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

In Volatility and Correlation 2nd edition: ThePerfect Hedger and the Fox, Rebonato looks at derivativespricing from the angle of volatility and correlation. With bothpractical and theoretical applications, this is a thorough updateof the highly successful Volatility & Correlation with over 80% new or fully reworked material and isa must have both for practitioners and for students.The new and updated material includes a critical examination ofthe 'perfect-replication' approach to derivativespricing, with special attention given to exotic options; a thoroughanalysis of the role of quadratic variation in derivatives pricingand hedging; a discussion of the informational efficiency ofmarkets in commonly-used calibration and hedging practices.Treatment of new models including Variance Gamma, displaceddiffusion, stochastic volatility for interest-rate smiles andequity/FX options.The book is split into four parts. Part I deals with a Blackworld without smiles, sets out the author's'philosophical' approach and covers deterministicvolatility. Part II looks at smiles in equity and FX worlds. Itbegins with a review of relevant empirical information aboutsmiles, and provides coverage of local-stochastic-volatilitygeneral-stochastic-volatility, jump-diffusion and Variance-Gammaprocesses. Part II concludes with an important chapter thatdiscusses if and to what extent one can dispense with an explicitspecification of a model, and can directly prescribe the dynamicsof the smile surface.Part III focusses on interest rates when the volatility isdeterministic. Part IV extends this setting in order to account forsmiles in a financially motivated and computationally tractablemanner. In this final part the author deals with CEV processeswith diffusive stochastic volatility and with Markov-chainprocesses.Praise for the First Edition:"In this book, Dr Rebonato brings his penetrating eye tobear on option pricing and hedging.... The book is a must-readfor those who already know the basics of options and are lookingfor an edge in applying the more sophisticated approaches that haverecently been developed."Professor Ian Cooper, London Business School"Volatility and correlation are at the very core of alloption pricing and hedging. In this book, Riccardo Rebonatopresents the subject in his characteristically elegant and simplefashion...A rare combination of intellectual insight andpractical common sense."Anthony Neuberger, London Business School

Preface xxi0.1 Why a Second Edition? xxi0.2 What This Book Is Not About xxiii0.3 Structure of the Book xxiv0.4 The New Subtitle xxivAcknowledgements xxviiI Foundations 11 Theory and Practice of Option Modelling 32 Option Replication 313 The Building Blocks 754 Variance and Mean Reversion in the Real and the Risk-Adjusted Worlds 1015 Instantaneous and Terminal Correlation 141II Smiles - Equity and FX 1656 Pricing Options in the Presence of Smiles 1677 Empirical Facts About Smiles 2018 General Features of Smile-Modelling Approaches 2379 The Input Data: Fitting an Exogenous Smile Surface 24910 Quadratic Variation and Smiles 29311 Local-Volatility Models: the Derman-and-Kani Approach 31912 Extracting the Local Volatility from Option Prices 34513 Stochastic-Volatility Processes 38914 Jump-Diffusion Processes 43915 Variance-Gamma 51116 Displaced Diffusions and Generalizations 52917 No-Arbitrage Restrictions on the Dynamics of Smile Surfaces 563III Interest Rates - Deterministic Volatilities 60118 Mean Reversion in Interest-Rate Models 60319 Volatility and Correlation in the LIBOR Market Model 62520 Calibration Strategies for the LIBOR Market Model 63921 Specifying the Instantaneous Volatility of Forward Rates 66722 Specifying the Instantaneous Correlation Among Forward Rates 687IV Interest Rates - Smiles 70123 How to Model Interest-Rate Smiles 70324 (CEV) Processes in the Context of the LMM 72925 Stochastic-Volatility Extensions of the LMM 75126 The Dynamics of the Swaption Matrix 76527 Stochastic-Volatility Extension of the LMM: Two-Regime Instantaneous Volatility 783Bibliography 805Index 813