Interest-rate management (Q5940703)

The aim of the present book is to give a professional insight into the field of modelling an interest-rate market, mark-to-market a selection of interest-rate derivatives, and simulate their future value using the market model (mark-to-future), together with deriving valuable risk numbers with a reliable risk management process. The book is addressed to students, researchers, and practitioners that are interested or work directly with the models of interest-rate markets, as well as for pricing and management of interest-rate derivatives. The three main parts of the book enclose seven chapters, whose contents may be briefly summarized as follows: Part I (Mathematical Finance Background), contains the first three chapters, and begins with an overview of the most important mathematical tools for describing financial markets, i.e. stochastic processes and martingales. Chapters 2 and 3 present the movement of market prices and define the theoretical framework for the pricing and hedging of contingent claims. The prices of financial derivatives are described in terms of conditional expectations, the Feynman-Kac formula providing the gateway between conditional expectations and differential equations which can be solved numerically. Introducing financial markets with stochastic processes, Chapter 3 shows that financial derivatives can be uniquely priced if the financial market is complete. On of the most famous models of complete market, the Black-Scholes model is discussed. Part II (Modelling and Pricing in Interest-Rate Markets) is made up of chapters 4 and 5. Chapter 4 deals with interest-rate markets and the zero-coupon bonds as primary traded assets. No-arbitrage and completeness conditions in the interest-rate market model are given, pricing (European) contingent claims are examined, and the Heath-Jarrow-Morton framework is discussed. Multi-factor models, the new class of LIBOR market models, and the credit risk models are presented. Chapter 5 describes the most popular interest-rate derivatives, and shows how they can be priced using a specific interest-rate model. All financial instruments are exposed from a practical point of view, and priced acoording to the theoretical framework, but the quality of pricing for all these instruments may depend very much on the availability of good market or price information, especially with respect yields and volatilities. Otherwise, misleading risk numbers and prices may result. Part III (Measuring and Management Interest-Rate Risk), with Chapters 6 and 7, intends to investigate the practical application of interest-rate models to the risk and portfolio management of interest-rate derivatives. Short- and long-term-oriented risk measures, and comprehensive case studies based on real market data are covered. Mark-to-future simulations, specific risk numbers and their use for risk management are also discussed. Satisfying the needs for both practitioners and researchers, the present book brings a valuable contribution to the general effort of finding the good middle way for describing the processes of mathematical modelling and pricing for the risk and asset management of interest-rate derivatives portfolios, or, in other words, to fill the gap between theory and practice within the investigated field.