In Volatility and Correlation 2nd edition: ThePerfect Hedger and the Fox, Rebonato looks at derivativespricing from the angle of volatility and correlation. With bothpractical and theoretical applications, this is a thorough updateof the highly successful Volatility & Correlation- with over 80% new or fully reworked material and isa must have both for practitioners and for students.The new and updated material includes a critical examination ofthe 'perfect-replication' approach to derivativespricing, with special attention given to exotic options; a thoroughanalysis of the role of quadratic variation in derivatives pricingand hedging; a discussion of the informational efficiency ofmarkets in commonly-used calibration and hedging practices.Treatment of new models including Variance Gamma, displaceddiffusion, stochastic volatility for interest-rate smiles andequity/FX options.The book is split into four parts. Part I deals with a Blackworld without smiles, sets out the author's'philosophical' approach and covers deterministicvolatility. Part II looks at smiles in equity and FX worlds. Itbegins with a review of relevant empirical information aboutsmiles, and provides coverage of local-stochastic-volatility,general-stochastic-volatility, jump-diffusion and Variance-Gammaprocesses. Part II concludes with an important chapter thatdiscusses if and to what extent one can dispense with an explicitspecification of a model, and can directly prescribe the dynamicsof the smile surface.Part III focusses on interest rates when the volatility isdeterministic. Part IV extends this setting in order to account forsmiles in a financially motivated and computationally tractablemanner. In this final part the author deals with CEV processes,with diffusive stochastic volatility and with Markov-chainprocesses.Praise for the First Edition:"In this book, Dr Rebonato brings his penetrating eye tobear on option pricing and hedging.... The book is a must-readfor those who already know the basics of options and are lookingfor an edge in applying the more sophisticated approaches that haverecently been developed."--Professor Ian Cooper, London Business School"Volatility and correlation are at the very core of alloption pricing and hedging. In this book, Riccardo Rebonatopresents the subject in his characteristically elegant and simplefashion...A rare combination of intellectual insight andpractical common sense."--Anthony Neuberger, London Business School