Now in its fifth edition Derivatives and Internal Models provides a comprehensive and thorough
introduction to derivative pricing risk management and portfolio optimization covering all
relevant topics with enough hands-on depth of detail to enable readers to develop their own
pricing and risk tools. The book provides insight into modern market risk quantification
methods such as variance-covariance historical simulation Monte Carlo hedge ratios etc.
including time series analysis and statistical concepts such as GARCH Models or
Chi-Square-distributions. It shows how optimal trading decisions can be deduced once risk has
been quantified by introducing risk-adjusted performance measures and a complete presentation
of modern quantitative portfolio optimization. Furthermore all the important modern
derivatives and their pricing methods are presented from basic discounted cash flow methods to
Black-Scholes binomial trees differential equations finite difference schemes Monte Carlo
methods Martingales and Numeraires terms structure models etc. The fifth edition of this
classic finance book has been comprehensively reviewed. New chapters content cover multicurve
bootstrapping the valuation and hedging of credit default risk that is inherently incorporated
in every derivative-both of which are direct and permanent consequences of the financial crises
with a large impact on our understanding of modern derivative valuation. The book will be
accompanied by downloadable Excel spread sheets which demonstrate how the theoretical concepts
explained in the book can be turned into valuable algorithms and applications and will serve as
an excellent starting point for the reader's own bespoke solutions for valuation and risk
management systems.
