#### Overview of this book

Introduction to R for Quantitative Finance will show you how to solve real-world quantitative fi nance problems using the statistical computing language R. The book covers diverse topics ranging from time series analysis to fi nancial networks. Each chapter briefl y presents the theory behind specific concepts and deals with solving a diverse range of problems using R with the help of practical examples.This book will be your guide on how to use and master R in order to solve quantitative finance problems. This book covers the essentials of quantitative finance, taking you through a number of clear and practical examples in R that will not only help you to understand the theory, but how to effectively deal with your own real-life problems.Starting with time series analysis, you will also learn how to optimize portfolios and how asset pricing models work. The book then covers fixed income securities and derivatives such as credit risk management.
Introduction to R for Quantitative Finance
Credits
www.PacktPub.com
Preface
Free Chapter
Time Series Analysis
Portfolio Optimization
Asset Pricing Models
Fixed Income Securities
Estimating the Term Structure of Interest Rates
Derivatives Pricing
Credit Risk Management
Extreme Value Theory
References
Index

## Chapter 6. Derivatives Pricing

Derivatives are financial instruments which derive their value from (or are dependent on) the value of another product, called the underlying. The three basic types of derivatives are forward and futures contracts, swaps, and options. In this chapter we will focus on this latter class and show how basic option pricing models and some related problems can be handled in R. We will start with overviewing how to use the continuous Black-Scholes model and the binomial Cox-Ross-Rubinstein model in R, and then we will proceed with discussing the connection between these models. Furthermore, with the help of calculating and plotting of the Greeks, we will show how to analyze the most important types of market risks that options involve. Finally, we will discuss what implied volatility means and will illustrate this phenomenon by plotting the volatility smile with the help of real market data.

The most important characteristics of options compared to futures or swaps...