## Quantitative Finance: A Simulation-Based Introduction Using Excel

Published:
Author(s):

Hardback
\$79.95
ISBN 9781439871683
Cat# K13284

### Features

• Offers a simulation-based approach to financial market problems
• Avoids excessive equations and formulas
• Includes a CD-ROM of Excel spreadsheets

Solutions manual available for qualifying instructors

### Summary

Providing readers with more quantitative insight into markets and a better overview of market structures, this book explains how the mathematical objects of finance relate to the business needs of markets. It takes a simulation approach to financial market problems, which allows readers to understand concepts without becoming bogged down by excessive equations. Each section describes the relevant financial or mathematical theory, an application of the theory in practice, and a spreadsheet to illustrate it. The text also includes a set of exercises, ranging from simple to complex.

Quantitative Finance: A Crisis in Modeling
The role of derivatives in the market crash of 1987
The subprime mortgage crisis of 2008-2009
The role of mathematical theories and financial modeling in these crises

Modeling CDOs
Modeling a risky bond
Modeling a portfolio of risky bonds
Modeling a simple collateralized debt obligation
The role of simulation in all this. How many trials is enough?

Monte Carlo Methods
Random variables
Generating random numbers on a computer
Named random variables and how to simulate them in Excel
Basic statistical underpinning of simulation

Modeling Stock Prices
Looking at the data
Independent returns
Are they normal?
Simulating using named variables
A nonparameteric approach: Bootstrapping

Modeling Portfolios
Diversification
The hypothesis that the returns of a group of stocks are jointly normal
Mean variance portfolio selection
CAPM
Sensitivity to stock price assumptions

Modeling European Options
Pricing stock options with present value and expected value when hedging is impossible
Risks in owning and selling options
Hedging option risk
The idea of delta hedging
(Sidebar: how to short sell a stock)
Binomial model
Delta hedging via simulation
Delta hedging in the presence of transaction costs

Early Exercise Options
American options
The link between pricing and optimal exercise
Perpetual American options
American options with finite expiry — with trees
Other issues in American option pricing

Interest Rates
Interest conventions
Pricing non-defaultable bonds
Dirty·and clean price and day count convention
The yield curve — yield to maturity
Calculating yield curves from bond prices. Sensitivity in this process
No arbitrage limits on the yield curve
Forward curves

Risk Management for Bonds
Duration and convexity for single bonds
Duration and convexity for portfolios of bonds
Asset-liability matching
Portfolio immunization

Risk Management for Option Books
The Greeks for options
Static option book hedges: Delta neutral, Delta-Gamma neutral, Vega neutral

Risk Management: VaR and Its Relatives
The idea of VaR
Calculating VaR for a stock
Calculating VaR for an option
Problems with VaR

Commodity and Forex Markets
Forward and futures
Contango and backwardation
Exotic commodity options like exchange options and how to price them

Strategy return measures
Strategy risk measures

Conclusions