Java Methods for Financial Engineering: Applications in Finance and Investment

Philip Barker9781852338329, 1852338326

In order to build a successful, Java-based application it is important to have a clear understanding of the principles underlying the various financial models. Those models guide the application designer in choosing the most appropriate Java data structures and implementation strategy. This book describes the principles of model building in financial engineering and explains those models as designs and working implementations for Java-based applications.
Throughout the book a series of packaged classes are developed to address a wide range of financial applications. Java methods are designed and implemented based on the most widely used models in financial engineering and investment practice. The classes and methods are explained and designed in a way which allows the financial engineer complete flexibility. The classes can be used as off-the-shelf working solutions or the innovative developer can re-arrange and modify methods to create new products

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Table of contents :
Java Methods for Financial Engineering……Page 1
Preface……Page 6
Numerical Accuracy & Errors……Page 15
Root Finding – Interval Bisection……Page 16
Newton’s Method……Page 21
Statistical Classes……Page 26
Measures of Dispersion……Page 27
Application Classes……Page 31
Deriving yield approximations — Bisection method……Page 32
Portfolio Management……Page 35
Portfolio Risk Measurement……Page 42
Nominal and Effective Interest……Page 46
Compounding Cashflows……Page 50
Perpetuity and Annuity……Page 52
Internal Rate of Return……Page 53
Rate Interchanges……Page 54
Spot Rates……Page 56
Deriving the Spot Curve……Page 62
Bonds — Fixed Interest……Page 72
Bond Prices……Page 81
Yield to Maturity……Page 82
Static Spread……Page 83
Credit Spreads……Page 87
Bond Volatility Measures……Page 94
Price Value of a Point……Page 98
Bond Pricing Characteristics……Page 101
Macaulay Duration……Page 111
Effective Duration……Page 117
Futures……Page 119
Forward & Futures Pricing……Page 120
Forward Price……Page 124
Stock Index……Page 127
Currencies……Page 129
Commodity Futures……Page 130
Option Types……Page 137
Option Specifications……Page 139
Pricing Specification……Page 140
Dividends and Stock Splits……Page 142
Option Quotes……Page 143
Margin Accounts……Page 144
Main Components of Pricing……Page 145
Limits for Pricing……Page 148
Early Exercise of American Options……Page 153
Option Convexity……Page 155
Put Call Parity……Page 157
Strategies……Page 161
Reverse Covered Call Hedge……Page 162
Profit Diagrams……Page 167
Random Walks……Page 174
Wiener Process……Page 175
Ito Differential……Page 179
Lognormal Modelling of Stock Prices……Page 181
Handling Empirical Data……Page 182
Simulation with Monte Carlo……Page 188
The Lognormal Property……Page 193
Stock Price……Page 201
Cox Ross Rubinstein (CRR) Model……Page 202
Binomial Tree……Page 203
Trees for American & European Pricing……Page 211
Black-Scholes-Merton……Page 214
Pricing with Black-Scholes……Page 216
Pricing without Dividends……Page 217
Effects of Dividends……Page 218
Options Paying a Yield……Page 219
Stock Index Options……Page 220
Options on Futures……Page 221
Currency Options……Page 222
Roll Geske Whaley (RGW) Approximation……Page 225
Bjerksund and Stensland (B&S) Approximation……Page 229
Quadratic Approximation (Barone-Adesi Whaley Derivation)……Page 232
Delta Sensitivity……Page 239
Gamma Sensitivity……Page 242
Theta Sensitivity……Page 246
Vega Sensitivity……Page 249
Rho Sensitivity……Page 253
Elasticity……Page 255
Cost of Carry……Page 257
Market Price of Risk……Page 263
Martingales……Page 265
Interest Rate Caps & Floors……Page 268
Swap Options……Page 270
Adjusting Rates for Convexity……Page 273
Zero Coupon Bond as the Asset……Page 274
Valuation of Bond Options……Page 275
Short Rate Modelling……Page 277
The Vasicek Model……Page 278
Arbitrage Free Models……Page 280
The Ho and Lee Model……Page 281
Hull and White Model……Page 282
Executive Stock Options……Page 286
Forward Start Option……Page 289
Indexed Stock Options……Page 291
Time Switch Option……Page 295
Chooser Option……Page 297
Simple Chooser……Page 299
Complex Chooser Options……Page 303
Options on Options……Page 307
Call on Call……Page 308
Put on Call……Page 309
Extendible Call……Page 313
Extendible Put……Page 315
Writer Extendible……Page 320
Two Asset Correlated……Page 323
Exchange Assets Option……Page 325
American Exchange Option……Page 328
Sequential Exchange Options……Page 330
Fixed Strike Lookback Call Option……Page 344
Fixed Strike Lookback Put……Page 346
Floating Strike Lookback Put……Page 350
Floating Strike Lookback Call……Page 351
Partial Time Fixed Strike Call……Page 354
Partial Time Fixed Strike Put……Page 355
Partial Time Floating Strike Call……Page 360
Partial Time Floating Strike Put……Page 363
Minimum of Two Risky Assets……Page 365
Maximum of Two Risky Assets……Page 366
Analytical Spread Approximation……Page 369
Extreme Spreads……Page 377
Reverse Extreme Spread……Page 378
Cash-or-Nothing Option……Page 380
Asset-or-Nothing Option……Page 385
In Barrier Valuation……Page 389
Valuation with a Rebate……Page 391
Down and In Call Valuation……Page 392
Down and In Put Valuation……Page 397
Up and In Put Valuation……Page 399
Out Barrier Valuation……Page 400
Down and Out Call Valuation……Page 401
Down and Out Put Valuation……Page 403
Up and Out Put Valuation……Page 406
Double Knock Out Call……Page 412
Double Knock Out Put……Page 413
Double Knock In Put……Page 416
Valuing With a Single Put/Call Model……Page 419
Valuing Double Put’s……Page 421
General (Rubinstein & Reiner) Method……Page 426
In Valuation……Page 432
Out Options……Page 437
In Cash or Nothing Valuations……Page 440
In Asset or Nothing Valuations……Page 443
In Asset Dependent Valuations……Page 444
Out Asset Dependent Valuations……Page 446
Out Asset limited Valuations……Page 450
Partial Time Options……Page 460
Two Asset Options……Page 470
Partial Time Two Asset Options……Page 477
Look Type Options……Page 481
Two Asset Cash or Nothing……Page 489
Gap Option……Page 493
Soft Barrier Options……Page 497
Sequential Barrier Type Options……Page 501
Supershares……Page 515
Geometric Average Rate Option……Page 517
Arithmetic Approximations……Page 519
Levy Method……Page 522
Fixed Exchange Valuation……Page 525
Foreign Exchange Option……Page 528
Appendix 1……Page 532
Appendix 2……Page 551
Index……Page 556