Paul Wilmott Introduces Quantitative Finance

Paul Wilmott, described by the Financial Times as ‘cult derivatives lecturer,’ is one of the world’s leading experts on quantitative finance and derivatives. He is the proprietor of an innovative magazine on quantitative finance and a highly popular community website (www.wilmott.com). He was formerly a partner in a successful volatility arbitrage hedge fund and is currently the principal of the financial consultancy and training firm, Wilmott Associates, and Course Director for the Certificate in Quantitative Finance. Dr Wilmott has researched and published widely on financial engineering. PWIQF2 is an accessible introduction to the classical side of quantitative finance specifically for university students. Adapted from the comprehensive, even epic work, Paul Wilmott on Quantitative Finance, Second Edition, itself an update to Derivatives, the book includes carefully selected chapters to give the student a thorough understanding of futures, options and numerical methods. Software is included to help visualize the most important ideas and to show how techniques are implemented in practice.

Preface xxiii

1 Products and Markets: Equities, Commodities, Exchange Rates, Forwards and Futures 1

2 Derivatives 27

3 The Binomial Model 59

4 The Random Behavior of Assets 95

5 Elementary Stochastic Calculus 117

6 The Black–Scholes Model 139

7 Partial Differential Equations 157

8 The Black–Scholes Formulæ and the ‘Greeks’ 169

9 Overview of Volatility Modeling 203

10 How to Delta Hedge 225

11 An Introduction to Exotic and Path-dependent Options 247

12 Multi-asset Options 271

13 Barrier Options 287

14 Fixed-income Products and Analysis: Yield, Duration and Convexity 319

15 Swaps 349

16 One-factor Interest Rate Modeling 359

17 Yield Curve Fitting 373

18 Interest Rate Derivatives 383

19 The Heath, Jarrow & Morton and Brace, Gatarek & Musiela Models 403

20 Investment Lessons from Blackjack and Gambling 423

21 Portfolio Management 441

22 Value at Risk 459

23 Credit Risk 473

24 RiskMetrics and CreditMetrics 495

25 CrashMetrics 505

26 Derivatives **** Ups 527

27 Overview of Numerical Methods 541

28 Finite-difference Methods for One-factor Models 549

29 Monte Carlo Simulation 581

30 Numerical Integration 605

A All the Math You Need. . . and No More (An Executive Summary) 617

B Forecasting the Markets? A Small Digression 627

C A Trading Game 643

D Contents of CD accompanying Paul Wilmott Introduces Quantitative Finance, second edition 649

E What you get if (when) you upgrade to PWOQF2 653

Bibliography 659

Index 683