FINANCIAL DERIVATIVES PRICING

This book is a collection of original papers by Robert Jarrow that contributed to significant advances in financial economics. Divided into three parts, Part I concerns option pricing theory and its foundations. The papers here deal with the famous Black-Scholes-Merton model, characterizations of the American put option, and the first applications of arbitrage pricing theory to market manipulation and liquidity risk.

Part II relates to pricing derivatives under stochastic interest rates. Included is the paper introducing the famous Heath–Jarrow–Morton (HJM) model, together with papers on topics like the characterization of the difference between forward and futures prices, the forward price martingale measure, and applications of the HJM model to foreign currencies and commodities.

Part III deals with the pricing of financial derivatives considering both stochastic interest rates and the likelihood of default. Papers cover the reduced form credit risk model, in particular the original Jarrow and Turnbull model, the Markov model for credit rating transitions, counterparty risk, and diversifiable default risk.

Contents:

Option Pricing Theory and Its Foundations:
- Approximate Option Valuation for Arbitrary Stochastic Processes (R Jarrow & A Rudd)
- Arbitrage, Continuous Trading, and Margin Requirements (D Heath & R Jarrow)
- Market Manipulation, Bubbles, Corners, and Short Squeezes (R Jarrow)
- Liquidity Risk and Arbitrage Pricing Theory (U Çetin et al.)
Stochastic Interest Rates:
- Liquidity Premiums and the Expectations Hypothesis (R Jarrow)
- Forward Contracts and Futures Contracts (R Jarrow & G Oldfield)
- Pricing Foreign Currency Options Under Stochastic Interest Rates (K Amin & R Jarrow)
Credit Risk:
- Pricing Derivatives on Financial Securities Subject to Credit Risk (R Jarrow & S Turnbull)
- Counterparty Risk and the Pricing of Defaultable Securities (R Jarrow & F Yu)
- Market Pricing of Deposit Insurance (D Duffie et al.)
- and other papers

Readership: Graduate students in economics, finance, and mathematics; financial industry professionals.

“Among connoisseurs, Robert A Jarrow is known as a pro among pros, a mathematical finance maven, who understands real-world financial markets and translates that specified knowledge into mathematical models of that world. Relevant, rigorous, and right on the mark in problem-selection, are the constants that mark the unmistakable stamp of a Jarrow paper. The present book patiently develops the complex mathematical models at the foundation of option pricing, bond pricing, and credit pricing. The chapters reproduce articles that have become classics in the field. The chapters of this volume are rigorous and at times demanding of what the reader must do to gain the full benefits of what they offer. But whether a serious academic researcher, a seasoned quantitative professional, or a mathematically inclined novice student, the reader is in for a treat well-worth the effort: Bon appetit!”

Robert C Merton
Nobel Laureate, Economics 1997
Harvard Business School

“Robert Jarrow's selected works, with colleagues, are a 'tour de force' of possible generalizations of the Black–Scholes–Merton options pricing analysis. Under some assumptions, the Black–Scholes formula still holds; under others it is an approximation; under others it is not even close. Nothing about the Black–Scholes–Merton analysis seems to be left unexplored. And then Jarrow tells us that, ‘although I have been studying the Black’Scholes–Merton model for almost 30 years, I still have not found answers to all of my questions about its structure.' He then lists fascinating questions which he is currently exploring, but which are not ready for presentation in the current volume.”

Harry M Markowitz
Nobel Laureate, Economics 1990
UC, San Diego

“This major selection of papers of Robert Jarrow, though only a fraction of his amazing output over nearly three decades, exemplifies his leadership in the world of financial mathematics and financial engineering, even before these fields were named. Always ahead of others with new methods, always relevant to real issues in financial markets, Jarrow covers all of the bases. Anyone who wants to see the path of development of these fields can find it in this great book.”

Darrell Duffie
Dean Witter Distinguished Professor of Finance
Stanford University

“Bob Jarrow is a giant in the field of financial engineering, and this volume of his most influential papers is a most welcome addition to the literature on derivatives, the term structure of interest rates, and credit-sensitive securities.”

Andrew W Lo
Harris & Harris Group Professor &
Director, MIT Laboratory for Financial Engineering

“Professor Robert Jarrow is extremely well known for his outstanding contributions to the subjects of mathematical economics and mathematical finance. This elegant volume contains an integrated collection of selected papers written by Professor Jarrow and his collaborators spanning decades of research. It covers several important topics including option pricing theory, interest rate modelling, and credit risk. The publication of this volume is long overdue. It will be of great help to anyone who wants to understand the inner workings of modern finance.”

Professor Alexander Lipton
Merrill Lynch and Imperial College, UK

“Robert A Jarrow has been a major force in mathematical finance for almost three decades. Having had the honor of spending the second of these three decades with him at Cornell, I stand slack-jawed in awe at the incredible range and depth of the articles in this collection.”

Peter Carr, PhD
Quantitative Financial Research, Bloomberg LP &
Director of the Masters program in Mathematical Finance
Courant Institute, NYU

608pp		Pub. date: Oct 2008
ISBN: 978-981-281-920-8 981-281-920-7		US$104 / £61

608pp		Pub. date: Oct 2008
ISBN: 978-981-281-922-2(ebook) 981-281-922-3(ebook)		US$135 / £79

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