at the same time, Head of the Complex Derivatives Trading Desk and of the Complex Derivatives Research Group at Barclays Capital, where he worked for nine years. Before that he was a Research Fellow in Physics at Corpus Christi College, Oxford. He is the author of the highly successful book Interest-Rate Option Models (Wiley, second edition 1998) and has published several papers on finance in academic journals. He is a regular speaker at conferences world-wide.
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Table of Contents

FOUNDATIONS.

Volatility: Fundamental Concepts and Definitions.

Variance and Mean Reversion in the Real and the Risk-Adjusted Worlds.

Instantaneous and Terminal Correlations.

DEALING WITH SMILES.

Pricing Options in the Presence of Smiles.

Tree Methodologies for Smiley Option Prices.

Efficient Extraction of the Future Local Volatility from Plain-Vanilla Option Prices.

Closed-Form Solutions for Smiley Option Prices via Direct Modelling of the Density.

Explaining Smiles by Means of Mixed Jump-Diffusion Processes.

INTEREST RATES.

The Role of Mean Reversion in Interest-Rate Models.

Optimal Calibration of the Brace-Gatarek-Musiela Model.

Specifying the Instantaneous Volatility of Forward Rates.

References.

Index.

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