Volatility and Correlation / Wiley Finance Series (PDF)

In Volatility and Correlation 2nd edition: The
Perfect Hedger and the Fox, Rebonato looks at derivatives
pricing from the angle of volatility and correlation. With both
practical and theoretical applications, this is a thorough update
of the highly successful Volatility & Correlation
- with over 80% new or fully reworked material and is
a must have both for practitioners and for students.

The new and updated material includes a critical examination of
the 'perfect-replication' approach to derivatives
pricing, with special attention given to exotic options; a thorough
analysis of the role of quadratic variation in derivatives pricing
and hedging; a discussion of the informational efficiency of
markets in commonly-used calibration and hedging practices.
Treatment of new models including Variance Gamma, displaced
diffusion, stochastic volatility for interest-rate smiles and
equity/FX options.

The book is split into four parts. Part I deals with a Black
world without smiles, sets out the author's
'philosophical' approach and covers deterministic
volatility. Part II looks at smiles in equity and FX worlds. It
begins with a review of relevant empirical information about
smiles, and provides coverage of local-stochastic-volatility,
general-stochastic-volatility, jump-diffusion and Variance-Gamma
processes. Part II concludes with an important chapter that
discusses if and to what extent one can dispense with an explicit
specification of a model, and can directly prescribe the dynamics
of the smile surface.

Part III focusses on interest rates when the volatility is
deterministic. Part IV extends this setting in order to account for
smiles in a financially motivated and computationally tractable
manner. In this final part the author deals with CEV processes,
with diffusive stochastic volatility and with Markov-chain
processes.

Praise for the First Edition:

"In this book, Dr Rebonato brings his penetrating eye to
bear on option pricing and hedging.... The book is a must-read
for those who already know the basics of options and are looking
for an edge in applying the more sophisticated approaches that have
recently been developed."

--Professor Ian Cooper, London Business School

"Volatility and correlation are at the very core of all
option pricing and hedging. In this book, Riccardo Rebonato
presents the subject in his characteristically elegant and simple
fashion...A rare combination of intellectual insight and
practical common sense."

--Anthony Neuberger, London Business School