The Volatility Smile

The Volatility Smile

Description

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 first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.

Similar Books

ISBN 10: 0470109106
ISBN 13: 9780470109106

12 Jan 2010
Pietro Veronesi

ISBN 10: 1119965837
ISBN 13: 9781119965831

10 Nov 2014
Eric Chin

ISBN 10: 012384682X
ISBN 13: 9780123846822

16 Dec 2013
Ali Hirsa

ISBN 10: 0471152803
ISBN 13: 9780471152804

14 Jan 1997
Nassim Nicholas Taleb

ISBN 10: 1461108756
ISBN 13: 9781461108757

17 Aug 2014
Colin Bennett

ISBN 10: 0471792519
ISBN 13: 9780471792512

11 Sep 2006
Jim Gatheral

ISBN 10: 1118347137
ISBN 13: 9781118347133

01 Apr 2013
Euan Sinclair

ISBN 10: 1119037999
ISBN 13: 9781119037996

03 Aug 2015
Yves Hilpisch

ISBN 10: 0071818774
ISBN 13: 9780071818773

28 Nov 2014
Sheldon Natenberg

ISBN 10: 0125153937
ISBN 13: 9780125153935

30 Apr 2001
Mitch Warachka

ISBN 10: 0470497106
ISBN 13: 9780470497104

21 Jun 2010
Euan Sinclair

ISBN 10: 0809045990
ISBN 13: 9780809045990

19 Sep 2006
William Poundstone