SUMMARY

• Provides all the insight and explanation you need in order to understand and apply all recent methodologies in the area of exotic options pricing and hedging

• Allows you to closely follow various cutting-edge products and methodologies that significantly extend the Black-Scholes framework

• Presents models and techniques that have explicit practical as well as theoretical value

• Edited collection of 42 articles compiled from Risk magazine featuring contributions from the top names in the field including: Peter Carr, Emanuel Derman, Claudio Albanese and Dilip Madan

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  TABLE OF CONTENTS

Volatility I: Quantitative and Qualitative Description

• Correcting Black-Scholes

Michael Kamal and Emanuel Derman

• Regimes of Volatility

Emanuel Derman

• If the skew fits

Gregory Brown and Curt Randall

• Uncertain volatility

Terry Lyons and Adam T Smith

• Jumping smiles

Leif Andersen and Jesper Andreasen

• Calibrating Random Volatility

Jean-Pierre Fouque, George Papanicolaou and Ronnie Sircar

• A mixed up smile

Damiano Brigo and Fabio Mercurio

• A fair value for the skew

Joe Zou and Emmanuel Derman

• Principles of the skew

Carol Alexander

• Crises and Volatility

Allan Malz

• The vol smile problem

Alexander Lipton

• Trees from history

Nusrat Cakici and Kevin Foster

• Reconstructing volatility

M.Avellaneda, Dash Boyer-Olson, Peter Friz and Jerome Busca

• Volatile volatilities

Leif Andersen and Jesper Andreasen

Volatility II: Vol Swaps

• Introducing the covariance swap

Peter Carr and Dilip Madan

• A guide to variance swaps

Kresimir Demeterfi, Emanuel Derman, Michael Kamal and Joseph Zou

• Market risk of variance swaps

Neil Chriss and William Morokoff

• Volatility Swaps Made Simple

Oliver Brockhaus and Douglas Long

Exotic Options: Products and Methods

• Similarities via self-similarities

Alexander Lipton

• Pricing exotics under the smile

Klaus Said

• Upgrading your passport

Jan Vecer and Steven Shreve

• Going with the flow

Peter Carr, Alexander Lipton and Dilip Madan

• Static barriers

Leif Andersen and Jesper Andreasen

• Jumping in line

Claudio Albanese, Sebastian Jaimungal and Dmitri Rubisov

• Hedge your Monte Carlo

Marc Potters, Jean-Philippe Bouchaud and Dragan Sestovic

• Behind the Mirror

Jesper Andreasen

• Black-Scholes goes hypergeometric

Claudio Albanese, Guiseppe Campolieti, Peter Carr and Alexander Lipton

• New products, new risks

Richard Quessette

• Himalaya Options

Marcus Overhaus

• Exotic Spectra

Vadim Linetsky

• Universal barriers

Alexander Lipton and William McGhee

• Unified Asian pricing

Jan Vecer

• Assets with jumps

Alexander Lipton

• Why Be Backward?

Peter Carr and Ali Hirsa

Exotic Underlyers

• Hedging under asymmetry

Angelo Arvanitis and Jean-Michel Lasry

• Insurance Optional

Claudio Giraldi, Gabriele Susinno, Giacomo Berti, John Brunello, Silvia Buttarazzi, Gianluca Cenciarelli, Carlo Daroda and Giuseppe Stamegna

• Pricing the Weather

Melanie Cao and Jason Wei

• Hedging electoral risk

Steve Kou and Michel Sobel

• Plugging into electricity

Helyette Geman and Oldrich Vasicek

• Mean-reverting Smiles

Alain Chebanier and David Beaglehole

• Substitute Hedging

Vicky Henderson and David Hobson

• A Two-factor mean-reverting model

David Beaglehole and Alain Chebanier

NB - This table of contents is provisional until final publication of the book. Small changes to chapter titles and sequence may occur.

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  QUOTES

Contingency Analysis Top Ten Book of 2003
"You will love the many practical insights the 42 papers offer"
Glyn Holton, Contingency Analysis

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  REVIEW

Reviewed by Glyn Holton, Contingency Analysis

During the early 1990s, Risk Magazine was THE place to publish practitioner-oriented research on derivatives pricing. Many classic papers appeared between its covers. Today, other publications attract much of this research, but RISK continues to play an important role—as evidenced by this edited collection of 42 research papers published in Risk between 1999 and 2003.

The book is divided into four parts. The first comprises 14 papers on modeling volatility skew. Together, they give an excellent overview of the challenges that skew presents as well as the state of the art for modeling it. If you struggle with the difference between sticky strikes and sticky deltas—or local volatility models vs. stochastic volatility models—you will find these chapters to be a goldmine of practical information.

The second part comprises four nice papers on variance swaps and related derivatives that have volatility or correlations as underliers. Together, these chapters offer an in-depth introduction to how these instruments are used, priced and hedged.

The book's third part offers 16 papers addressing financial engineering issues raised by various exotic options—barriers, passports, binaries, etc. Because this is such an enormous topic, the section is less unified than the others. Its papers offer more a sampling of ideas than an overview of the topic.

The book's final part comprises eight papers discussing derivatives with exotic underliers: insurance, elections, weather, electricity.

This is an excellent collection of papers. While not all the papers are seminal, taken as a whole, they offer far more than the sum of their parts. Together, they immerse the reader in the cutting edge topics important to financial engineers today. While many important papers from the period were not published in RISK, the papers in this book orient you to those papers, explaining what they are about and how they fit into a broader scheme of things.

Who is this book for? I highly recommend it to anyone who wants to understand emerging trends in financial engineering. This includes both practitioners and researchers. More than anything else, this book brings to mind Taleb's (1996) book Dynamic Hedging. If you enjoyed that, you will be right at home reading this book. You will find similar sophisticated-but-not-too-technical discussions. You will love the many practical insights the 42 papers offer.

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  AUTHOR BIOGRAPHY

Alex Lipton is a Managing Director and Global Head of Credit Analytics at Merrill Lynch, and a Visiting Professor of Mathematics at Imperial College London. Prior to his current role, he was a Managing Director and Head of Credit Analytics at Citadel Investment Group in Chicago; he has also worked at Credit Suisse, Deutsche Bank and Bankers Trust. Previously, Alex was a Full Professor of Mathematics at the University of Illinois at Chicago and a Consultant at Los Alamos National Laboratory. He received his undergraduate and graduate degrees from Lomonosov Moscow State University. His current interests include credit correlation and related topics, quantitative aspects of securitization, as well as technical trading strategies. In 2000 Alex was awarded the first Quant of the Year Award by Risk Magazine. Alex is the author of two books (Magnetohydrodynamics and Spectral Theory and Mathematical Methods for Foreign Exchange) and the editor of two more. He has published numerous research papers on hydrodynamics, magnetohydrodynamics, astrophysics, and financial engineering. Alex has given dozens of invited lectures at leading universities worldwide.

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  CONTRIBUTORS

Michael Kamal and Emanuel Derman Emanuel Derman Gregory Brown and Curt Randall Terry Lyons and Adam T Smith Damiano Brigo and Fabio Mercurio Joe Zou and Emmanuel Derman Carol Alexander Allan Malz Alexander Lipton M.Avellaneda, Dash Boyer-Olson, Peter Friz and Jerome Busca Leif Andersen and Jesper Andreasen Peter Carr and Dilip Madan Kresimir Demeterfi, Emanuel Derman, Michael Kamal and Joseph Zou Neil Chriss and William Morokoff Oliver Brockhaus and Douglas Long Alexander Lipton Klaus Said Jan Vecer and Steven Shreve Peter Carr, Alexander Lipton and Dilip Madan Leif Andersen and Jesper Andreasen Claudio Albanese, Sebastian Jaimungal and Dmitri Rubisov Marc Potters, Jean-Philippe Bouchaud and Dragan Sestovic Jesper Andreasen Claudio Albanese, Guiseppe Campolieti, Peter Carr and Alexander Lipton Richard Quessette Marcus Overhaus Vadim Linetsky Alexander Lipton and William McGhee Jan Vecer Alexander Lipton Peter Carr and Ali Hirsa Angelo Arvanitis and Jean-Michel Lasry, Claudio Giraldi, Gabriele Susinno, Giacomo Berti, John Brunello, Silvia Buttarazzi, Gianluca Cenciarelli, Carlo Daroda and Giuseppe Stamegna Melanie Cao and Jason Wei Steve Kou and Michel Sobel Helyette Geman and Oldrich Vasicek Alain Chebanier and David Beaglehol Vicky Henderson and David Hobson David Beaglehole and Alain Chebanier
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