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Manufacturing and Managing Customer-Driven Derivatives sheds light on customer-driven derivative products and their manufacturing process, which can prove a complicated topic for even experienced financial practitioners. This authoritative text offers up-to-date knowledge and practices across a broad range of topics that address the entire manufacturing, pricing and risk management process, including practical knowledge and industrial best practices. This resource blends quantitative and business perspectives to provide an in-depth understanding of the derivative risk management skills that are necessary to adopt in the competitive financial industry.
Manufacturing and managing customer-driven derivative products have become more complex due to macro factors such as the multi-curve environments triggered by the recent financial crises, stricter regulatory requirements of consistent modelling and managing frameworks, and the need for risk/reward optimisation.
* Explore the fundamental components of the derivatives business, including equity derivatives, interest rates derivatives, real estate derivatives, and real life derivatives, etc.
* Examine the life cycle of manufacturing derivative products and practical pricing models
* Deep dive into a wide range of customer-driven structured derivative products, their investment or hedging payoff features and associated risk exposures
* Examine the implications of changing regulatory standards, which can increase costs in the banking sector
* Discover practical yet sophisticated product analysis, quantitative modeling, infrastructure integration, risk analysis, and hedging analysis
* Gain insight on how banks should handle complex derivatives products
Manufacturing and Managing Customer-Driven Derivatives is an essential guide for quants, structurers, derivatives traders, risk managers, business executives, insurance industry professionals, hedge fund managers, academic lecturers, and financial math students who are interested in looking at the bigger picture of the manufacturing, pricing and risk management process of customer-driven derivative transactions.
"Like many people on the quantitative side of finance I've often wondered why and how the more complex derivatives are created. I mean, some of the term sheets I've seen are just downright bizarre. Well, thanks to Dong Qu, the expert in both quant finance and the business side, now I know. Dong covers everything from creative ideas, country specifics, regulatory issues, and tax implications, to modeling and risk management. This is an excellent book, unique for its breadth of coverage, genuinely for the whole business of quantitative finance."
Paul Wilmott, Wilmott Magazine
"With so many books out there on derivatives pricing, I thought it was impossible to write a new, original one. Dong Qu proved I was wrong. Not only does this volume focus on the main industry-standard pricing models, it also sheds light on the typical workflow and development process of derivatives contracts in banks, from quant library design to meeting new regulatory risk-management requirements. I wish this book was out there when I started my career as a front-office quant!"
Fabio Mercurio, Global Head of Quant Analytics, Bloomberg
"Everything you always wanted to know about financial derivatives but were afraid to ask could also be the title of this book. Written by an author with over 20 years of experience in the industry, this book joins practical hedging, risk management and regulation issues with sophisticated yet not overly complicated maths. An absolute must for all practitioners and very informative for academicians."
Dariusz Gatarek, Professor, Polish Academy of Sciences
"This book has been expertly written from a practitioner's viewpoint. Dong Qu uses his vast experience of working in major global banks to create an operationally relevant textbook, delivering a range and subject matter which is very readable and applicable in today's financial markets. He writes clearly and authoritatively on all aspects of the life-cycle, manufacturing and regulation of structured products. He also uses his mathematical skills to explore and clearly explain pricing models, whilst never ignoring the practicalities of applying quantitative models to actual risk management requirements."
Andrew Law, Global Head of Institutional Sales & Structuring, Bank of Ireland Global Markets
Manufacturing and Managing Customer-Driven Derivatives sheds light on customer-driven derivative products and their manufacturing process, which can prove a complicated topic for even experienced financial practitioners. This authoritative text offers up-to-date knowledge and practices across a broad range of topics that address the entire manufacturing, pricing and risk management process, including practical knowledge and industrial best practices. This resource blends quantitative and business perspectives to provide an in-depth understanding of the derivative risk management skills that are necessary to adopt in the competitive financial industry.
Manufacturing and managing customer-driven derivative products have become more complex due to macro factors such as the multi-curve environments triggered by the recent financial crises, stricter regulatory requirements of consistent modelling and managing frameworks, and the need for risk/reward optimisation.
* Explore the fundamental components of the derivatives business, including equity derivatives, interest rates derivatives, real estate derivatives, and real life derivatives, etc.
* Examine the life cycle of manufacturing derivative products and practical pricing models
* Deep dive into a wide range of customer-driven structured derivative products, their investment or hedging payoff features and associated risk exposures
* Examine the implications of changing regulatory standards, which can increase costs in the banking sector
* Discover practical yet sophisticated product analysis, quantitative modeling, infrastructure integration, risk analysis, and hedging analysis
* Gain insight on how banks should handle complex derivatives products
Manufacturing and Managing Customer-Driven Derivatives is an essential guide for quants, structurers, derivatives traders, risk managers, business executives, insurance industry professionals, hedge fund managers, academic lecturers, and financial math students who are interested in looking at the bigger picture of the manufacturing, pricing and risk management process of customer-driven derivative transactions.
"Like many people on the quantitative side of finance I've often wondered why and how the more complex derivatives are created. I mean, some of the term sheets I've seen are just downright bizarre. Well, thanks to Dong Qu, the expert in both quant finance and the business side, now I know. Dong covers everything from creative ideas, country specifics, regulatory issues, and tax implications, to modeling and risk management. This is an excellent book, unique for its breadth of coverage, genuinely for the whole business of quantitative finance."
Paul Wilmott, Wilmott Magazine
"With so many books out there on derivatives pricing, I thought it was impossible to write a new, original one. Dong Qu proved I was wrong. Not only does this volume focus on the main industry-standard pricing models, it also sheds light on the typical workflow and development process of derivatives contracts in banks, from quant library design to meeting new regulatory risk-management requirements. I wish this book was out there when I started my career as a front-office quant!"
Fabio Mercurio, Global Head of Quant Analytics, Bloomberg
"Everything you always wanted to know about financial derivatives but were afraid to ask could also be the title of this book. Written by an author with over 20 years of experience in the industry, this book joins practical hedging, risk management and regulation issues with sophisticated yet not overly complicated maths. An absolute must for all practitioners and very informative for academicians."
Dariusz Gatarek, Professor, Polish Academy of Sciences
"This book has been expertly written from a practitioner's viewpoint. Dong Qu uses his vast experience of working in major global banks to create an operationally relevant textbook, delivering a range and subject matter which is very readable and applicable in today's financial markets. He writes clearly and authoritatively on all aspects of the life-cycle, manufacturing and regulation of structured products. He also uses his mathematical skills to explore and clearly explain pricing models, whilst never ignoring the practicalities of applying quantitative models to actual risk management requirements."
Andrew Law, Global Head of Institutional Sales & Structuring, Bank of Ireland Global Markets
DONG QU is the global head of the Quantitative Product Group at UniCredit, having previously worked at banks including HSBC, Nikko and Abbey/Santander. He is credited with being instrumental in industrialising barrier reverse convertibles. The barrier protection feature has since become a market stalwart as an industry- standard risk-reduction tool. During his career, He has worked in derivative pricing and hedging models, associated trading and risk management infrastructures, and gained first-hand experience and in-depth knowledge of customer-driven derivatives across major asset classes, including equity, interest rate, FX, credit and real estate.
Preface xiii
Acknowledgments xv
About the Author xvii
PART I Overview of Customer-driven Derivative Business 1
CHAPTER 1 Evolving Derivative Business Environment 3
Customer-driven Derivative Product Categories 3
Lessons in Derivatives and Crises 4
Regulations Affecting Derivative Business 7
Structured Derivative Products Geographic Features 11
CHAPTER 2 Pillars in Structured Derivative Business 21
Derivative Business Value Chain 21
Model and Product Development Process 22
Product Issuance and Wrappers 31
Product Distribution 35
CHAPTER 3 Financial Risk Management, Basel III and Beyond 39
Risk Measures and Financial Rule Books 39
Basel III Technical Requirements 41
Internal Model Method (IMM) 48
Beyond Basel III 55
PART II Equity Derivatives 59
CHAPTER 4 Equity Derivatives Market Features 61
Equity Index Underlyings 61
Discrete Dividends 61
Option Settlement Delay 68
Quanto Effect 70
Future Versus Forward 72
Implied Volatility Surface 74
CHAPTER 5 Black-Scholes Paradigm 87
Basic Modelling Framework 87
Asian Options 93
Basket Options 100
Dividend Futures and Options 103
American Options 106
Barrier Options 110
Lookback and Hindsight Options 113
Volatility Smile/Skew Dynamics Impact on Hedging 117
CHAPTER 6 Local Volatility Framework 123
Local Volatility Stripper 123
Local Volatility PDE Solver 127
Local Volatility Monte Carlo 132
Local Volatility to Implied Volatility 138
Practical Issues With Local Volatility 142
CHAPTER 7 Stochastic Local Volatility Framework 145
Stochastic Volatility Models 145
SLV Model Formulation 147
SLV Numerical Implementation 150
SLV Numerical Results 154
SLV in Practice 161
CHAPTER 8 Equity-Linked Structured Products 163
General Payoff Category 163
Features of Important Structured Product Categories 168
Barrier Reverse Convertibles 183
Constant Proportion Portfolio Insurance (CPPI) 187
Risks During Retail Issuance Period 193
CHAPTER 9 Basket Option Analysis 197
Basket Option Risks 197
Copula Pricing Models 198
Historic Basket Volatility Surfaces 213
Implied Basket Volatility Surfaces 217
Copula Applications 224
PART III Interest Rate Derivatives 227
CHAPTER 10 Multi-Curve Environment and Yield Curve Stripping 229
Multi-Curve Environment 229
Yield Curve Stripping 237
Collateral Impacts 248
Multi-Curve Multi-Facet Reality 252
CHAPTER 11 Vanilla Interest Rate Options 255
Martingale Pricing Principle 255
Cap/Floor 258
European Swaption and SABR 274
Risk Sensitivities 286
CHAPTER 12 Practical Interest Rate Derivative Models 293
Key Model Categories 293
Linear Gauss-Markov Model 295
Libor Market Model 303
Extended Cheyette Model 312
Local Volatility Model 318
CHAPTER 13 CMS Replication and CMS Spread Options 343
CMS Convexity 343
CMS Replication 344
CMS Calibration 350
CMS Spread Option Pricing Framework 356
Copula Pricing with Full Market Marginal Distributions 362
CHAPTER 14 Interest Rate Derivative Products 375
Product Design and Product Risks 375
Bermudan Swaption 381
Callable Products 387
Other Important Products 392
PART IV Real-Life Options and Derivatives 399
CHAPTER 15 Long-dated FX Volatility and Hybrid Risks 401
FX Volatility Surface 401
Extrapolating FX Volatility Term Structure to Long End 403
Extrapolating FX Volatility Smile to Long End 407
Hybrid Optionality 410
PRDC Hybrid Risks 413
CHAPTER 16 Portfolio CVA: Efficient Numerical Techniques 419
CVA Valuation Implementation Framework 420
Numerical Techniques in Portfolio CVA Valuation 420
Grid Monte Carlo for CVA 422
GMC Implementation Example 425
GMC in Practice 432
CHAPTER 17 Contingent Convertibles (CoCo) 435
CoCo Features 435
CoCo Categories 436
CoCo Risk Factors 438
Indirect Modelling Approaches 439
Direct Modelling Approaches 442
CHAPTER 18 Variable Annuity Products 451
Key VA Product Types 453
Major Risk Factors in VA Products 456
Hybrid Pricing Models for VA Products 458
Practicalities of Handling Long-dated VA Products 466
Importance of Understanding VA Risks 469
CHAPTER 19 Interest Rate Optionality in Fixed-Rate Mortgage 473
Prepayment Optionality 473
Prepayment Risk Characteristics 479
Early Redemption Charge 486
Applying Option-Based Prepayment Technique 488
CHAPTER 20 Real Estate Derivatives 491
Equity Release Scheme and Related Derivatives 491
Mortality in Derivatives Pricing 492
Reversion Derivatives Products 497
Real Estate Portfolio Derivatives 501
Property-Linked Roll-Up Mortgage 507
HPI Retail Products 512
APPENDIX A: PRODUCT OF TWO CALLS 515
Decomposition 515
Three Key Integrals 516
Analytical Formula 518
BIBLIOGRAPHY 521
INDEX 531
| Erscheinungsjahr: | 2016 |
|---|---|
| Fachbereich: | Betriebswirtschaft |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| ISBN-13: | 9781118632628 |
| ISBN-10: | 1118632621 |
| Sprache: | Englisch |
| Einband: | Gebunden |
| Autor: | Qu, Dong |
| Hersteller: |
Wiley
John Wiley & Sons |
| Maße: | 246 x 165 x 38 mm |
| Von/Mit: | Dong Qu |
| Erscheinungsdatum: | 21.03.2016 |
| Gewicht: | 1,111 kg |
DONG QU is the global head of the Quantitative Product Group at UniCredit, having previously worked at banks including HSBC, Nikko and Abbey/Santander. He is credited with being instrumental in industrialising barrier reverse convertibles. The barrier protection feature has since become a market stalwart as an industry- standard risk-reduction tool. During his career, He has worked in derivative pricing and hedging models, associated trading and risk management infrastructures, and gained first-hand experience and in-depth knowledge of customer-driven derivatives across major asset classes, including equity, interest rate, FX, credit and real estate.
Preface xiii
Acknowledgments xv
About the Author xvii
PART I Overview of Customer-driven Derivative Business 1
CHAPTER 1 Evolving Derivative Business Environment 3
Customer-driven Derivative Product Categories 3
Lessons in Derivatives and Crises 4
Regulations Affecting Derivative Business 7
Structured Derivative Products Geographic Features 11
CHAPTER 2 Pillars in Structured Derivative Business 21
Derivative Business Value Chain 21
Model and Product Development Process 22
Product Issuance and Wrappers 31
Product Distribution 35
CHAPTER 3 Financial Risk Management, Basel III and Beyond 39
Risk Measures and Financial Rule Books 39
Basel III Technical Requirements 41
Internal Model Method (IMM) 48
Beyond Basel III 55
PART II Equity Derivatives 59
CHAPTER 4 Equity Derivatives Market Features 61
Equity Index Underlyings 61
Discrete Dividends 61
Option Settlement Delay 68
Quanto Effect 70
Future Versus Forward 72
Implied Volatility Surface 74
CHAPTER 5 Black-Scholes Paradigm 87
Basic Modelling Framework 87
Asian Options 93
Basket Options 100
Dividend Futures and Options 103
American Options 106
Barrier Options 110
Lookback and Hindsight Options 113
Volatility Smile/Skew Dynamics Impact on Hedging 117
CHAPTER 6 Local Volatility Framework 123
Local Volatility Stripper 123
Local Volatility PDE Solver 127
Local Volatility Monte Carlo 132
Local Volatility to Implied Volatility 138
Practical Issues With Local Volatility 142
CHAPTER 7 Stochastic Local Volatility Framework 145
Stochastic Volatility Models 145
SLV Model Formulation 147
SLV Numerical Implementation 150
SLV Numerical Results 154
SLV in Practice 161
CHAPTER 8 Equity-Linked Structured Products 163
General Payoff Category 163
Features of Important Structured Product Categories 168
Barrier Reverse Convertibles 183
Constant Proportion Portfolio Insurance (CPPI) 187
Risks During Retail Issuance Period 193
CHAPTER 9 Basket Option Analysis 197
Basket Option Risks 197
Copula Pricing Models 198
Historic Basket Volatility Surfaces 213
Implied Basket Volatility Surfaces 217
Copula Applications 224
PART III Interest Rate Derivatives 227
CHAPTER 10 Multi-Curve Environment and Yield Curve Stripping 229
Multi-Curve Environment 229
Yield Curve Stripping 237
Collateral Impacts 248
Multi-Curve Multi-Facet Reality 252
CHAPTER 11 Vanilla Interest Rate Options 255
Martingale Pricing Principle 255
Cap/Floor 258
European Swaption and SABR 274
Risk Sensitivities 286
CHAPTER 12 Practical Interest Rate Derivative Models 293
Key Model Categories 293
Linear Gauss-Markov Model 295
Libor Market Model 303
Extended Cheyette Model 312
Local Volatility Model 318
CHAPTER 13 CMS Replication and CMS Spread Options 343
CMS Convexity 343
CMS Replication 344
CMS Calibration 350
CMS Spread Option Pricing Framework 356
Copula Pricing with Full Market Marginal Distributions 362
CHAPTER 14 Interest Rate Derivative Products 375
Product Design and Product Risks 375
Bermudan Swaption 381
Callable Products 387
Other Important Products 392
PART IV Real-Life Options and Derivatives 399
CHAPTER 15 Long-dated FX Volatility and Hybrid Risks 401
FX Volatility Surface 401
Extrapolating FX Volatility Term Structure to Long End 403
Extrapolating FX Volatility Smile to Long End 407
Hybrid Optionality 410
PRDC Hybrid Risks 413
CHAPTER 16 Portfolio CVA: Efficient Numerical Techniques 419
CVA Valuation Implementation Framework 420
Numerical Techniques in Portfolio CVA Valuation 420
Grid Monte Carlo for CVA 422
GMC Implementation Example 425
GMC in Practice 432
CHAPTER 17 Contingent Convertibles (CoCo) 435
CoCo Features 435
CoCo Categories 436
CoCo Risk Factors 438
Indirect Modelling Approaches 439
Direct Modelling Approaches 442
CHAPTER 18 Variable Annuity Products 451
Key VA Product Types 453
Major Risk Factors in VA Products 456
Hybrid Pricing Models for VA Products 458
Practicalities of Handling Long-dated VA Products 466
Importance of Understanding VA Risks 469
CHAPTER 19 Interest Rate Optionality in Fixed-Rate Mortgage 473
Prepayment Optionality 473
Prepayment Risk Characteristics 479
Early Redemption Charge 486
Applying Option-Based Prepayment Technique 488
CHAPTER 20 Real Estate Derivatives 491
Equity Release Scheme and Related Derivatives 491
Mortality in Derivatives Pricing 492
Reversion Derivatives Products 497
Real Estate Portfolio Derivatives 501
Property-Linked Roll-Up Mortgage 507
HPI Retail Products 512
APPENDIX A: PRODUCT OF TWO CALLS 515
Decomposition 515
Three Key Integrals 516
Analytical Formula 518
BIBLIOGRAPHY 521
INDEX 531
| Erscheinungsjahr: | 2016 |
|---|---|
| Fachbereich: | Betriebswirtschaft |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| ISBN-13: | 9781118632628 |
| ISBN-10: | 1118632621 |
| Sprache: | Englisch |
| Einband: | Gebunden |
| Autor: | Qu, Dong |
| Hersteller: |
Wiley
John Wiley & Sons |
| Maße: | 246 x 165 x 38 mm |
| Von/Mit: | Dong Qu |
| Erscheinungsdatum: | 21.03.2016 |
| Gewicht: | 1,111 kg |
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