In 2004, while working as an equity derivatives analyst at J.P. Morgan in London, I came upon an esoteric trade: someone was simultaneously selling correlation and buying it back for a (risky) profit using two different methods. I became obsessed with the rationale behind this trade, and, after writing down the math, I discovered with excitement that with some corrections this trade led to a pure dynamic arbitrage strategy—the kind you normally find only in textbooks.

I could see, however, that transaction costs and other market frictions made the strategy very hard to implement in practice, especially for price takers on the buy side. But the fact remained that correlation could be bought and sold at very different prices, and that didn't make sense to me. So I developed a simple “toy” model to see how this gap might be accounted for, and as I suspected I found that there should be little difference. What this meant is that one of the two correlation instruments involved in the trade, namely the correlation swap, was not priced at “fair value” according to my analysis.

Later on I refined my model, which I introduce in the last chapter of this book among other topics, and reached similar conclusions. I am very pleased that the topic of equity correlation has gained tremendous momentum since 2004, and it is one of this book's ambitions to introduce the work of others in this highly specialized field. I have no doubt that many new exciting results are yet to be discovered in the coming years.

I also wanted to cover other key advanced concepts in equity derivatives that are relevant to traders, quantitative analysts, and other professionals. Many of these concepts, such as implied distributions and local volatilities, are now well-known and established in the field, while others, such as local and stochastic correlation, lie at the forefront of current research.

To get the most out of this book, readers must already be familiar with the terminology and standard pricing theory of equity derivatives, which can be found in my textbook Introduction to Equity Derivatives: Theory & Practice, second edition, also published by John Wiley & Sons.

I relied on a fair amount of advanced mathematics, and therefore a graduate scientific education is a prerequisite here, especially for those readers who want to solve the problems included at the end of each chapter.

The book is made of nine chapters, which are meant to be read sequentially, starting with an exposition of the most widespread exotic derivatives and culminating with cutting-edge concepts on stochastic correlation, which are necessary to correctly price the next generation of equity derivatives such as correlation swaps.

Some simplifications, such as zero interest rates and dividends, were often necessary to avoid convoluted mathematical expressions. I strongly encourage readers to check the particular assumptions used for each formula before transposing it into another context.

I hope this book will prove insightful and useful to its target audience. I am always interested to hear feedback; please do not hesitate to contact me to share your thoughts.