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Foreign Exchange Option Pricing: A Practitioner's Guide, by Iain J. Clark
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This book covers foreign exchange options from the point of view of the finance practitioner. It contains everything a quant or trader working in a bank or hedge fund would need to know about the mathematics of foreign exchange—not just the theoretical mathematics covered in other books but also comprehensive coverage of implementation, pricing and calibration.
With content developed with input from traders and with examples using real-world data, this book introduces many of the more commonly requested products from FX options trading desks, together with the models that capture the risk characteristics necessary to price these products accurately. Crucially, this book describes the numerical methods required for calibration of these models – an area often neglected in the literature, which is nevertheless of paramount importance in practice. Thorough treatment is given in one unified text to the following features:
- Correct market conventions for FX volatility surface construction
- Adjustment for settlement and delayed delivery of options
- Pricing of vanillas and barrier options under the volatility smile
- Barrier bending for limiting barrier discontinuity risk near expiry
- Industry strength partial differential equations in one and several spatial variables using finite differences on nonuniform grids
- Fourier transform methods for pricing European options using characteristic functions
- Stochastic and local volatility models, and a mixed stochastic/local volatility model
- Three-factor long-dated FX model
- Numerical calibration techniques for all the models in this work
- The augmented state variable approach for pricing strongly path-dependent options using either partial differential equations or Monte Carlo simulation
Connecting mathematically rigorous theory with practice, this is the essential guide to foreign exchange options in the context of the real financial marketplace.
- Sales Rank: #349009 in Books
- Published on: 2011-01-18
- Original language: English
- Number of items: 1
- Dimensions: 9.90" h x .90" w x 6.90" l, 1.49 pounds
- Binding: Hardcover
- 298 pages
About the Author
Dr Iain J. Clark, (London, UK), is Head of Foreign Exchange Quantitative Analysis at Dresdner Kleinwort in London, where he set up and runs the team responsible for developing pricing libraries for the front office. Previously, he was Director of the Quantitative Research Group in Lehman Brothers, Fixed Income Quantitative Analyst at BNP Paribas and has also worked in FX Commodities Derivatives research at JP Morgan. He holds an MSc in Mathematics from the University of Edinburgh, and a PhD in Applied Mathematics from the University of Queensland, Australia. Dr Clark is a regular speaker at key finance events, and has presented at London Imperial College, The Bachelier Society Annual Conference, London Imperial College, world business Strategies annual Conference, Risk events, Marcus Evans events and many more.
Most helpful customer reviews
15 of 15 people found the following review helpful.
A real practioner's book
By M. Carreira
I traded BRLUSD options for 5 years, and Iain's book is the only book that covers all the different aspects of trading and modelling FX options:
Different delta conventions
Market strangles, and how to fit your interpolating function to the traded strikes
Realistic interpolations for volatility surface construction
Local volatility in FX
Local Stochastic Volatility Models
Longdated FX Options
Also covered are the different issues and approaches of implementing the models, like Monte Carlo and PDEs; and a good discussion of barrier bending and exotics.
The focus is on presenting the methods and formulas, not proving theorems; even so, traders should not treat it as only a formula depository, there's real depth behind it.
Highly recommended for anyone trading or modelling FX options.
4 of 4 people found the following review helpful.
Relevant and insightful for modelling FX options
By Divyesh Bakhda
Once you start going through the book - very quickly you will realize that it is extremely practical and comes for a person who has been a significant participant of the market with many years of experience. This is important since most texts are theoretical and and less insightful
Some of the most useful topics are:
Concept of many deltas and decent treatment of ATM and Delta conventions
Correctness of FX vol surface construction in the light of 1-vol Butterfly convention
Most relevant fitting methods
good details about models and practical mention of the LSV model -
entire section on practical aspects of the numerical methods
Really like the comparison with Heat equation.
Barrier options have been treated very well. I was able to do a comparative analysis of different skew based models - LV, SV LSV through Moustache graphs for OneTouch and DNTs.
Since Iain was heading desk activities, I would have really liked for him to also cover a few more things like:
- practical aspects of curve building given FX market is so convoluted with conventions - which ccys use LIBOR/OIS curve and which ones use FX Forward implied curves
- How is the model used practically for hedging activities - a little more intuition besides the math
- FX Volatility products in the light of FX models - calibrating SV model parameters to variance swaps.
overall a great book and definitely recommend reading it for desk activities
-d
4 of 4 people found the following review helpful.
One of the best quant books around
By quant
Although I've only managed to read about the first 4 chapters...based on my reading, I can already recommend this very highly.
Thoughtful, clear and rigorous, this book offers an in depth, unified treatment of fx options pricing. It will be a great reference for a quant and also potential traders. Not only does ian bridge the gap about volatility surface, but how one applies these models to the fx. I would recommend having read a prior book in stochastic calculus prior to coming to this book....Although you don't really need an indepth knowledge about stochastic calculus prior to reading this book. Say, a book by ubbo wiersema brownian motion calculus should do the trick or perhaps even shreve (i've read ubbo's book completely and have only read about 7-8 chapters in shreve).
apart from that...a course in numerical linear algebra would also help. although most of the numerical stuff in this book is very self-contained. in short...buy it...The mathematical tootls you will learn from this book can very well be applied in other areas of options pricing.
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