The Best of Wilmott 1

NOVEMBER 11TH 2003 saw a landmark event take place in London. As the first conference designed for quants by quants, the Quantitative Finance Review 2003 moved away from the anonymous bazaars that have become the norm, and instead delivered valuable information to market practitioners with the greatest interest. The roster of speakers was phenomenal, ranging from founding fathers to bright young things, discussing the latest developments, with a specific emphasis on the burgeoning field of credit derivatives. You really had to be there. Until now, at least. The Best of Wilmott 1: Incorporating the Quantitative Finance Review 2003 contains these first-class articles, originally presented at the QFR 2003, along with a collection of selected technical papers from Wilmott magazine. In publishing this book we hope to share some of the great insights that, until now, only delegates at QFR 2003 were privy to, and give you some idea why Wilmott magazine is the most talked about periodical in the market. Including articles from luminaries such as Ed Thorp, Jean-Philippe Bouchaud, Philipp Schoenbucher, Pat Hagan, Ephraim Clark, Marc Potters, Peter Jaeckel and Paul Wilmott, this collection is a must for anyone working in the field of quantitative finance. The articles cover a wide range of topics: Psychology in Financial Markets Measuring Country Risk as Implied Volatility The Equity-to-Credit Problem Introducing Variety in Risk Management The Art and Science of Curve Building Next Generation Models for Convertible Bonds with Credit Risk Stochastic Volatility and Mean-variance Analysis Cliquet Options and Volatility Models And as they say at the end of (most) Bond movies The Best of Wilmott. . . will return on an annual basis.

Introduction ix Paul Wilmott I Education in Quantitative Finance 1 Riaz Ahmad II Financialcad® 5 Owen Walsh III Quantitative Finance Review 2003 7 Dan Tudball Chapter 1 Rewind 11 Dan Tudball Chapter 2 In for the Count 19 Dan Tudball Chapter 3 A Perspective on Quantitative Finance: Models for Beating the Market 33 Ed Thorp Chapter 4 Psychology in Financial Markets 39 Henriëtte Prast Chapter 5 Credit Risk Appraisal: From the Firm Structural Approach to Modern Probabilistic Methodologies 59 Hugues E. Pirotte Spéder Chapter 6 Modelling and Measuring Sovereign Credit Risk 69 Ephraim Clark Chapter 7 The Equity-to-credit Problem (or the Story of Calibration, Co-calibration and Re-calibration) 79 Elie Ayache Chapter 8 Measuring Country Risk as Implied Volatility 109 Ephraim Clark Chapter 9 Next Generation Models for Convertible Bonds with Credit Risk 117 E.Ayache,P.A.ForsythandK.R.Vetzal Chapter 10 First to Default Swaps 135 Antony Penaud and James Selfe Chapter 11 Taken to the Limit: Simple and Not-so-simple Loan Loss Distributions 143 Philipp J. Schönbucher Chapter 12 Sovereign Debt Default Risk: Quantifying the (Un)Willingness to Pay 161 Ephraim Clark Chapter 13 Chord of Association 167 Aaron Brown Chapter 14 Introducing Variety in Risk Management 181 Fabrizio Lillo, Rosario N. Mantegna, Jean-Philippe Bouchaud and Marc Potters Chapter 15 Alternative Large Risks Hedging Strategies for Options 191 F. Selmi and Jean-Philippe Bouchaud Chapter 16 On Exercising American Options: The Risk of Making More Money than You Expected 199 Hyungsok Ahn and Paul Wilmott Chapter 17 Phi-alpha Optimal Portfolios and Extreme Risk Management 223 R. Douglas Martin, Svetlozar (Zari) Rachev, and Frederic Siboulet Chapter 18 Managing Smile Risk 249 Patrick S. Hagan, Deep Kumar, Andrew S. Lesniewski and Diana E. Woodward Chapter 19 Adjusters: Turning Good Prices into Great Prices 297 Patrick S. Hagan Chapter 20 Convexity Conundrums: Pricing CMS Swaps, Caps, and Floors 305 Patrick S. Hagan Chapter 21 Mind the Cap 319 Peter Jäckel Chapter 22 The Art and Science of Curve Building 349 Owen Walsh Chapter 23 Stochastic Volatility Models: Past, Present and Future 355 Peter Jäckel Chapter 24 Cliquet Options and Volatility Models 379 Paul Wilmott Chapter 25 Long Memory and Regime Shifts in Asset Volatility 391 Jonathan Kinlay Chapter 26 Heston’s Stochastic Volatility Model: Implementation, Calibration and Some Extensions 401 Sergei Mikhailov and Ulrich Nögel Chapter 27 Forward-start Options in Stochastic Volatility Models 413 Vladimir Lucic Chapter 28 Stochastic Volatility and Mean-variance Analysis 421 Hyungsok Ahn and Paul Wilmott Index 435