For undergraduate and graduate courses in derivatives, options and futures, financial engineering, financial mathematics, and risk management.

Designed to bridge the gap between theory and practice, this highly successful book is regarded as the “bible” on trading floors and in academic classrooms throughout the world.

Mathematical Sophistication

One of the key decisions that must be made by an author who is writing in the area of derivatives concerns the use of mathematics.  If the level of mathematical sophistication is too high, the material is likely to be inaccessible to many students and practitioners.  If it is too low, some important issues will inevitably be treated in a rather superficial way.

• Nonessential mathematical material has been either eliminated or included in end-of-chapter appendices and the technical notes on my website. 
• Concepts that are likely to be new to many readers have been explained carefully, and many numerical examples have been included. 

NEW! Employee Stock Options

A new chapter on employee stock options has been included in this text. Issues such as whether employee stock options align the interests of senior executives and shareholders, how the options should be valued, and backdating scandals are quite topical and students enjoy discussing them.

Credit Derivatives

Chapter 23 on credit derivatives has been expanded to include material on:

·        Subprime mortgages in the U.S.

·        Asset-backed securities

·        The credit crunch of 2007

·        The valuation of CDOs

·        The implementation of the Gaussian copula model

·        Alternatives to the Gaussian copula model

Software

Version 1.5101 of DerivaGem is included with this book. This consists of two Excel applications: the Options Calculator and the Applications Builder.

• The Options Calculator - Consists of easy-to-use software for valuing a wide range of options.

• The Applications Builder - consists of a number of Excel functions from which users can build their own applications. It includes a number of sample applications and enables students to explore the properties of options and numerical procedures more easily. It also allows more interesting assignments to be designed. 

OTHER TOPICS OF DISTINCTION

* Options on futures are now covered in a separate chapter from options on indices and currencies.

* Many new topics are covered. For example, I cover the VIX volatility index in Chapters 13 and 26, variance swaps in Chapter 26, Gaussian quadrature (for the implementation of the Gaussian copula model) in Chapter 23, how transactions involving index credit spreads work (Chapter 23), and more on volatility smiles (Chapter 18).

* End-of-chapter problems have been added.