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Paul Wilmott on Quantitative Finance is perfect for executives who want to sound knowledgeable about derivatives and is ideal for potential traders and students eager for information on the subject. The two-volume, 1000-page-plus work, which assumes no prior knowledge and consoles readers with the fact that only a few basic mathematics skills are required to understand the logic, is written deftly and with humour by an author who describes himself as having "competed in Ballroom Dancing at Oxford University and ... [been] voted best (joint) dancer in 1984". But make no mistake: there is some heavy-lifting involved as he talks readers through the mathematics of calculating option values.

Topics covered include: the famous Black-Scholes option pricing formula, different varieties of options (American, European, Bermudan, and Asian), early exercise of American options, an introduction to exotic and path-dependent options, the effects of dividends and various option strategies for making money-- such as bull and bear spreads, straddles and strangles, as well as butterflies and condors. If you are not involved in day-to-day option trading and don't plan to read every page, Quantitative Finance will make a handy reference--simple explanations of terms such as delta-hedging or implied volatility are offered throughout. On the other hand, for those who want to get into the option trading game, there are numerous snapshots of Bloomberg terminal screens to highlight the data available to practitioners.

Helpful hints are provided through speech boxes-essentially, cartoon portraits of Wilmott himself--pointing out the usefulness of the various sections. As an added incentive to working through the text, some of these drawings have scenes from famous movies in the background and, if you are able to guess them all correctly, he will award a prize--at his option, of course. --Bruce McWilliams

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CONTENTS
Prolog = xxiii
PART ONE BASIC THEORY OF DERIVATIVES = 1
  1 Products and Markets = 3
  2 Derivatives = 23
  3 The Random Behavior of Assets = 51
  4 Elementary Stochastic Calculus = 65
  5 The Black-Scholes Model = 81
  6 Partial Differential Equations = 91
  7 The Black-Scholes Formulae and the 'Greeks' = 99
  8 Simple Generalizations of the Black-Scholes World = 127
  9 Early Exercise and American Options = 137
  10 Probability Density Functions and First Exit Times = 155
  11 Multi-asset Options = 167
  12 The Binomial Model = 179
  13 Predicting the Markets? = 193
  14 A Trading Game = 207
PART TWO PATH DEPENDENCY = 211
  15 An Introduction to Exotic and Path-Dependent Options = 213
  16 Barrier Options = 229
  17 Strongly Path-dependent Options = 253
  18 Asian Options = 263
  19 Lookback Options = 277
  20 Derivatives and Stochastic Control = 285
  21 Miscellaneous Exotics = 293
PART THREE EXTENDING BLACK-SCHOLES = 309
  22 Defects in the Black-Scholes Model = 311
  23 Discrete Hedging = 319
  24 Transaction Costs = 331
  25 Volatility Smiles and Surfaces = 357
  26 Stochastic Volatility = 373
  27 Uncertain Parameters = 383
  28 Empirical Analysis of Volatility = 395
  29 Jump Diffusion = 403
  30 Crash Modeling = 415
  31 Speculating with Options = 429
  32 Static Hedging = 445
  33 The Feedback Effect of Hedging in Illiquid Markets = 461
  34 Utility Theory = 477
  35 More About American Options and Related Matters = 485
  36 Stochastic Volatility and Mean-variance Analysis = 505
  37 Advanced Dividend Modeling = 513
PART FOUR INTEREST RATES AND PRODUCTS = 523
  38 Fixed-Income Products and Analysis : Yield, Duration and Convexity = 525
    38.1 Introduction = 525
    38.2 Simple fixed-income contracts and features = 525
      38.2.1 The zero-coupon bond = 525
      38.2.2 The coupon-bearing bond = 526
      38.2.3 The money market account = 526
      38.2.4 Floating rate bonds = 526
      38.2.5 Forward-rate agreements = 526
      38.2.6 Repos = 527
      38.2.7 STRIPS = 528
      38.2.8 Amortization = 528
      38.2.9 Call provision = 528
    38.3 International bond markets = 528
      38.3.1 United States of America = 528
      38.3.2 United Kingdom = 529
      38.3.3 Japan = 529
    38.4 Accrued interest = 529
    38.5 Day count conventions = 529
    38.6 Continuously- and discretely-compounded interest = 529
    38.7 Measures of yield = 530
      38.7.1 Current yield = 530
      38.7.2 The Yield to Maturity (YTM) or Internal Rate of Return (IRR) = 531
    38.8 The yield curve = 532
    38.9 Price／yield relationship = 533
    38.10 Duration = 533
    38.11 Convexity = 535
    38.12 An example = 536
    38.13 Hedging = 536
    38.14 Time-dependent interest rate = 538
    38.15 Discretely-paid coupons = 540
    38.16 Forward-rates and bootstrapping = 541
    38.17 Interpolation = 543
    38.18 Summary = 544
  39 Swaps = 545
    39.1 Introduction = 545
    39.2 The vanilla interest rate swap = 545
    39.3 Comparative advantage = 547
    39.4 The swap curve = 548
    39.5 Relationship between swaps and bonds = 548
    39.6 Bootstrapping = 551
    39.7 Other features of swaps contracts = 551
    39.8 Other types of swap = 552
      39.8.1 Basis rate swap = 552
      39.8.2 Equity swaps = 553
      39.8.3 Currency swaps = 553
    39.9 Summary = 553
  40 One-factor Interest Rate Modeling = 555
    40.1 Introduction = 555
    40.2 Stochastic interest rates = 555
    40.3 The bond pricing equation for the general model = 556
    40.4 What is the market price of risk? = 558
    40.5 Interpreting the market price of risk, and risk neutrality = 559
    40.6 Tractable models and solutions of the bond pricing equation = 559
    40.7 Solution for constant parameters = 561
    40.8 Named models = 563
      40.8.1 Vasicek = 563
      40.8.2 Cox, Ingersoll & Ross = 565
      40.8.3 Ho & Lee = 566
      40.8.4 Hull & White = 567
    40.9 Summary = 567
  41 Yield Curve Fitting = 569
    41.1 Introduction = 569
    41.2 Ho & Lee = 569
    41.3 The extended Vasicek model of Hull & White = 570
    41.4 Yield-curve fitting : for and against = 571
      41.4.1 For = 571
      41.4.2 Against = 572
    41.5 Other models = 575
    41.6 Summary = 575
  42 Interest Rate Derivatives = 577
    42.1 Introduction = 577
    42.2 Callable bonds = 577
    42.3 Bond options = 578
      42.3.1 Market practice = 578
    42.4 Caps and floors = 581
      42.4.1 Cap／floor parity = 583
      42.4.2 The relationship between a caplet and a bond option = 583
      42.4.3 Market practice = 583
      42.4.4 Collars = 584
      42.4.5 Step-up swaps, caps and floors = 584
    42.5 Range notes = 584
    42.6 Swaptions, captions and floortions = 584
      42.6.1 Market practice = 584
    42.7 Spread options = 586
    42.8 Index amortizing rate swaps = 586
      42.8.1 Similarity solution = 588
      42.8.2 Other features in the index amortizing rate swap = 589
    42.9 Contracts with embedded decisions = 590
    42.10 When the interest rate is not the spot rate = 591
      42.10.1 The relationship between the spot interest rate and other rates = 592
    42.11 Some more exotics = 592
    42.12 Some examples = 593
    42.13 Summary = 595
  43 Convertible Bonds = 597
    43.1 Introduction = 597
    43.2 Convertible bond basics = 597
    43.3 Market practice = 598
    43.4 What are CBs for? = 600
    43.5 Pricing CBs with known interest rate = 600
      43.5.1 Call and put features = 601
    43.6 Two-factor modeling : convertible bonds with stochastic interest rate = 603
    43.7 A special model = 607
    43.8 Path dependence in convertible bonds = 608
    43.9 Dilution = 609
    43.10 Credit risk issues = 609
    43.11 Summary = 610
  44 Mortgage-backed Securities = 611
    44.1 Introduction = 611
    44.2 Individual mortgages = 611
      44.2.1 Monthly payments in the fixed rate mortgage = 612
      44.2.2 Prepayment = 612
    44.3 Mortgage-backed securities = 613
      44.3.1 The issuers = 613
    44.4 Modeling prepayment = 613
      44.4.1 The statistics of repayment = 614
      44.4.2 The PSA model = 615
      44.4.3 More realistic models = 616
    44.5 Valuing MBSs = 617
    44.6 Summary = 619
  45 Multi-factor Interest Rate Modeling = 621
    45.1 Introduction = 621
    45.2 Theoretical framework for two factors = 621
      45.2.1 Special case : modeling a long-term rate = 623
      45.2.2 Special case : modeling the spread between the long and the short rate = 624
    45.3 Popular models = 624
    45.4 The phase plane in the absence of randomness = 626
    45.5 The yield curve swap = 629
    45.6 General multi-factor theory = 630
      45.6.1 Tractable affine models = 630
    45.7 Summary = 632
  46 Empirical Behavior of the Spot Interest Rate = 633
    46.1 Introduction = 633
    46.2 Popular one-factor spot-rate models = 634
    46.3 Implied modeling : one factor = 635
    46.4 The volatility structure = 636
    46.5 The drift structure = 637
    46.6 The slope of the yield curve and the market price of risk = 639
    46.7 What the slope of the yield curve tells us = 640
    46.8 Properties of the forward-rate curve 'on average' = 641
    46.9 Implied modeling : two factor = 643
    46.10 Summary = 644
  47 Heath, Jarrow and Morton = 645
    47.1 Introduction = 645
    47.2 The forward-rate equation = 645
    47.3 The spot rate process = 646
      47.3.1 The non-Markov nature of HJM = 647
    47.4 The market price of risk = 647
    47.5 Real and risk neutral = 648
      47.5.1 The relationship between the risk-neutral forward-rate drift and volatility = 648
    47.6 Pricing derivatives = 649
    47.7 Simulations = 649
    47.8 Trees = 650
    47.9 The Musiela parameterization = 650
    47.10 Multi-factor HJM = 650
    47.11 A simple one-factor example : Ho & Lee = 651
    47.12 Principal component analysis = 652
      47.12.1 The power method = 654
    47.13 Options on equities etc. = 654
    47.14 Non-infinitesimal short rate = 655
    47.15 The Brace, Gatarek and Musiela model = 655
    47.16 Summary = 657
  48 Interest-rate Modeling Without Probabilities = 659
    48.1 Introduction = 659
    48.2 What do I want from an interest rate model? = 660
    48.3 A non-probabilistic model for the behavior of the short-term interest rate = 660
    48.4 Worst-case scenarios and a nonlinear equation = 661
      48.4.1 Let's see that again in slow motion = 662
    48.5 Examples of hedging : spreads for prices = 663
      48.5.1 Hedging with one instrument = 665
      48.5.2 Hedging with multiple instruments = 666
    48.6 Generating the 'Yield Envelope' = 669
    48.7 Swaps = 671
    48.8 Caps and floors = 675
    48.9 Applications of the model = 677
      48.9.1 Identifying arbitrage opportunities = 677
      48.9.2 Establishing prices for the market maker = 677
      48.9.3 Static hedging to reduce interest rate risk = 677
      48.9.4 Risk management : a measure of absolute loss = 678
      48.9.5 A remark on the validity of the model = 678
    48.10 Summary = 678
  49 Pricing and Optimal Hedging of Derivatives, the Non-Probabilistic Model Cont'd = 679
    49.1 Introduction = 679
    49.2 A real portfolio = 679
    49.3 Bond options = 683
      49.3.1 Pricing the European option on a zero-coupon bond = 683
      49.3.2 Pricing and hedging American options = 685
    49.4 Contracts with embedded decisions = 688
    49.5 The index amortizing rate swap = 690
    49.6 Convertible bonds = 693
    49.7 Summary = 695
  50 Extensions to the Non-probabilistic Interest-rate Model = 697
    50.1 Introduction = 697
    50.2 Fitting forward-rates = 697
    50.3 Economic cycles = 698
    50.4 Interest rate bands = 699
      50.4.1 Estimating ε from past data = 700
    50.5 Crash modeling = 701
      50.5.1 A maximum number of crashes = 702
      50.5.2 A maximum frequency of crashes = 704
      50.5.3 Estimating ε from past data = 705
    50.6 Liquidity = 705
    50.7 Summary = 707
PART FIVE RISK MEASUREMENT AND MANAGEMENT = 709
  51 Portfolio Management = 711
    51.1 Introduction = 711
    51.2 The Kelly criterion = 712
    51.3 Diversification = 713
      51.3.1 Uncorrelated assets = 714
    51.4 Modern Portfolio Theory = 715
      51.4.1 Including a risk-free investment = 716
    51.5 Where do I want to be on the efficient frontier? = 717
    51.6 Markowitz in practice = 720
    51.7 Capital asset pricing model = 720
      51.7.1 The single-index model = 720
      51.7.2 Choosing the optimal portfolio = 722
    51.8 The multi-index model = 722
    51.9 Cointegration = 722
    51.10 Performance measurement = 724
    51.11 Summary = 725
  52 Asset Allocation in Continuous Time = 727
    52.1 Introduction = 727
    52.2 One risk-free and one risky asset = 727
      52.2.1 The wealth process = 727
      52.2.2 Maximizing expected utility = 728
      52.2.3 Stochastic control and the Bellman equation = 729
      52.2.4 Constant Relative Risk Aversion = 730
      52.2.5 Constant Absolute Risk Aversion = 731
    52.3 Many assets = 732
    52.4 Maximizing long-term growth = 733
    52.5 A brief look at transaction costs = 734
    52.6 Summary = 736
  53 Value at Risk = 737
    53.1 Introduction = 737
    53.2 Definition of value at risk = 737
    53.3 VaR for a single asset = 738
    53.4 VaR for a portfolio = 740
    53.5 VaR for derivatives = 740
      53.5.1 The delta approximation = 741
      53.5.2 The delta-gamma approximation = 741
      53.5.3 Use of valuation models = 743
      53.5.4 Fixed-income portfolios = 743
    53.6 Simulations = 743
      53.6.1 Monte Carlo = 743
      53.6.2 Bootstrapping = 744
    53.7 Use of VaR as a performance measure = 744
    53.8 Summary = 746
  54 Value of the Firm and the Risk of Default = 747
    54.1 Introduction = 747
    54.2 The value of the firm as a random variable = 747
      54.2.1 Known interest rate = 748
      54.2.2 Stochastic interest rates = 749
    54.3 Modeling with measurable parameters and Variables = 750
    54.4 Calculating the value of the firm = 751
    54.5 Summary = 753
  55 Credit Risk = 755
    55.1 Introduction = 755
    55.2 Risky bonds = 755
    55.3 Modeling the risk of default = 756
    55.4 The Poisson process and the instantaneous risk of default = 757
      55.4.1 A note on hedging = 759
    55.5 Time-dependent intensity and the term structure of default = 759
    55.6 Stochastic risk of default = 761
    55.7 Positive recovery = 763
    55.8 Special cases and yield curve fitting = 763
    55.9 A case study : The Argentine Par bond = 764
    55.10 Hedging the default = 766
    55.11 Credit rating = 767
    55.12 A model for change of credit rating = 769
      55.12.1 The forward equation = 770
      55.12.2 The backward equation = 772
    55.13 The pricing equation = 772
      55.13.1 Constant interest rates = 772
      55.13.2 Stochastic interest rates = 773
    55.14 Credit risk in CBs = 773
      55.14.1 Bankruptcy when stock reaches a critical level = 773
      55.14.2 Incorporating the instantaneous risk of default = 773
    55.15 Modeling liquidity risk = 775
    55.16 Summary = 776
  56 Credit Derivatives = 779
    56.1 Introduction = 779
    56.2 Derivatives triggered by default = 779
      56.2.1 Default swap = 779
      56.2.2 Credit default swap = 780
      56.2.3 Limited recourse note = 780
      56.2.4 Asset swap = 780
    56.3 Derivatives of the yield spread = 781
      56.3.1 Default calls and puts = 781
      56.3.2 Credit spread options = 781
    56.4 Payment on change of rating = 781
    56.5 Pricing credit derivatives = 782
      56.5.1 An exchange option = 783
      56.5.2 Pay off on change of rating = 784
    56.6 Multi-factor derivatives = 786
    56.7 Summary = 786
  57 RiskMetrics and CreditMetrics = 789
    57.1 Introduction = 789
    57.2 The RiskMetrics datasets = 790
    57.3 Calculating the parameters the RiskMetrics way = 790
      57.3.1 Estimating volatility = 790
      57.3.2 Correlation = 791
    57.4 The CreditMetrics dataset = 793
      57.4.1 Yield curves = 793
      57.4.2 Spreads = 793
      57.4.3 Transition matrices = 794
      57.4.4 Correlations = 794
    57.5 The CreditMetrics methodology = 794
    57.6 A portfolio of risky bonds = 795
    57.7 CreditMetrics model outputs = 796
    57.8 Summary = 796
  58 CrashMetrics = 797
    58.1 Introduction = 797
    58.2 Why do banks go broke? = 797
    58.3 Market crashes = 798
    58.4 CrashMetrics = 799
    58.5 CrashMetrics for one stock = 799
      58.5.1 Portfolio optimization and the Platinum Hedge = 801
    58.6 The multi-asset／single-index model = 802
      58.6.1 Portfolio optimization and the Platinum Hedge in the multi-asset model = 809
      58.6.2 The marginal effect of an asset = 810
    58.7 The multi-index model = 810
    58.8 Incorporating time value = 811
    58.9 Margin calls and margin hedging = 811
      58.9.1 What is margin? = 812
      58.9.2 Modeling margin = 812
      58.9.3 The single-index model = 813
    58.10 Counterparty risk = 813
    58.11 Simple extensions to CrashMetrics = 814
    58.12 The CrashMetrics Index (CMI) = 814
    58.13 Summary = 815
PART SIX MISCELLANEOUS TOPICS = 817
  59 Derivatives Ups = 819
    59.1 Introduction = 819
    59.2 Orange County = 819
    59.3 Proctor and Gamble = 821
    59.4 Metallgesellschaft = 823
      59.4.1 Basis risk = 824
    59.5 Gibson Greetings = 825
    59.6 Barings = 827
    59.7 Long-Term Capital Management = 828
    59.8 Summary = 831
  60 Bonus Time = 833
    60.1 Introduction = 833
    60.2 One bonus period = 833
      60.2.1 Bonus depending on the Sharpe ratio = 833
      60.2.2 Numerical results = 835
    60.3 The skill factor = 837
    60.4 Putting skill into the equation = 841
      60.4.1 Example = 842
    60.5 Summary = 843
  61 Real Options = 847
    61.1 Introduction = 847
    61.2 Financial options and Real options = 847
    61.3 An introductory example : Abandonment of a machine = 847
    61.4 Optimal investment : simple example #2 = 849
    61.5 Temporary suspension of the project, costless = 850
    61.6 Temporary suspension of the project, costly = 850
    61.7 Sequential and incremental investment = 851
    61.8 Summary = 852
  62 Energy Derivatives = 855
    62.1 Introduction = 855
    62.2 The energy market = 855
    62.3 What's so special about the energy markets? = 856
    62.4 Why can't we apply Black-Scholes theory to energy derivatives? = 859
    62.5 The convenience yield = 860
    62.6 The Pilopovi c' two-factor model = 860
      62.6.1 Fitting = 862
    62.7 Energy derivatives = 862
      62.7.1 One-day options = 862
      62.7.2 Asian options = 862
      62.7.3 Caps and floors = 862
      62.7.4 Cheapest to deliver = 863
      62.7.5 Basis spreads = 863
      62.7.6 Swing options = 863
      62.7.7 Spread options = 864
    62.8 Summary = 864
PART SEVEN NUMERICAL METHODS = 865
  63 Finite-difference Methods for One-factor Models = 867
    63.1 Introduction = 867
    63.2 Program of study = 868
    63.3 Grids = 869
    63.4 Differentiation using the grid = 870
    63.5 Approximating θ = 871
    63.6 Approximating Δ = 872
    63.7 Approximating Γ = 874
    63.8 Bilinear interpolation = 874
    63.9 Final conditions and payoffs = 875
    63.10 Boundary conditions = 875
    63.11 The explicit finite-difference method = 878
      63.11.1 The Black-Scholes equation = 881
      63.11.2 Convergence of the explicit method = 881
    63.12 Upwind differencing = 885
    63.13 Summary = 887
  64 Further Finite-Difference Methods for One-Factor Models = 889
    64.1 Introduction = 889
    64.2 Implicit finite-difference methods = 889
    64.3 The Crank-Nicolson method = 891
      64.3.1 Boundary condition type Ⅰ : V0 k+1 given = 893
      64.3.2 Boundary condition type Ⅱ : relationship between V0 k+1 and V1 k+1 = 893
      64.3.3 Boundary condition type Ⅲ : ∂2 V／ ∂ S2 ＝0 = 894
      64.3.4 The matrix equation = 895
      64.3.5 LU decomposition . = 895
      64.3.6 Successive over-relaxation, SOR = 898
      64.3.7 Optimal choice of ω = 900
    64.4 Comparison of finite-difference methods = 901
    64.5 Other methods = 901
    64.6 Douglas schemes = 902
    64.7 Three time-level methods = 903
    64.8 Richardson extrapolation = 904
    64.9 Free boundary problems and American options = 905
      64.9.1 Early exercise and the explicit method = 906
      64.9.2 Early exercise and Crank-Nicolson = 906
    64.10 Jump conditions = 907
      64.10.1 A discrete cashflow = 907
      64.10.2 Discretely-paid dividend = 909
    64.11 Path-dependent options = 909
      64.11.1 Discretely-sampled quantities = 910
      64.11.2 Continuously-sampled quantities = 910
    64.12 Summary = 911
  65 Finite-difference Methods for Two-factor Models = 913
    65.1 Introduction = 913
    65.2 Two-factor models = 913
    65.3 The explicit method = 915
      65.3.1 Stability of the explicit method = 918
    65.4 Alternating Direction Implicit = 918
    65.5 The Hopscotch method = 920
    65.6 Summary = 921
  66 Monte Carlo Simulation and Related Methods = 923
    66.1 Introduction = 923
    66.2 Relationship between derivative values and simulations : Equities, indices, currencies, commodities = 924
    66.3 Advantages of Monte Carlo simulation = 926
    66.4 Using random numbers = 927
    66.5 Generating normal variables = 928
    66.6 Real versus risk neutral, speculation versus hedging = 929
    66.7 Interest rate products = 931
    66.8 Calculating the greeks = 933
    66.9 Higher dimensions : Cholesky factorization = 934
    66.10 Speeding up convergence = 935
      66.10.1 Antithetic variables = 935
      66.10.2 Control variate technique = 935
    66.11 Pros and cons of Monte Carlo simulations = 936
    66.12 American options = 937
    66.13 Numerical integration = 937
    66.14 Regular grid = 938
    66.15 Basic Monte Carlo integration = 938
    66.16 Low-discrepancy sequences = 940
    66.17 Advanced techniques = 944
    66.18 Summary = 945
  67 Finite-difference Programs = 947
    67.1 Introduction = 947
    67.2 Explicit one-factor model for a convertible bond = 947
    67.3 American call, implicit = 948
    67.4 Explicit Parisian option = 949
    67.5 Explicit stochastic volatility = 951
    67.6 Crash modeling = 952
    67.7 Explicit Epstein-Wilmott solution = 953
    67.8 Risky-bond calculator = 954
Appendix A All the Math You Need... and No More (An Executive Summary) = 959
  A.1 Introduction = 959
  A.2 ℓ = 959
  A.3 log = 960
  A.4 Differentiation and Taylor series = 961
  A.5 Expectation and variance = 963
  A.6 Another look at Black-Scholes = 965
  A.7 Summary = 966
Epilog = 967
Bibliography = 969
Index = 985