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Chapter 6: Arbitrage and Trading (pdf)

Book Details

  • Hardcover
  • Bookstore's Wholesale Price: $147
  • February 2013
  • ISBN: 978-0-393-91307-1
  • 8.4 × 10.3 in / 880 pages
  • Territory Rights: Worldwide

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  1. Economics
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  1. Economics

An Introduction to Derivative Securities, Financial Markets, and Risk Management


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Robert A. Jarrow (Author, Cornell University), Arkadev Chatterjea (Author, Cornell University)


The first real introductory text in derivatives.

Written by Robert Jarrow, one of the true titans of finance, and his former student Arkadev Chatterjea, Introduction to Derivatives is the first text developed from the ground up for students taking the introductory derivatives course. The math is presented at the right level and is always motivated by what’s happening in the financial markets. And, as one of the developers of the Heath-Jarrow-Morton Model, Robert Jarrow presents a novel, accessible way to understand this important topic.


A true introductory text

Co-author Arka Chatterjea’s years of teaching derivatives to a broad range of students has influenced the level and organization of the text. Seven introductory chapters, including a unique chapter on arbitage, provide overviews of topics that are addressed in detail later in the text. The math is accessible and consistently motivated by the underlying financial environment. 

Intuitive and accessible treatment of the three most important derivative models

Introduction to Derivatives carefully explains the Single-Period Binomial Model, the Black-Scholes-Merton Model, and the Heath-Jarrow-Morton Model. The authors present the Single-Period Binomial Model and Black-Scholes-Merton Model with an eye toward the later presentation of Heath-Jarrow-Morton, developing the three key models of derivative valuation in a consistent and integrated way. 

Risk management issues are addressed throughout the text

Risk environments make derivatives necessary and highly beneficial for businesses and the economy. The authors thoroughly explore and explain each type of risk environment: market risk, credit risk, liquidity risk, and operational risk. 

Priced! Derivative valuation software specifically designed for the text

Developed by a Cornell computer scientist in collaboration with the authors, Priced! is Excel-based software that makes the models real rather than just hypothetical. Priced! enables students to learn models through manipulating concrete values and seeing the real-life impact of changes to certain variables such as exchange and interest rates. Instructors can use the software during lecture to provide concrete, scenario-based examples of theories discussed during the course. Students can use the software to work through homework assignments or check calculations they’ve done by hand.  



    Part I: Introduction to Derivatives
    Chapter 1: Derivatives and Risk Management
    Chapter 2: Interest Rates
    Chapter 3: Stocks
    Chapter 4: Forwards and Futures
    Chapter 5: Options
    Chapter 6: Arbitrage and Trading
    Chapter 7: Financial Engineering and Swaps

    Part II: Forwards and Futures
    Chapter 8: Forward and Futures Markets
    Chapter 9: Futures Trading
    Chapter 10: Futures Regulations
    Chapter 11: The Cost of Carry Model
    Chapter 12: The Extended Cost of Carry Model
    Chapter 13: Futures Hedging

    Part III: Options
    Chapter 14: Options Markets and Trading
    Chapter 15: Option Trading Strategies
    Chapter 16: Option Relations
    Chapter 17: Single Period Binomial Model
    Chapter 18: Multiperiod Binomial Model
    Chapter 19: The Black-Scholes-Merton Model
    Chapter 20: Using the Black-Scholes-Merton Model

    Part IV: Interest Rate Derivatives
    Chapter 21: Yields and Forward Rates
    Chapter 22: Interest Rate Swaps
    Chapter 23: Single Period Binomial HJM Model
    Chapter 24: Multiperiod Binomial HJM Model
    Chapter 25: The HJM Libor Model
    Chapter 26: Risk Management Models

    Appendix: Mathematics and Statistics
    Information Sources and Websites
    Books on Derivatives