## Financial Derivatives in Theory and PracticeThe term Financial Derivative is a very broad term which has come to mean any financial transaction whose value depends on the underlying value of the asset concerned. Sophisticated statistical modelling of derivatives enables practitioners in the banking industry to reduce financial risk and ultimately increase profits made from these transactions. The book originally published in March 2000 to widespread acclaim. This revised edition has been updated with minor corrections and new references, and now includes a chapter of exercises and solutions, enabling use as a course text. - Comprehensive introduction to the theory and practice of financial derivatives.
- Discusses and elaborates on the theory of interest rate derivatives, an area of increasing interest.
- Divided into two self-contained parts ? the first concentrating on the theory of stochastic calculus, and the second describes in detail the pricing of a number of different derivatives in practice.
- Written by well respected academics with experience in the banking industry.
A valuable text for practitioners in research departments of all banking and finance sectors. Academic researchers and graduate students working in mathematical finance. |

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### Contents

Brownian Motion | 19 |

Stochastic Integration | 63 |

Girsanov and Martingale Representation | 91 |

Stochastic Differential Equations | 115 |

Option Pricing in Continuous Time | 141 |

Dynamic Term Structure Models | 183 |

Modelling in Practice | 215 |

Basic Instruments and Terminology | 227 |

Pricing Exotic European Derivatives | 259 |

Convexity Corrections | 277 |

Implied Interest Rate Pricing Models | 287 |

MultiCurrency Terminal SwapRate Models | 303 |

ShortRate Models | 319 |

Market Models | 337 |

MarkovFunctional Modelling | 351 |

Exercises and Solutions | 373 |

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### Common terms and phrases

algorithm amount apply arbitrage arbitrage-free asset prices Bermudan Black's formula Brownian motion cadlag calibrating caplet cashflows Chapter consider continuous semimartingale convergence Corollary corresponding counterparty define definition denote discount bond discount curve discount factors distribution economy equation example exists exponential filtration finite variation follows forward LIBOR functional form futures contract futures price process Girsanov's theorem given implied integrands interest rate Ito's formula Lemma local martingale log-normal market models Markov process Markov-functional model martingale measure martingale property martingale representation theorem maturity Note numeraire pair pathwise payoff pricing kernel probability measure probability space Proof pure discount bonds quadratic variation random variable Remark replicating result risk-neutral measure satisfies Section sequence solution Statistical stochastic integral strictly positive Suppose swap rate swaption swaption measure term structure model terminal swap-rate model trading strategy unique volatility yields zero coupon