Volatility and Correlation: The Perfect Hedger and the Fox (Wiley Finance) (Hardcover)

by Riccardo Rebonato (Author)
Key Phrases: swaption matrix, future smile surface, jump amplitude ratio, Monte Carlo, Smile Tale, Spot Figure (more...)

Editorial Reviews

Review
"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

Product Description
In Volatility and Correlation 2^nd edition: The Perfect Hedger and the Fox, Rebonato looks at derivatives pricing from the angle of volatility and correlation. With both practical and theoretical applications, this is a thorough update of the highly successful Volatility & Correlation – with over 80% new or fully reworked material and is a must have both for practitioners and for students.

The new and updated material includes a critical examination of the ‘perfect-replication’ approach to derivatives pricing, with special attention given to exotic options; a thorough analysis of the role of quadratic variation in derivatives pricing and hedging; a discussion of the informational efficiency of markets in commonly-used calibration and hedging practices. Treatment of new models including Variance Gamma, displaced diffusion, stochastic volatility for interest-rate smiles and equity/FX options.

The book is split into four parts. Part I deals with a Black world without smiles, sets out the author’s ‘philosophical’ approach and covers deterministic volatility. Part II looks at smiles in equity and FX worlds. It begins with a review of relevant empirical information about smiles, and provides coverage of local-stochastic-volatility, general-stochastic-volatility, jump-diffusion and Variance-Gamma processes. Part II concludes with an important chapter that discusses if and to what extent one can dispense with an explicit specification of a model, and can directly prescribe the dynamics of the smile surface.

Part III focusses on interest rates when the volatility is deterministic. Part IV extends this setting in order to account for smiles in a financially motivated and computationally tractable manner. In this final part the author deals with CEV processes, with diffusive stochastic volatility and with Markov-chain processes.

Praise for the First Edition:

“In this book, Dr Rebonato brings his penetrating eye to bear on option pricing and hedging.… 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

“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…A rare combination of intellectual insight and practical common sense.”
—Anthony Neuberger, London Business School

See all Editorial Reviews

Product Details

• Hardcover: 864 pages
• Publisher: Wiley; 2 edition (September 20, 2004)
• Language: English
• ISBN-10: 0470091398
• ISBN-13: 978-0470091395
• Product Dimensions: 9.7 x 7 x 2.2 inches
• Shipping Weight: 3.4 pounds (View shipping rates and policies)
• Average Customer Review: 4.2 out of 5 stars See all reviews (5 customer reviews)
• Amazon.com Sales Rank: #306,720 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

4.0 out of 5 stars A must-have for some, January 18, 2009

By	Franz Woyzeck "FW" (Frankfurt) - See all my reviews

If you are really into exotics, then this book will provide a lot. It is the most extensive book that I know and it is written by a trader for traders. It has some serious weaknesses though: its structure is somewhat chaotic and it seems as if the chapters have just been pasted together from different sources. On top of that, it is somewhat lengthy.

If you want to trade exotics, you have to read it anyway...

4.0 out of 5 stars Amazing book, June 21, 2008

By	Aniruddha Pant (India) - See all my reviews

This is an extra-ordinary book by one of the best in the field. Very unique perspective on theory and practice of pricing and hedging. Wish it was bit less verbose though.

3 of 5 people found the following review helpful:

3.0 out of 5 stars Very good but missing little things here and there, February 7, 2007

By	W. D.72 "GWD" (Vienna, AT) - See all my reviews

Although the author warns the reader in the Preface, that because he ran out of pages (come on it is more than 800!) he omited dealing with Copulas, it is still a pitty that a book about correlation does not present at least a small chapter on this new (state-of-the-art) area.
Everything else is very good, solid material with a good balance between maths surrounding the topic, explanations and worked out examples.