"In this book Dr Rebonato brings his penetrating eye to bear on option pricing and hedging. In his usual intuitive style he critically examine a variety of approaches to equity, currency and interest-rate options. This book is full of practical insights that reflect a wealth of experience in applying these models. The book is a 'must read' for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.", Professor Ian Cooper, , London Business School#"This book is a blend of the theoretical, the practical, and the abstract, but always staying in contact with reality. I don't agree with everything in it, but it taught me a thing or two. Read it carefully and thoroughly.", Paul Wilmott, , Derivatives#"Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion. He rightly emphasises the financial and economic assumptions which underpin the models, and gives salutary warnings against models which overfit the current structure of prices but which perform poorly in predicting future behaviour. A rare combination of intellectual insight and practical common sense.
Selected 3D graphs from the book are reproduced in colour at ftp.wiley.co.uk/pub/books/rebonato", Anthony Neuberger, Associate Professor, Institute of Finance and Accounting, London Business School#
From the Inside Flap
Volatility and Correlation in the Pricing of Equity, FX and Interest-Rate Options is split into three sections. In the first, an introduction is presented to the complex concepts of correlation and volatility encountered in equity/FX and interest-rate option pricing, aimed at providing practitioners with a better informed choice when deciding which models to utilise. This first part also highlights the fundamental conceptual difference between interest-rate volatility on the one hand, and of FX and equity volatility on the other. The author then moves on to the problem of smiles, with considerable emphasis placed on option pricing when markets are incomplete. This second part focuses on the need for end users to take an approach, at the same time practical and theoretically sound, when it comes to implementing the various models which can account for smiles. To this effect, many existing models are reviewed and several new, original approaches are presented. The author points out that the temptation of being seduced by the elegance of mathematical models must be tempered by the need to look at the financial mechanisms driving the dynamics of the specific derivative product. The analysis of the third part deals with the role of volatility and correlation in the context of interest-rate models. In particular, it covers in detail practical and powerful calibration techniques to caplet volatilities and correlation surfaces of the state-of-the-art BGM approach, and suggests criteria to choose the functional form for the all-important instantaneous volatility functions.