Principles of Financial Engineering

3rd Edition

Authors: Robert Kosowski Salih Neftci
Hardcover ISBN: 9780123869685
eBook ISBN: 9780123870070
Imprint: Academic Press
Published Date: 27th November 2014
Page Count: 896
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Table of Contents

  • Dedication
  • Preface to the Third Edition
  • Chapter 1. Introduction

    • 1.1 A Unique Instrument
    • 1.2 A Money Market Problem
    • 1.3 A Taxation Example
    • 1.4 Some Caveats for What Is to Follow
    • 1.5 Trading Volatility
    • 1.6 Conclusions
    • Suggested Reading
    • Exercises
  • Chapter 2. Institutional Aspects of Derivative Markets

    • 2.1 Introduction
    • 2.2 Markets
    • 2.3 Players
    • 2.4 The Mechanics of Deals
    • 2.5 Market Conventions
    • 2.6 Instruments
    • 2.7 Positions
    • 2.8 The Syndication Process
    • 2.9 Conclusions
    • Suggested Reading
    • Exercises
  • Chapter 3. Cash Flow Engineering, Interest Rate Forwards and Futures

    • 3.1 Introduction
    • 3.2 What Is a Synthetic?
    • 3.3 Engineering Simple Interest Rate Derivatives
    • 3.4 LIBOR and Other Benchmarks
    • 3.5 Fixed Income Market Conventions
    • 3.6 A Contractual Equation
    • 3.7 Forward Rate Agreements
    • 3.8 Fixed Income Risk Measures: Duration, Convexity and Value-at-Risk
    • 3.9 Futures: Eurocurrency Contracts
    • 3.10 Real-World Complications
    • 3.11 Forward Rates and Term Structure
    • 3.12 Conventions
    • 3.13 A Digression: Strips
    • 3.14 Conclusions
    • Suggested Reading
    • Appendix—Calculating the Yield Curve
    • Exercises
  • Chapter 4. Introduction to Interest-Rate Swap Engineering

    • 4.1 The Swap Logic
    • 4.2 Applications
    • 4.3 The Instrument: Swaps
    • 4.4 Types of Swaps
    • 4.5 Engineering Interest-Rate Swaps
    • 4.6 Uses of Swaps
    • 4.7 Mechanics of Swapping New Issues
    • 4.8 Some Conventions
    • 4.9 Additional Terminology
    • 4.10 Conclusions
    • Suggested Reading
    • Exercises
  • Chapter 5. Repo Market Strategies in Financial Engineerin


Three new chapters, numerous additions to existing chapters, and an expanded collection of questions and exercises make this third edition of Principles of Financial Engineering essential reading. Between defining swaps on its first page and presenting a case study on its last, Robert Kosowski and Salih Neftci's introduction to financial engineering shows readers how to create financial assets in static and dynamic environments. Poised among intuition, actual events, and financial mathematics, this book can be used to solve problems in risk management, taxation, regulation, and above all, pricing.

Key Features

  • The Third Edition presents three new chapters on financial engineering in commodity markets, financial engineering applications in hedge fund strategies, correlation swaps, structural models of default, capital structure arbitrage, contingent convertibles and how to incorporate counterparty risk into derivatives pricing, among other topics.

  • Additions, clarifications, and illustrations throughout the volume show these instruments at work instead of explaining how they should act

  • The solutions manual enhances the text by presenting additional cases and solutions to exercises


financial engineers, quantitative analysts in banks and investment houses, and other financial industry professionals; graduate students in financial engineering and financial mathematics programs.


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Academic Press
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"This text has quickly become a modern classic of financial engineering, as broad in coverage as it is deep in content, and the addition of Kosowski brings another dimension of academic rigor and practical relevance to Neftci's impressive pedagogical legacy." --Andrew W. Lo, MIT Sloan School of Management

"I’m delighted that this classical text has been updated by Professor Kosowski to reflect financial engineering post-crisis. This timely combination of timeless principles and recent revelations makes for an irresistible read." --Peter Carr, Morgan Stanley and New York University

About the Authors

Robert Kosowski Author

Robert Kosowski is Associate Professor in the Finance Group of Imperial College Business School, Imperial College London, and Director of the Risk Management Lab and Centre for Hedge Fund Research. Robert is an associate member of the Oxford-Man Institute of Quantitative Finance at Oxford University and a member of AIMA's research committee. His research interests include asset management, asset pricing, and financial econometrics with a focus on hedge and mutual funds, performance measurement, asset allocation, business cycles, and derivative trading strategies. Robert's research has been featured in "The Financial Times" and "The Wall Street Journal" and was awarded the European Finance Association 2007 Best Paper Award, an INQUIRE UK 2008 best paper award, an INQUIRE Europe 2009/10 and 2012/13 best paper award, and the British Academy's mid-career fellowship (2011-2012). Robert's research has been published in top peer-reviewed finance journals such as "The Journal of Finance," "The Journal of Financial Economics" and the "Review of Financial Studies." Prior to joining Imperial College London Robert was an Assistant Professor of Finance at INSEAD, where he taught in the MBA, Executive Education, and Ph.D. programs. Robert was a visiting scholar at the UCSD Economics Department (2000) and the International Monetary Fund (2008). At Imperial Robert teaches in the MSc Finance. He won teaching prizes at Imperial College Business School in 2009 and 2014. Robert holds a BA (First Class Honours) and MA in Economics from Trinity College, Cambridge University, and a MSc in Economics and Ph.D. from the London School of Economics. He has consulted for private and public sector organizations and has worked for Goldman Sachs, the Boston Consulting Group, and Deutsche Bank. His policy related advisory work includes: Specialist Adviser to UK House of Lords (2009-2010) and Expert Technical Consultant (International Monetary Fund, USA, 2008).

Affiliations and Expertise

Associate Professor of Finance and Director of the Risk Management Lab and Centre for Hedge Fund Research, Imperial College, London, UK

Salih Neftci Author

Professor Neftci completed his Ph.D. at the University of Minnesota and was head of the FAME Certificate program in Switzerland. He taught at the Graduate School, City University of New York; ICMA Centre, University of Reading; and at the University of Lausanne. He was also a Visiting Professor in the Finance Department at Hong Kong University of Science and Technology. Known his books and articles, he was a regular columnist for CBN daily, the most influential financial newspaper in China.

Affiliations and Expertise

Late of the Global Finance Master’s Program, New School for Social Research, New York, NY, USA