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.

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.

NEW! 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 CDO’s

·        The implementation of the Gaussian copula model

·        Alternatives to the Gaussian copula model

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.

* Chapter 17 on Greek letters has been restructured with various letters now explained in the context of an option on a non-dividend paying stock.

* Chapter 4 now contains a more detailed description of liquidity preference theory and how banks manage net interest income.

* The second argument of f is now the variance rather than the standard deviation of the distribution.