Read online book Wiley Finance: The Volatility Smile by Michael B. Miller PDF, MOBI
9781118959169 1118959167 Cutting edge volatility and options pricing from the world's top quant "The Volatility Smile" is a comprehensive introduction to this important topic in derivatives pricing and options trading, by celebrated author and quant Emanuel Derman. Using mathematics, calculus, differential equations, and stochastic calculus, Derman presents models and methods of solution in the world of derivatives pricing--but this "is not" a book about math. This book is designed to help you hone your instincts and intuition about a variety of options models, understanding what you're doing and why you're doing it. Building models is the easy part--this book teaches you how to determine whether or not your model is realistic, and what it actually leads to. You'll dive deep into the volatility smile and how it contradicts the classic Black-Scholes model, and then explore alternative models that account for it. You'll derive simple proofs to key formulas, and develop them logically to estimate the effects, and learn just how limited financial models are. You'll develop a strong foundational understanding of the meaning, mechanics, and methods that go way beyond solutions to provide a more accurate picture of options pricing. Academics tend to think of options valuations as a solved problem of little interest, but practitioners understand that the problem isn't solved at all. This book deepens your understanding of the tools of your trade, with practical insight for better results. Extend the Black-Scholes-Merton model to accommodate the volatility smile Gain deep insight into model choice, model validity, and model testing Build your own models and understand what the results are telling you "The Volatility Smile "provides the clarity and understanding real-world practitioners need to perform more effectively and authoritatively., The Black-Scholes-Merton options model was the greatest innovation of 20th Century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models, The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models, The Volatility Smile uses mathematics, calculus, differential equations and stochastic calculus to present models and methods of solution in the world of derivatives pricing, but this isn't a book about mathematics, calculus, differential equations or stochastic calculus. This book develops a reader's intuition about a variety of options models, not merely the methods of solution. No assumptions behind financial models are genuinely true, and no financial models are really correct, so it's very important to understand what you're doing and why you're doing it. Derman, successful quant, professor, and author, presents readers with the tools they need to form an understanding of the practical use of the Black-Scholes-Merton model by finding the theoretical and practical limitations of it and its extensions to accommodate and explain the volatility smile, as well as the consequences of its extensions. He offers up that it is easy to make up new models but readers should more importantly understand whether they are realistic and what they lead to. Derman describes the smile structure of implied volatilities and the way that structure contradicts the classic Black-Scholes model then considers some of the sorts of models that can account for the smile. There are many important issues of model choice, model validity and model testing that are of practical concern that involve many people in the front and back office, as well as in IT groups at firms. Derman shows readers how to build their own models and understand what they lead to. He also derives simple proofs of the key model formulas and develops them logically so that readers can estimate the effects of the models., The Volatility Smile: An Introduction for Students and Practitioners The Black-Scholes-Merton options model was the greatest innovation of 20th Century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models
9781118959169 1118959167 Cutting edge volatility and options pricing from the world's top quant "The Volatility Smile" is a comprehensive introduction to this important topic in derivatives pricing and options trading, by celebrated author and quant Emanuel Derman. Using mathematics, calculus, differential equations, and stochastic calculus, Derman presents models and methods of solution in the world of derivatives pricing--but this "is not" a book about math. This book is designed to help you hone your instincts and intuition about a variety of options models, understanding what you're doing and why you're doing it. Building models is the easy part--this book teaches you how to determine whether or not your model is realistic, and what it actually leads to. You'll dive deep into the volatility smile and how it contradicts the classic Black-Scholes model, and then explore alternative models that account for it. You'll derive simple proofs to key formulas, and develop them logically to estimate the effects, and learn just how limited financial models are. You'll develop a strong foundational understanding of the meaning, mechanics, and methods that go way beyond solutions to provide a more accurate picture of options pricing. Academics tend to think of options valuations as a solved problem of little interest, but practitioners understand that the problem isn't solved at all. This book deepens your understanding of the tools of your trade, with practical insight for better results. Extend the Black-Scholes-Merton model to accommodate the volatility smile Gain deep insight into model choice, model validity, and model testing Build your own models and understand what the results are telling you "The Volatility Smile "provides the clarity and understanding real-world practitioners need to perform more effectively and authoritatively., The Black-Scholes-Merton options model was the greatest innovation of 20th Century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models, The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models, The Volatility Smile uses mathematics, calculus, differential equations and stochastic calculus to present models and methods of solution in the world of derivatives pricing, but this isn't a book about mathematics, calculus, differential equations or stochastic calculus. This book develops a reader's intuition about a variety of options models, not merely the methods of solution. No assumptions behind financial models are genuinely true, and no financial models are really correct, so it's very important to understand what you're doing and why you're doing it. Derman, successful quant, professor, and author, presents readers with the tools they need to form an understanding of the practical use of the Black-Scholes-Merton model by finding the theoretical and practical limitations of it and its extensions to accommodate and explain the volatility smile, as well as the consequences of its extensions. He offers up that it is easy to make up new models but readers should more importantly understand whether they are realistic and what they lead to. Derman describes the smile structure of implied volatilities and the way that structure contradicts the classic Black-Scholes model then considers some of the sorts of models that can account for the smile. There are many important issues of model choice, model validity and model testing that are of practical concern that involve many people in the front and back office, as well as in IT groups at firms. Derman shows readers how to build their own models and understand what they lead to. He also derives simple proofs of the key model formulas and develops them logically so that readers can estimate the effects of the models., The Volatility Smile: An Introduction for Students and Practitioners The Black-Scholes-Merton options model was the greatest innovation of 20th Century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models