Principles of Financial Engineering

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.

1. Introduction2. Institutional Aspects of Derivatives Markets - An Introduction to Some Concepts and Definitions3. Cash Flow Engineering, Interest Rate Forwards and Futures4. Introduction to Swap Engineering5. Repo Market Strategies in Financial Engineering6. Cash Flow Engineering and FX Contracts7. Cash Flow Engineering and Alternative Classes (Commodities and Hedge Funds)8. Dynamic Replication Methods and Synthetics9. Mechanics of Options10. Engineering Convexity Positions11. Options Engineering with Applications12. Pricing Tools in Financial Engineering13. Some Applications of the Fundamental Theorem14. Fixed-Income Engineering15. Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading16. Correlation as an Asset Class and the Smile17. Caps/Floors and Swaptions with an Application to Mortgages18. Engineering of Equity Instruments: Pricing and Replication19. Credit Markets: CDS Engineering20. Essentials of Structured Product Engineering21. Essentials of Credit Structured Product Engineering22. Default Correlation Pricing and Trading23. Principal Protection Techniques24. Counter-Party Risk, Multiple Curves, CVA, DVA, FVA, OIS