Principles of Financial Engineering, 3rd Edition

Principles of Financial Engineering, Third Edition, is a highly acclaimed text on the fast-paced and complex subject of financial engineering. This updated edition describes the “engineering” elements of financial engineering instead of the mathematics underlying it. It shows how to use financial tools to accomplish a goal rather than describing the tools themselves. It lays emphasis on the engineering aspects of derivatives (how to create them) rather than their pricing (how they act) in relation to other instruments, the financial markets, and financial market practices.

This volume explains ways to create financial tools and how the tools work together to achieve specific goals. Applications are illustrated using real-world examples. It presents three new chapters on financial engineering in topics ranging from commodity markets to financial engineering applications in hedge fund strategies, correlation swaps, structural models of default, capital structure arbitrage, contingent convertibles, and how to incorporate counterparty risk into derivatives pricing. Poised midway between intuition, actual events, and financial mathematics, this book can be used to solve problems in risk management, taxation, regulation, and above all, pricing. A solutions manual enhances the text by presenting additional cases and solutions to exercises.

This latest edition of Principles of Financial Engineering is ideal for financial engineers, quantitative analysts in banks and investment houses, and other financial industry professionals. It is also highly recommended to graduate students in financial engineering and financial mathematics programs.

• The Third Edition presents three new chapters on financial engineering in commodity markets, financial engineering applications in hedge fund strategies, correlation swaps, structural models of default, capital structure arbitrage, contingent convertibles and how to incorporate counterparty risk into derivatives pricing, among other topics
• Additions, clarifications, and illustrations throughout the volume show these instruments at work instead of explaining how they should act
• The solutions manual enhances the text by presenting additional cases and solutions to exercises

Table of Contents

Chapter 1 Introduction
Chapter 2 Institutional Aspects of Derivative Markets
Chapter 3 Cash Flow Engineering, Interest Rate Forwards and Futures
Chapter 4 Introduction to Interest-Rate Swap Engineering
Chapter 5 Repo Market Strategies in Financial Engineering
Chapter 6 Cash Flow Engineering in Foreign Exchange Markets
Chapter 7 Cash Flow Engineering and Alternative Classes (Commodities and Hedge Funds)
Chapter 8 Dynamic Replication Methods and Synthetics Engineering
Chapter 9 Mechanics of Options
Chapter 10 Engineering Convexity Positions
Chapter 11 Options Engineering with Applications
Chapter 12 Pricing Tools in Financial Engineering
Chapter 13 Some Applications of the Fundamental Theorem
Chapter 14 Fixed Income Engineering
Chapter 15 Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading
Chapter 16 Correlation as an Asset Class and the Smile
Chapter 17 Caps/Floors and Swaptions with an Application to Mortgages
Chapter 18 Credit Markets: CDS Engineering
Chapter 19 Engineering of Equity Instruments and Structural Models of Default
Chapter 20 Essentials of Structured Product Engineering
Chapter 21 Securitization, ABSs, CDOs, and Credit Structured Products
Chapter 22 Default Correlation Pricing and Trading
Chapter 23 Principal Protection Techniques
Chapter 24 Counterparty Risk, Multiple Curves, CVA, DVA, and FVA