This book addresses selected practical applications and recent developments in the areas of quantitative financial modeling in derivatives instruments, some of which are from the authors' own research and practice. It is written from the viewpoint of financial engineers or practitioners, and, as such, it puts more emphasis on the practical applications of financial mathematics in the real market than the mathematics itself with precise (and tedious) technical conditions. It attempts to combine economic insights with mathematics and modeling so as to help the reader to develop intuitions.

Among the modeling and the numerical techniques presented are the practical applications of the martingale theories, such as martingale model factory and martingale resampling and interpolation. In addition, the book addresses the counterparty credit risk modeling, pricing, and arbitraging strategies from the perspective of a front office functionality and a revenue center (rather than merely a risk management functionality), which are relatively recent developments and are of increasing importance. It also discusses various trading structuring strategies and touches upon some popular credit/IR/FX hybrid products, such as PRDC, TARN, Snowballs, Snowbears, CCDS, and credit extinguishers.

While the primary scope of this book is the fixed-income market (with further focus on the interest rate market), many of the methodologies presented also apply to other financial markets, such as the credit, equity, foreign exchange, and commodity markets.

Contents:

    * Theory and Applications of Derivatives Modeling:
          o Introduction to Counterparty Credit Risk
          o Martingale Arbitrage Pricing in Real Market
          o The Black–Scholes Framework and Extensions
          o Martingale Resampling and Interpolation
          o Introduction to Interest Rate Term Structure Modeling
          o The Health–Jarrow–Morton Framework
          o The Interest Rate Market Model
          o Credit Risk Modeling and Pricing
    * Interest Rate Market Fundamentals and Proprietary Trading Strategies:
          o Simple Interest Rate Products
          o Yield Curve Modeling
          o Two-Factor Risk Model
          o The Holy Grail — Two-Factor Interest Rate Arbitrage
          o Yield Decomposition Model
          o Inflation Linked Instruments Modeling
          o Interest Rate Proprietary Trading Strategies


Readership: Advanced readers who work or are interested in the fixed-income market.

“This state of the art text emphasizes various contemporary topics in fixed income derivatives from a practitioner's perspective. The combination of martingale technology with the author's expert practical knowledge contributes hugely to the book's success. For those who desire timely reporting straight from the trenches, this book is a must.”
Peter Carr, PhD
Head of Quantitative Financial ResearchDirector of the Masters in Math Finance Program
Bloomberg LPCourant Institute, NYU

“It is quite obvious that the authors have significant practical experience in sophisticated quantitative analysis and derivatives modeling. This real world focus has resulted in a text that not only provides clear presentations on modeling, pricing and hedging derivatives products, but also provides more advanced material that is usually found only in research publications. This book has innovative ideas, state of the art applications, and contains a wealth of valuable information that will interest academics, applied quantitative derivatives modelers, and traders.”
Peter Ritchken
Kenneth Walter Haber Professor
Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University

“Written by two experienced production Quants, this book contains a wealth of practical methods and useful insights that have been tried and tested. In addressing new tasks, most Quants worry about best practice. Along with specialist published papers, etc, this book is a must to help calibrate judgment. Presently one of the dozen select math-finance books that really should be on one's shelf!”
Alan Brace
National Australia BankUniversity of Technology Sydney