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Quantitative Finance: A Simulation-Based Introduction Using Excel

Matt Davison
Chapman & Hall/CRC
Publication Date: 
Number of Pages: 
We do not plan to review this book.


Intuition about Uncertainty and Risk

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

Repaying Loans Over Time
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

Tranching and Collateralized Debt Obligations
Collateralized Debt Obligations
Tranched Portfolios
The Detailed Calculation
Correlation of Two Identical Bonds

Bond CDOs: More Than Two Bonds, Correlation, and Simulation
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
Constructing Yield Curves from Bond Prices
Bond Price Sensitivities to the Yield

Forward Rates
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

Pricing Options Using Binomial Trees
Binomia l Model
Single-Period Binomial Tree Model for Option Pricing
Extending the Binomial Model to Multiple Time Steps
Multiple-Step Binomial Trees

Random Walks
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

Black Scholes PDE for Pricing Options in Continuous Time
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

Pricing Put Options Using Put Call Parity

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
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

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