Theory, Implementation and Practice with MATLAB Source
Financial Modelling - Theory, Implementation and Practiceis a unique combination of quantitative techniques, the applicationto financial problems and programming using Matlab. The bookenables the reader to model, design and implement a wide range offinancial models for derivatives pricing and asset allocation,providing practitioners with complete financial modelling workflow,from model choice, deriving prices and Greeks using (semi-)analytic and simulation techniques, and calibration even for exoticoptions.
The book is split into three parts. The first part considersfinancial markets in general and looks at the complex models neededto handle observed structures, reviewing models based on diffusionsincluding stochastic-local volatility models and (pure) jumpprocesses. It shows the possible risk neutral densities, impliedvolatility surfaces, option pricing and typical paths for a varietyof models including SABR, Heston, Bates, Bates-Hull-White,Displaced-Heston, or stochastic volatility versions of VarianceGamma, respectively Normal Inverse Gaussian models and finally,multi-dimensional models. The stochastic-local-volatility Libormarket model with time-dependent parameters is considered and as anapplication how to price and risk-manage CMS spread products isdemonstrated.
The second part of the book deals with numerical methods whichenables the reader to use the models of the first part for pricingand risk management, covering methods based on direct integrationand Fourier transforms, and detailing the implementation of theCOS, CONV, Carr-Madan method or Fourier-Space-Time Stepping. Thisis applied to pricing of European, Bermudan and exotic options aswell as the calculation of the Greeks. The Monte Carlo simulationtechnique is outlined and bridge sampling is discussed in aGaussian setting and for Lévy processes. Computation of Greeksis covered using likelihood ratio methods and adjoint techniques. Achapter on state-of-the-art optimization algorithms rounds up thetoolkit for applying advanced mathematical models to financialproblems and the last chapter in this section of the book alsoserves as an introduction to model risk.
The third part is devoted to the usage of Matlab, introducingthe software package by describing the basic functions applied forfinancial engineering. The programming is approached from anobject-oriented perspective with examples to propose a frameworkfor calibration, hedging and the adjoint method for calculatingGreeks in a Libor Market model.
Source code used for producing the results and analysing themodels is provided on the author’s dedicated website,http://www.mathworks.de/matlabcentral/fileexchange/authors/246981
736 pages; ISBN 9781118413296
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Title: Financial Modelling
Author: Joerg Kienitz; Daniel Wetterau
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