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Quantitative finance : a simulation-based introduction using Excel

Author: Matt Davison
Publisher: Boca Raton, FL : CRC Press Taylor & Francis Group, [2014]
Series: A Chapman & Hall Book
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
"Preface It is necessary to thank many people at the end of a big project like writing a book. First, my thanks go to my patient editor Sunil Nair and his editorial assistants Rachel Holt and Sarah Gelson. Two anonymous reviewers made very thorough and useful comments on an earlier manuscript. Tao Luo and Sharon Wang typed and made figures for many versions of this book. Tao's valuable comments, mastery of visual
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Matt Davison
ISBN: 9781439871683 143987168X
OCLC Number: 890475339
Notes: CRC Press is an imprint of the Taylor & Francis Group, an informa business.
Description: XIX, 511 pages : illustrations ; 24 cm
Contents: Introduction Intuition about Uncertainty and Risk Introduction Individual Attitudes toward Risk The St. Petersburg Paradox Looking Forward to Chapter 3 The Classical Approach to Decision Making under Uncertainty Map to the Future Valuing Investment Opportunities: The Discounted Cash Flow Method Discounted Cash Flow Method for Evaluating Investment Opportunities Conclusions Repaying Loans Over Time Introduction Repaying a Loan over Time: Excel Repaying a Loan over Time: Mathematics First-Order Difference Equations Solving the Loan Repayment Difference Equation More Examples of Using Difference Equations to Find Loan Payments Writing the Difference Equation in Forward versus Backward Forms Bridges to the Future Bond Pricing with Default: Using Simulations Modeling a Defaultable Bond or Loan Financial Insights Simulating Loan Portfolios What Happens if There Are a Large Number of Independent Loans? Bridge to the Future Bond Pricing with Default: Using Difference Equations Risky Bonds Using Difference Equations to Find C Exploring the Insights Arising from Equation 7.5 Determining Recovery Rates Determining the Probability of Default A Bridge to the Future Difference Equations for Life Annuities Introduction Tranching and Collateralized Debt Obligations Collateralized Debt Obligations Tranched Portfolios The Detailed Calculation Correlation of Two Identical Bonds Conclusion Bond CDOs: More Than Two Bonds, Correlation, and Simulation Introduction Using an Excel Simulation to Analyze CDOs with More Than Two Bonds Collateralized Debt Obligations: An Example of Financial Engineering The Binomial Simplification Correlated Defaults Fundamentals of Fixed Income Markets What Are Bonds? Getting Down to Quantitative Details Simplest Bond Pricing Equation How Bonds Are Traded in Canada Clean and Dirty Bond Prices Conclusion and Bridge to the Next Yield Curves and Bond Risk Measures Introduction Constructing Yield Curves from Bond Prices Bond Price Sensitivities to the Yield Forward Rates Introduction Relationships between Forward Rates and the Yield Curve Yield Curves, Discount Factors, and Forward Rates Interpreting Forward Curves Modeling Stock Prices What Are Stocks? Simple Statistical Analysis of Real Stock Data Mean Variance Portfolio Optimization Selecting Portfolios CAPM and Markowitz A Qualitative Introduction to Options Stock Option Definitions Uses for Put and Call Options Qualitative Behavior of Puts and Calls Value at Risk (VaR) Introduction to Value at Risk Pitfalls of VaR Summary Pricing Options Using Binomial Trees Introduction Binomia l Model Single-Period Binomial Tree Model for Option Pricing Extending the Binomial Model to Multiple Time Steps Multiple-Step Binomial Trees Summary Random Walks Introduction Deriving the Diffusion Partial Differential Equation Basic Stochastic Calculus Basics of Stochastic Calculus Stochastic Integration by Examples Conclusions and Bridge to Next Chapters Simulating Geometric Brownian Motion Simulating GBM Stock Prices at a Single Future Time Simulating a Time Sequence of GBM Stock Prices Summary Black Scholes PDE for Pricing Options in Continuous Time Introduction Hedging Argument Call Price Solution of the Black Scholes Equation Why Short Selling Is So Dangerous Summary and Bridge to the Future Solving the Black Scholes PDE Solving the Black Scholes Partial PDE for a European Call General European Option Payoffs: Risk-Neutral Pricing Summary Pricing Put Options Using Put Call Parity Summary Some Approximate Values of the Black Scholes Call Formula Approximate Call Formulas at-the-Money Approximate Call Values Near-the-Money Approximate Call Values Far-from-the-Money Simulating Delta Hedging Introduction How Does Delta Hedging Really Work? Understanding the Results of the Delta Hedging Process The Impact of Transaction Costs A Hedgers Perspective on Option Gamma or, "Big Gamma" = "Big Money" Bridge to the Future Black Scholes with Dividends Modeling Dividends The Black Scholes PDE for the Continuously Paid Dividend Case Pricing the Prepaid Forward on a Continuous Dividend Paying Stock More Complicated Derivatives on Underlying Paying Continuous Dividends American Options Introduction and Binomial Pricing American Puts American Calls Pricing the Perpetual American Put and Call Perpetual Options: Underlying Pays No Dividends Basic Perpetual American Call Perpetual American Call/Put Model with Dividends The Perpetual American Call, Continuous Dividends Options on Multiple Underlying Assets Exchange Options Interest Rate Models Setting the Stage for Stochastic Interest Rate Models Pricing When You CANNOT Trade the Underlying Asset Hedging Bonds in Continuous Time Solving the Bond Pricing PDE Vasicek Model Summary Incomplete Markets Introduction to Incomplete Markets Trying to Hedge Options on a Trinomial Tree Minimum Variance Hedging of a European Option with Default Binomial Tree Model with Default Risk Appendix 1: Probability Theory Basics-Experiments, Sample Outcomes, Events, and Sample Space Appendix 2: Proof of De Moivre-Laplace Theorem Using MGF Appendix 3: Naming Variables in Excel Appendix 4: Building VBA Macros from Excel Index Exercises and References appear at the end of each chapter.
Series Title: A Chapman & Hall Book
Responsibility: Matt Davison.

Abstract:

"Preface It is necessary to thank many people at the end of a big project like writing a book. First, my thanks go to my patient editor Sunil Nair and his editorial assistants Rachel Holt and Sarah Gelson. Two anonymous reviewers made very thorough and useful comments on an earlier manuscript. Tao Luo and Sharon Wang typed and made figures for many versions of this book. Tao's valuable comments, mastery of visual basic, and untiring commitment were a particular help in both of the final pushes to completing this project. I have benefitted from teaching this material to many students over many years, beginning with many insightful master's and PhD students. Classroom versions of this content has been taught to the actuarial science, financial modeling, and applied mathematics students of AM3613b, AM9578b, AS9022a, SS4521 g, SS9521b, and SS3520b at Western University, to the HBA students of Bus4486 and MBA students of Bus9443 at the Richard Ivey School of Business, and to students at a course on interest rate models given at the Bank of Canada. Greg Sullivan and Kirk Cooper, then at Deutsche Bank Canada, were my first teachers in trading floor quant finance. Chris Essex, Henning Rasmussen, and Mark Reesor at Western, Adam Metzler at Wilfrid Laurier, Matt Thompson at Queens, Lindsay Anderson at Cornell, and Alejandro Garcia at the Office of the Superintendent of Financial Institutions, have all helped shape my thinking. Of course, any errors or omissions in this book are mine alone. The final thanks go to my wife Christine and my sons Liam and Shawn, without whom none of this would be worth doing"--

"Teach Your Students How to Become Successful Working QuantsQuantitative Finance: A Simulation-Based Introduction Using Excel provides an introduction to financial mathematics for students in applied mathematics, financial engineering, actuarial science, and business administration. The text not only enables students to practice with the basic techniques of financial mathematics, but it also helps them gain significant intuition about what the techniques mean, how they work, and what happens when they stop working.After introducing risk, return, decision making under uncertainty, and traditional discounted cash flow project analysis, the book covers mortgages, bonds, and annuities using a blend of Excel simulation and difference equation or algebraic formalism. It then looks at how interest rate markets work and how to model bond prices before addressing mean variance portfolio optimization, the capital asset pricing model, options, and value at risk (VaR). The author next focuses on binomial model tools for pricing options and the analysis of discrete random walks. He also introduces stochastic calculus in a nonrigorous way and explains how to simulate geometric Brownian motion. The text proceeds to thoroughly discuss options pricing, mostly in continuous time. It concludes with chapters on stochastic models of the yield curve and incomplete markets using simple discrete models.Accessible to students with a relatively modest level of mathematical background, this book will guide your students in becoming successful quants. It uses both hand calculations and Excel spreadsheets to analyze plenty of examples from simple bond portfolios. The spreadsheets are available on the book's CRC Press web page"--

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"With this book, Matt Davison succeeds where many have failed: it provides a genuinely understandable introduction to quantitative finance that remains true to the excitement experienced by both Read more...

 
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