Principles of Financial Engineering, 3rd Edition

Principles of Financial Engineering, 3rd Edition,Robert Kosowski,Salih Neftci,ISBN9780123869685


Academic Press




235 X 191

Bestselling author updates this highly acclaimed text on the fast-paced and complex subject of financial engineering

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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


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.


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

Robert Kosowski

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

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

View additional works by Salih N. Neftci

Principles of Financial Engineering, 3rd Edition

CHAPTER 1 Introduction
CHAPTER 2 Institutional Aspects of Derivatives Markets - An Introduction to Some Concepts and Definitions
CHAPTER 3 Cash Flow Engineering, Interest Rate Forwards and Futures
CHAPTER 4 Introduction to Swap Engineering
CHAPTER 5 Repo Market Strategies in Financial Engineering
CHAPTER 6 Cash Flow Engineering and FX   Contracts
CHAPTER 7 Cash Flow Engineering and Alternative Classes (Commodities and Hedge Funds)
CHAPTER 8 Dynamic Replication Methods and Synthetics
CHAPTER 9 Mechanics of Options
CHAPTER 10 Engineering Convexity Positions
CHAPTER 11 Options Engineering with Applications
CHAPTER 12 Pricing Tools in Financial Engineering
CHAPTER 13 Some Applications of the Fundamental Theorem
CHAPTER 14 Fixed-Income Engineering
CHAPTER 15 Tools for Volatility Engineering, Volatility Swaps, and Volatility Trading
CHAPTER 16 Correlation as an Asset Class and the Smile
CHAPTER 17 Caps/Floors and Swaptions with an Application to Mortgages
CHAPTER 18 Engineering of Equity Instruments: Pricing and Replication
CHAPTER 19 Credit Markets: CDS Engineering
CHAPTER 20 Essentials of Structured Product Engineering
CHAPTER 21 Essentials of Credit Structured Product Engineering 
CHAPTER 22 Default Correlation Pricing and Trading
CHAPTER 23 Principal Protection Techniques
CHAPTER 24 Counter-Party Risk, Multiple Curves, CVA, DVA, FVA

Quotes and reviews

"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

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