Foreign Exchange Option Pricing: A Practitioner's Guide (The Wiley Finance Series) - Hardcover

Iain J. Clark

Hardcover

ISBN 10: 0470683686 ISBN 13: 9780470683682

Publisher: Wiley, 2010

Synopsis

This book covers foreign exchange options from the point of view of the finance practitioner. It contains everything a quant or trader working in a bank or hedge fund would need to know about the mathematics of foreign exchange not just the theoretical mathematics covered in other books but also comprehensive coverage of implementation, pricing and calibration. With content developed with input from traders and with examples using real-world data, this book introduces many of the more commonly requested products from FX options trading desks, together with the models that capture the risk characteristics necessary to price these products accurately. Crucially, this book describes the numerical methods required for calibration of these models an area often neglected in the literature, which is nevertheless of paramount importance in practice. Thorough treatment is given in one unified text to the following features: * Correct market conventions for FX volatility surface construction * Adjustment for settlement and delayed delivery of options * Pricing of vanillas and barrier options under the volatility smile * Barrier bending for limiting barrier discontinuity risk near expiry * Industry strength partial differential equations in one and several spatial variables using finite differences on nonuniform grids * Fourier transform methods for pricing European options using characteristic functions * Stochastic and local volatility models, and a mixed stochastic/local volatility model * Three-factor long-dated FX model * Numerical calibration techniques for all the models in this work * The augmented state variable approach for pricing strongly path-dependent options using either partial differential equations or Monte Carlo simulation Connecting mathematically rigorous theory with practice, this is the essential guide to foreign exchange options in the context of the real financial marketplace.

About this title

From the Back Cover

"The author has carefully selected the most relevant and up to date topics in the theory of option pricing of foreign exchange (FX) derivatives, covering both the theoretical and practical aspects of trading with FX option products. Through the insightful descriptions of a wide range of exotic products, the reader learns how to deal with various complex issues behind the pricing and hedging procedures of these products. Various state-of-the-art pricing models and their numerical implementation are clearly explained. The text contains thorough discussion of stochastic volatility models and their calibration in the context of applications in FX derivatives. Foreign Exchange Option Pricing is destined to be a valuable text and reference for practitioners and students who wish to acquire the working knowledge of FX derivatives trading."
Yue Kuen Kwok, Professor, Department of Mathematics, Hong Kong University of Science and Technology, China

"This is bound to become the reference book on FX modeling. It takes care of everything practitioners need to know - from fussy market conventions to sophisticated short dated exotic FX models, as well as the state of the art examples in long dated FX modeling. It should be on everyone's desk, from the recent graduate to the most seasoned quant."
Messaoud Chibane, Global Head Of Quantitative Research, Shinsei Bank

"If you want to learn Delta-neutral Straddles and Market Strangles, Foreign Exchange Option Pricing is the book for you. This accessible contribution to the FX Options literature, with discussions on market conventions and the FX volatility smile surface is most valuable. A final section on long dated FX derivatives also fills a gap in current literature."
Uwe Wystup, Managing Director of MathFinance AG

"An indispensable reference which should be on every FX quant's bookshelf. The section on local stochastic volatility models is a much needed addition to the literature as it describes in detail how the models are applied today on many trading desks. The book strikes a perfect balance between practicality and mathematical rigor - if you buy only one book on FX options, I recommend this one."
Dr. Alex Langnau, Global Head of Quantitative Analytics, Allianz Investment Management, and visiting scientist at the Ludwig-Maximilians University, Munich

About the Author

Dr Iain J. Clark, (London, UK), is Head of Foreign Exchange Quantitative Analysis at Dresdner Kleinwort in London, where he set up and runs the team responsible for developing pricing libraries for the front office. Previously, he was Director of the Quantitative Research Group in Lehman Brothers, Fixed Income Quantitative Analyst at BNP Paribas and has also worked in FX Commodities Derivatives research at JP Morgan. He holds an MSc in Mathematics from the University of Edinburgh, and a PhD in Applied Mathematics from the University of Queensland, Australia. Dr Clark is a regular speaker at key finance events, and has presented at London Imperial College, The Bachelier Society Annual Conference, London Imperial College, world business Strategies annual Conference, Risk events, Marcus Evans events and many more.

Edition details

• Publisher: Wiley
• Publication date: 2010
• ISBN 10: 0470683686
• ISBN 13: 9780470683682
• Binding: Hardcover
• Language: English
• Edition number: 1
• Number of pages: 304