Introduction Intuition about Uncertainty and Risk Introduction Individual Attitudes toward Risk The St. Petersburg Paradox Looking Forward to Chapter 3 The Classical Approach to Decision Making under Uncertainty Map to the Future Valuing Investment Opportunities: The Discounted Cash Flow Method Discounted Cash Flow Method for Evaluating Investment Opportunities Conclusions Repaying Loans Over Time Introduction Repaying a Loan over Time: Excel Repaying a Loan over Time: Mathematics First-Order Difference Equations Solving the Loan Repayment Difference Equation More Examples of Using Difference Equations to Find Loan Payments Writing the Difference Equation in Forward versus Backward Forms Bridges to the Future Bond Pricing with Default: Using Simulations Modeling a Defaultable Bond or Loan Financial Insights Simulating Loan Portfolios What Happens if There Are a Large Number of Independent Loans? Bridge to the Future Bond Pricing with Default: Using Difference Equations Risky Bonds Using Difference Equations to Find C Exploring the Insights Arising from Equation 7.5 Determining Recovery Rates Determining the Probability of Default A Bridge to the Future Difference Equations for Life Annuities Introduction Tranching and Collateralized Debt Obligations Collateralized Debt Obligations Tranched Portfolios The Detailed Calculation Correlation of Two Identical Bonds Conclusion Bond CDOs: More Than Two Bonds, Correlation, and Simulation Introduction Using an Excel Simulation to Analyze CDOs with More Than Two Bonds Collateralized Debt Obligations: An Example of Financial Engineering The Binomial Simplification Correlated Defaults Fundamentals of Fixed Income Markets What Are Bonds? Getting Down to Quantitative Details Simplest Bond Pricing Equation How Bonds Are Traded in Canada Clean and Dirty Bond Prices Conclusion and Bridge to the Next Yield Curves and Bond Risk Measures Introduction Constructing Yield Curves from Bond Prices Bond Price Sensitivities to the Yield Forward Rates Introduction Relationships between Forward Rates and the Yield Curve Yield Curves, Discount Factors, and Forward Rates Interpreting Forward Curves Modeling Stock Prices What Are Stocks? Simple Statistical Analysis of Real Stock Data Mean Variance Portfolio Optimization Selecting Portfolios CAPM and Markowitz A Qualitative Introduction to Options Stock Option Definitions Uses for Put and Call Options Qualitative Behavior of Puts and Calls Value at Risk (VaR) Introduction to Value at Risk Pitfalls of VaR Summary Pricing Options Using Binomial Trees Introduction Binomia l Model Single-Period Binomial Tree Model for Option Pricing Extending the Binomial Model to Multiple Time Steps Multiple-Step Binomial Trees Summary Random Walks Introduction Deriving the Diffusion Partial Differential Equation Basic Stochastic Calculus Basics of Stochastic Calculus Stochastic Integration by Examples Conclusions and Bridge to Next Chapters Simulating Geometric Brownian Motion Simulating GBM Stock Prices at a Single Future Time Simulating a Time Sequence of GBM Stock Prices Summary Black Scholes PDE for Pricing Options in Continuous Time Introduction Hedging Argument Call Price Solution of the Black Scholes Equation Why Short Selling Is So Dangerous Summary and Bridge to the Future Solving the Black Scholes PDE Solving the Black Scholes Partial PDE for a European Call General European Option Payoffs: Risk-Neutral Pricing Summary Pricing Put Options Using Put Call Parity Summary Some Approximate Values of the Black Scholes Call Formula Approximate Call Formulas at-the-Money Approximate Call Values Near-the-Money Approximate Call Values Far-from-the-Money Simulating Delta Hedging Introduction How Does Delta Hedging Really Work? Understanding the Results of the Delta Hedging Process The Impact of Transaction Costs A Hedgers Perspective on Option Gamma or, "Big Gamma" = "Big Money" Bridge to the Future Black Scholes with Dividends Modeling Dividends The Black Scholes PDE for the Continuously Paid Dividend Case Pricing the Prepaid Forward on a Continuous Dividend Paying Stock More Complicated Derivatives on Underlying Paying Continuous Dividends American Options Introduction and Binomial Pricing American Puts American Calls Pricing the Perpetual American Put and Call Perpetual Options: Underlying Pays No Dividends Basic Perpetual American Call Perpetual American Call/Put Model with Dividends The Perpetual American Call, Continuous Dividends Options on Multiple Underlying Assets Exchange Options Interest Rate Models Setting the Stage for Stochastic Interest Rate Models Pricing When You CANNOT Trade the Underlying Asset Hedging Bonds in Continuous Time Solving the Bond Pricing PDE Vasicek Model Summary Incomplete Markets Introduction to Incomplete Markets Trying to Hedge Options on a Trinomial Tree Minimum Variance Hedging of a European Option with Default Binomial Tree Model with Default Risk Appendix 1: Probability Theory Basics-Experiments, Sample Outcomes, Events, and Sample Space Appendix 2: Proof of De Moivre-Laplace Theorem Using MGF Appendix 3: Naming Variables in Excel Appendix 4: Building VBA Macros from Excel Index Exercises and References appear at the end of each chapter.