Foreword xi
Preface xiii
Acknowledgments xv
Chapter 1 Exotic Derivatives 11-1 Single-Asset Exotics 1
1-2 Multi-Asset Exotics 4
1-3 Structured Products 9
References 11
Problems 11
Chapter 2 The Implied Volatility Surface 152-1 The Implied Volatility Smile and Its Consequences 15
2-2 Interpolation and Extrapolation 20
2-3 Implied Volatility Surface Properties 22
2-4 Implied Volatility Surface Models 22
References 29
Problems 30
Chapter 3 Implied Distributions 333-1 Butterfly Spreads and the Implied Distribution 33
3-2 European Payoff Pricing and Replication 36
3-3 Pricing Methods for European Payoffs 39
3-4 Greeks 41
References 42
Problems 42
Chapter 4 Local Volatility and Beyond 454-1 Local Volatility Trees 45
4-2 Local Volatility in Continuous Time 46
4-3 Calculating Local Volatilities 48
4-4 Stochastic Volatility 50
References 55
Problems 55
Chapter 5 Volatility Derivatives 595-1 Volatility Trading 59
5-2 Variance Swaps 61
5-3 Realized Volatility Derivatives 65
5-4 Implied Volatility Derivatives 67
References 70
Problems 70
Chapter 6 Introducing Correlation 736-1 Measuring Correlation 73
6-2 Correlation Matrices 75
6-3 Correlation Average 77
6-4 Black-Scholes with Constant Correlation 82
6-5 Local Volatility with Constant Correlation 84
References 84
Problems 85
Chapter 7 Correlation Trading 877-1 Dispersion Trading 87
7-2 Correlation Swaps 91
Problems 93
Chapter 8 Local Correlation 958-1 The Implied Correlation Smile and Its Consequences 95
8-2 Local Volatility with Local Correlation 97
8-3 Dynamic Local Correlation Models 99
8-4 Limitations 99
References 100
Problems 100
Chapter 9 Stochastic Correlation 1039-1 Stochastic Single Correlation 103
9-2 Stochastic Average Correlation 104
9-3 Stochastic Correlation Matrix 108
References 111
Problems 111
Appendix A Probability Review 115A-1 Standard Probability Theory 115
A-2 Random Variables, Distribution, and Independence 116
A-3 Conditioning 117
A-4 Random Processes and Stochastic Calculus 118
Appendix B Linear Algebra Review 119B-1 Euclidean Spaces 119
B-2 Square Matrix Decompositions 120
Solutions Manual 123
Author's Note 143
About the Author 145
Index 147
SEBASTIEN BOSSU is Principal at Ogee Group LLC, an investment management and software development business based in New York. His past experience includes positions as director of Equity Derivatives Structuring for a London bank and exotics structurer at J.P. Morgan. Bossu is currently an adjunct professor at Pace University and also recently taught at Fordham University.
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