Derivatives and Internal Models 4th edition (Finance and Capital Markets) by Hans-Peter Deutsch

Derivatives and Internal Models 4th edition (Finance and Capital Markets) by Hans-Peter Deutsch
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Derivatives and Internal Models

4th edition

(Finance and Capital Markets)

by Hans-Peter Deutsch

Now in its fourth edition, this classic book provides a comprehensive and thorough introduction to derivative pricing, risk management and portfolio optimization, covering all relevant topics with enough hands-on, depth of detail to enable readers to develop their own pricing and risk tools.

In this book, Dr. Hans-Peter Deutsch provides insight into modern market risk quantification methods such as variance-covariance, historical simulation, Monte Carlo, hedge ratios, etc., including time series analysis and statistical concepts such as GARCH Models or Chi-Square-distributions.

He also shows how optimal trading decisions can be deduced once risk has been quantified by introducing risk adjusted performance measures and a complete presentation of modern quantitative portfolio optimization. Furthermore, all the important modern derivatives and their pricing methods are presented; from basic discounted cash flow methods to Black-Scholes, binomial trees, differential equations, finite difference schemes, Monte Carlo methods, Martingales and Numeraires, terms structure models, etc.

All these methods are explained with adequate mathematical rigor and in great detail both in theory and with the help of hundreds of spreadsheet examples using one consistent logical approach and notation. This book should enable any bank to create and implement its own so-called 'internal' risk models.

The new edition is completely updated. Formulations have been streamlined to make the topics even more accessible and the explanations even more understandable.


HANS-PETER DEUTSCH is Founder and Managing Director of d-fine, one of the leading financial services consulting firms in Europe. He was formerly a Partner at Arthur Andersen and Head of Financial Risk Consulting in Germany.

Dr Deutsch holds a Ph.D. in theoretical physics and is author of many publications in the area of quantitative finance. He is also Guest Lecturer for Mathematical Finance at Oxford University, UK, and Chairman of the Advisory Board of the MathFinance Institute at Goethe University in Frankfurt, Germany




Fundamental Risk Factors of Financial Markets

Financial Instruments: A System of Derivatives and Underlyings


Overview of the Assumptions

Present Value Methods, Yields and Traditional Risk Measures


The Black-Scholes Differential Equation

Integral Forms and Analytic Solutions in the Black-Scholes World

Numerical Solutions Using Finite Differences

Binomial and Trinomial Trees

Monte-Carlo Simulations


Martingales and Numeraires

Interest Rates and Term Structure Models


Spot Transactions on Interest Instruments

Forward Transactions on Interest Rates

Plain Vanilla Options

Exotic Options



The Variance-Covariance Method

Simulation Methods

Interest Rate Risk and Cash Flows

Example VaR-Computation

Backtesting: Checking the Applied Methods

PART V: Portfolios

Classical Portfolio Management

Attributes and their Characteristic Portfolios

Active Management and Benchmarking


Interest Rate Term Structures


Market Parameter from Historical Time Series

Time Series Modelling

Forecasting with Time Series Models

Principle Component Analysis

Pre-Treatment of Time Series and Assesment of Models

Probabiltiy and Statistics