RICCARDO REBONATO

The new edition of "Volatility and Correlation" has been thoroughly updated and expanded with over 80ew or reworked material, reflecting the changes and developments that have taken place in the field. The new and updated material includes: empirical and theoretical analysis of the smile dynamics; examination of the perfect-replication model in relation to exotic options; treatment of additional important models, namely, Variance Gamma, displaced diffusion, CEV, stochastic volatility for interest-rate smiles and equity/FX options; questioning of the informational efficiency of markets in commonly-used calibration and hedging practices. The book is split into four sections. Part I deals with a deterministic-volatility Black world (no smiles), and sets out the author''s ''philosophical'' approach to option pricing. Part II deals with smiles in the equity and FX worlds. Beginning with a review of relevant empirical information about smiles, this part 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 process-based model, and can directly prescribe the dynamics of the smile surface. Part III focuses on interest rates, and part IV extends the setting used for the deterministic-volatility LIBOR market model in order to account for interest-rate smiles in a financially-motivated and computationally-tractable manner. In this final part the author deals, in increasing levels of complexity, with CEV processes, with diffusive stochastic volatility and with Markov-chain processes. Covering FX, equity and interest-rate products, "Volatility and Correlation" is a blend of theoretical and practical material and is designed for traders, risk managers, financial professionals and students. ''The second edition is even more comprehensive than the first, and ideally suited to quantitatively oriented traders and risk managers. Rebonato has a knack for distilling the essence from a wide range of complex option pricing models.'' Darrell Duffie, Stanford University, USA ''The author has greatly extended the first edition of this book, whose main merit remains its courage t

In recent years, interest-rate modeling has developed rapidly in terms of both practice and theory. The academic and practitioners'' communities, however, have not always communicated as productively as would have been desirable. As a result, their research programs have often developed with little constructive interference. In this book, Riccardo Rebonato draws on his academic and professional experience, straddling both sides of the divide to bring together and build on what theory and trading have to offer. Rebonato begins by presenting the conceptual foundations for the application of the LIBOR market model to the pricing of interest-rate derivatives. Next he treats in great detail the calibration of this model to market prices, asking how possible and advisable it is to enforce a simultaneous fitting to several market observables. He does so with an eye not only to mathematical feasibility but also to financial justification, while devoting special scrutiny to the implications of market incompleteness. Much of the book concerns an original extension of the LIBOR market model, devised to account for implied volatility smiles. This is done by introducing a stochastic-volatility, displaced-diffusion version of the model. The emphasis again is on the financial justification and on the computational feasibility of the proposed solution to the smile problem. This book is must reading for quantitative researchers in financial houses, sophisticated practitioners in the derivatives area, and students of finance.