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Adopting a highly accessible approach, the author explains derivative products in straightforward terms and without the complex mathematics that underlie the subject, focusing on practical applications, case studies and examples of how the products are used to solve real-world problems. Derivatives Demystified follows a sequence that is designed to show that, although there are many applications of derivatives, there are only a small number of basic building blocks, namely forwards and futures, swaps and options. The book shows how each building block is applied to different markets and to the solution of various risk management and trading problems.
This new edition will be fully revised to reflect the many changes the derivatives markets have seen over the last three years. New material will include a comprehensive history of derivatives, leading up to their use and abuse in the current credit crisis. It will also feature new chapters on regulation and control of derivatives, commodity derivatives, credit derivatives and structured products and new derivative markets including inflation linked and insurance linked products.
Derivatives Demystified is essential reading for everyone who operates in the financial markets or within the corporate environment who requires a good understanding of these important financial instruments.
Adopting a highly accessible approach, the author explains derivative products in straightforward terms and without the complex mathematics that underlie the subject, focusing on practical applications, case studies and examples of how the products are used to solve real-world problems. Derivatives Demystified follows a sequence that is designed to show that, although there are many applications of derivatives, there are only a small number of basic building blocks, namely forwards and futures, swaps and options. The book shows how each building block is applied to different markets and to the solution of various risk management and trading problems.
This new edition will be fully revised to reflect the many changes the derivatives markets have seen over the last three years. New material will include a comprehensive history of derivatives, leading up to their use and abuse in the current credit crisis. It will also feature new chapters on regulation and control of derivatives, commodity derivatives, credit derivatives and structured products and new derivative markets including inflation linked and insurance linked products.
Derivatives Demystified is essential reading for everyone who operates in the financial markets or within the corporate environment who requires a good understanding of these important financial instruments.
ANDREW M. CHISHOLM MA MBA PhD is a Visiting Fellow at the International Capital Market Association (ICMA) Centre at the University of Reading in England. He has designed, developed and taught programmes in derivatives and finance for more than 25 years. In that time, he has worked with many of the largest financial institutions around the world, teaching corporate financiers, traders, sales and marketing staff, risk managers, analysts, fund managers, operations and technology professionals. He has worked extensively on seminars at senior management level as well as training programmes designed to introduce new graduate and MBA entrants to the securities industry. He was formerly Head of Professional Development for Europe at JP Morgan and is the author of An Introduction to International Capital Markets, the second edition of which was published by John Wiley and Sons in 2009.
Acknowledgements xix
1 The Origins and Growth of the Market 1
Definitions 1
Derivatives Building Blocks 1
Market Participants 3
Supporting Organizations 4
Early Origins of Derivatives 5
Derivatives in the USA 6
Overseas Developments, Innovation and Expansion 7
An Example of Recent Innovation: Weather Derivatives 7
Temperature-Linked Derivatives 8
The Wild Beast of Finance? 9
Lessons from Recent History 10
Creative Destruction and Contagion Effects 13
The Modern OTC Derivatives Market 13
The Exchange-Traded Derivatives Market 15
Chapter Summary 15
2 Equity and Currency Forwards 17
Introduction 17
Equity Forward Contract 17
The Forward Price 18
The Forward Price and Arbitrage Opportunities 19
The Forward Price and the Expected Payout 20
Foreign Exchange Forwards 21
Managing Currency Risk 22
Hedging with an Outright Forward FX Deal 23
The Forward Foreign Exchange Rate 24
The Forward FX Rate and Arbitrage Opportunities 25
Forward Points 26
FX Swaps 27
Applications of FX Swaps 28
Chapter Summary 28
3 Forward Rate Agreements 31
Introduction 31
FRA Case Study: Corporate Borrower 31
Results of the FRA Hedge 33
The FRA as Two Payment Legs 34
Dealing in FRAs 36
Forward Interest Rates 37
Chapter Summary 37
4 Commodity and Bond Futures 39
Introduction 39
The Margining System and the Clearing House 39
Users of Futures Contracts 40
Commodity Futures 41
Futures Prices and the Basis 42
US Treasury Bond Futures 43
US Treasury Bond Futures: Delivery Procedures 44
Gilt Futures 45
The Cheapest-To-Deliver (CTD) Bond 45
Chapter Summary 46
5 Interest Rate and Equity Futures 47
Introduction 47
Eurodollar Futures 47
Trading Eurodollar Futures 48
Hedging with Interest Rate Futures 50
Interest Rate Futures Prices 50
Equity Index Futures 52
Applications of S&P 500 Index Futures 53
FT-SE 100 Index Futures Contracts 54
Establishing Net Profits and Losses 55
Single Stock Futures (SSFs) 56
Chapter Summary 57
6 Interest Rate Swaps 59
Introduction 59
Interest Rate Swap Structure 59
Basic Single-Currency Interest Rate Swap 60
The Swap as a Package of Spot and Forward Deals 61
Rationale for the Swap Deal 62
Swap Terminology and Swap Spreads 62
Typical Swap Applications 63
Interest Rate Swap Variants 64
Cross-Currency Interest Rate Swaps 65
Net Borrowing Costs Using a Cross-Currency Swap 66
Inflation Swaps 67
Chapter Summary 68
7 Equity and Credit Default Swaps 69
Introduction to Equity Swaps 69
Equity Swap Case Study 69
Other Applications of Equity Swaps 71
Equity Index Swaps 73
Hedging an Equity Index Swap 74
Credit Default Swaps 75
Credit Default Swap: Basic Structure 76
Credit Default Swap Applications 77
Credit Spreads 78
The CDS Premium and the Credit Spread 78
Pricing Models for CDS Premium 80
Index Credit Default Swaps 80
Basket Credit Default Swaps 81
Chapter Summary 82
8 Fundamentals of Options 83
Introduction 83
Definitions 83
Types of Options 83
Basic Option Trading Strategies 84
Long Call: Expiry Payoff Profile 85
Short Call: Expiry Payoff Profile 87
Long Put: Expiry Payoff Profile 88
Short Put: Expiry Payoff Profile 90
Summary: Intrinsic and Time Value 90
9 Hedging with Options 93
Chapter Overview 93
Futures Hedge Revisited 93
Protective Put 93
Hedging with ATM Put Option 96
Covered Call Writing 97
Equity Collar 98
Zero-Cost Equity Collar 99
Protective PUT with a Barrier Option 100
Behaviour of Barrier Options 101
Chapter Summary 102
10 Exchange-Traded Equity Options 103
Introduction 103
Basic Concepts 103
CBOE Stock Options 104
UK Stock Options on NYSE Liffe 106
CME S&P 500 Index Options 107
FT-SE 100 Index Options 109
Chapter Summary 109
11 Currency or FX Options 111
Introduction 111
Users of Currency Options 111
Hedging FX Exposures with Options: Case Study 112
Graph of Hedged and Unhedged Positions 113
Hedging with a Zero-Cost Collar 114
Reducing Premium on FX Hedges 115
Compound Options 116
Exchange-Traded Currency Options 117
Chapter Summary 118
12 Interest Rate Options 119
Introduction 119
OTC Interest Rate Options 119
OTC Interest Rate Option Case Study 120
Hedging a Loan with a Caplet 121
Interest Rate Cap 123
Interest Rate Collar 123
Interest Rate Swap and Swaption 124
Summary of Interest Rate Hedging Strategies 125
Eurodollar Options 126
Euro and Sterling Interest Rate Options 127
Bond Options 127
Exchange-Traded Bond Options 128
Chapter Summary 130
13 Option Valuation Concepts (1) 131
Introduction 131
The Concept of a Riskless Hedge 132
A Simple Option Pricing Model 132
Option Fair Value 134
Extending the Binomial Model 134
Cost of Dynamic Hedging 135
The Black-Scholes Option Pricing Model 136
Historical Volatility 137
Measuring and Using Historical Volatility 139
Chapter Summary 140
14 Option Valuation Concepts (2) 141
Introduction 141
Problems with Historical Volatility 141
Implied Volatility 142
Black-Scholes Model Assumptions 143
Value of a Call Option 143
Value of a Put Option 144
Equity Index and Currency Options 145
Pricing Interest Rate Options 146
Chapter Summary 148
15 Option Sensitivities: The 'Greeks' 149
Introduction 149
Delta (¿ or ¿) 149
Delta Behaviour 150
Delta as the Hedge Ratio 151
The Effects of Changes in Delta 152
Readjusting the Delta Hedge 153
Gamma (¿ or ¿) 153
Gamma and the Spot Price of the Underlying 154
Gamma and Time to Expiry 155
Theta (¿) 156
Vega or Kappa (¿) 157
Rho (¿) 158
Summary of Greeks 159
Chapter Summary 160
16 Option Trading Strategies (1) 161
Introduction 161
Bull Spread 161
Bull Position with Digital Options 162
Spot Price and Con Value 163
Bear Spread 164
The Greeks for the Bear Spread 165
Put or Bear Ratio Spread 166
Long Straddle 167
Long Straddle Current Payoff Profile 168
Potential Risks with a Long Straddle 169
Chapter Summary 170
17 Option Trading Strategies (2) 171
Introduction 171
Chooser Option 171
Short Straddle 172
Short Straddle Current Payoff Profile 172
Potential Profits with a Short Straddle 175
Managing the Risk on a Short Straddle 175
Short Strangle 177
New Ways of Trading Volatility 177
Calendar or Time Spread 178
Chapter Summary 179
18 Convertible and Exchangeable Bonds 181
Introduction 181
Investors in Convertible Bonds 181
Issuers of Convertible Bonds 182
CB Measures of Value 183
Conversion Premium and Parity 184
Other Factors Affecting CB Value 185
Convertible Arbitrage 186
Convertible Arbitrage Example 186
Profits and Risks with the CB Arbitrage Trade 187
Mandatorily Convertibles and Exchangeables 188
Structuring a Mandatorily Exchangeable (ME) Bond 189
Chapter Summary 190
19 Structured Securities 193
Introduction 193
Capital Protection Equity-Linked Notes 193
Expiry Value of 100% Capital Protection Notes 195
100% Participation Equity-Linked Notes 196
Capped Participation Equity-Linked Notes 197
Average Price Notes 199
Locking in Interim Gains: Cliquet Options 200
Securitization and CDOs 201
The Basic CDO Structure 202
Rationale for Securitization 203
Synthetic CDOs 203
Chapter Summary 205
20 Clearing, Settlement and Operational Risk 207
Introduction 207
Risk Management in General 207
Settlement of Exchange-Traded Derivatives 208
Major Clearing Houses 209
Confirmation and Settlement of OTC Deals 210
Controlling Counterparty Risk on OTC Derivatives 211
Operational Risk 211
Best Practice in Operational Risk Management 213
Chapter Summary 213
Appendix A: Financial Calculations 215
Appendix B: Exotic Options 235
Appendix C: Glossary of Terms 239
Index 255
| Erscheinungsjahr: | 2010 |
|---|---|
| Fachbereich: | Betriebswirtschaft |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| Inhalt: | 288 S. |
| ISBN-13: | 9780470749371 |
| ISBN-10: | 0470749377 |
| Sprache: | Englisch |
| Herstellernummer: | 14574937000 |
| Einband: | Gebunden |
| Autor: | Chisholm, Andrew M |
| Auflage: | 2nd edition |
| Hersteller: |
Wiley
John Wiley & Sons |
| Maße: | 251 x 176 x 25 mm |
| Von/Mit: | Andrew M Chisholm |
| Erscheinungsdatum: | 23.08.2010 |
| Gewicht: | 0,649 kg |
ANDREW M. CHISHOLM MA MBA PhD is a Visiting Fellow at the International Capital Market Association (ICMA) Centre at the University of Reading in England. He has designed, developed and taught programmes in derivatives and finance for more than 25 years. In that time, he has worked with many of the largest financial institutions around the world, teaching corporate financiers, traders, sales and marketing staff, risk managers, analysts, fund managers, operations and technology professionals. He has worked extensively on seminars at senior management level as well as training programmes designed to introduce new graduate and MBA entrants to the securities industry. He was formerly Head of Professional Development for Europe at JP Morgan and is the author of An Introduction to International Capital Markets, the second edition of which was published by John Wiley and Sons in 2009.
Acknowledgements xix
1 The Origins and Growth of the Market 1
Definitions 1
Derivatives Building Blocks 1
Market Participants 3
Supporting Organizations 4
Early Origins of Derivatives 5
Derivatives in the USA 6
Overseas Developments, Innovation and Expansion 7
An Example of Recent Innovation: Weather Derivatives 7
Temperature-Linked Derivatives 8
The Wild Beast of Finance? 9
Lessons from Recent History 10
Creative Destruction and Contagion Effects 13
The Modern OTC Derivatives Market 13
The Exchange-Traded Derivatives Market 15
Chapter Summary 15
2 Equity and Currency Forwards 17
Introduction 17
Equity Forward Contract 17
The Forward Price 18
The Forward Price and Arbitrage Opportunities 19
The Forward Price and the Expected Payout 20
Foreign Exchange Forwards 21
Managing Currency Risk 22
Hedging with an Outright Forward FX Deal 23
The Forward Foreign Exchange Rate 24
The Forward FX Rate and Arbitrage Opportunities 25
Forward Points 26
FX Swaps 27
Applications of FX Swaps 28
Chapter Summary 28
3 Forward Rate Agreements 31
Introduction 31
FRA Case Study: Corporate Borrower 31
Results of the FRA Hedge 33
The FRA as Two Payment Legs 34
Dealing in FRAs 36
Forward Interest Rates 37
Chapter Summary 37
4 Commodity and Bond Futures 39
Introduction 39
The Margining System and the Clearing House 39
Users of Futures Contracts 40
Commodity Futures 41
Futures Prices and the Basis 42
US Treasury Bond Futures 43
US Treasury Bond Futures: Delivery Procedures 44
Gilt Futures 45
The Cheapest-To-Deliver (CTD) Bond 45
Chapter Summary 46
5 Interest Rate and Equity Futures 47
Introduction 47
Eurodollar Futures 47
Trading Eurodollar Futures 48
Hedging with Interest Rate Futures 50
Interest Rate Futures Prices 50
Equity Index Futures 52
Applications of S&P 500 Index Futures 53
FT-SE 100 Index Futures Contracts 54
Establishing Net Profits and Losses 55
Single Stock Futures (SSFs) 56
Chapter Summary 57
6 Interest Rate Swaps 59
Introduction 59
Interest Rate Swap Structure 59
Basic Single-Currency Interest Rate Swap 60
The Swap as a Package of Spot and Forward Deals 61
Rationale for the Swap Deal 62
Swap Terminology and Swap Spreads 62
Typical Swap Applications 63
Interest Rate Swap Variants 64
Cross-Currency Interest Rate Swaps 65
Net Borrowing Costs Using a Cross-Currency Swap 66
Inflation Swaps 67
Chapter Summary 68
7 Equity and Credit Default Swaps 69
Introduction to Equity Swaps 69
Equity Swap Case Study 69
Other Applications of Equity Swaps 71
Equity Index Swaps 73
Hedging an Equity Index Swap 74
Credit Default Swaps 75
Credit Default Swap: Basic Structure 76
Credit Default Swap Applications 77
Credit Spreads 78
The CDS Premium and the Credit Spread 78
Pricing Models for CDS Premium 80
Index Credit Default Swaps 80
Basket Credit Default Swaps 81
Chapter Summary 82
8 Fundamentals of Options 83
Introduction 83
Definitions 83
Types of Options 83
Basic Option Trading Strategies 84
Long Call: Expiry Payoff Profile 85
Short Call: Expiry Payoff Profile 87
Long Put: Expiry Payoff Profile 88
Short Put: Expiry Payoff Profile 90
Summary: Intrinsic and Time Value 90
9 Hedging with Options 93
Chapter Overview 93
Futures Hedge Revisited 93
Protective Put 93
Hedging with ATM Put Option 96
Covered Call Writing 97
Equity Collar 98
Zero-Cost Equity Collar 99
Protective PUT with a Barrier Option 100
Behaviour of Barrier Options 101
Chapter Summary 102
10 Exchange-Traded Equity Options 103
Introduction 103
Basic Concepts 103
CBOE Stock Options 104
UK Stock Options on NYSE Liffe 106
CME S&P 500 Index Options 107
FT-SE 100 Index Options 109
Chapter Summary 109
11 Currency or FX Options 111
Introduction 111
Users of Currency Options 111
Hedging FX Exposures with Options: Case Study 112
Graph of Hedged and Unhedged Positions 113
Hedging with a Zero-Cost Collar 114
Reducing Premium on FX Hedges 115
Compound Options 116
Exchange-Traded Currency Options 117
Chapter Summary 118
12 Interest Rate Options 119
Introduction 119
OTC Interest Rate Options 119
OTC Interest Rate Option Case Study 120
Hedging a Loan with a Caplet 121
Interest Rate Cap 123
Interest Rate Collar 123
Interest Rate Swap and Swaption 124
Summary of Interest Rate Hedging Strategies 125
Eurodollar Options 126
Euro and Sterling Interest Rate Options 127
Bond Options 127
Exchange-Traded Bond Options 128
Chapter Summary 130
13 Option Valuation Concepts (1) 131
Introduction 131
The Concept of a Riskless Hedge 132
A Simple Option Pricing Model 132
Option Fair Value 134
Extending the Binomial Model 134
Cost of Dynamic Hedging 135
The Black-Scholes Option Pricing Model 136
Historical Volatility 137
Measuring and Using Historical Volatility 139
Chapter Summary 140
14 Option Valuation Concepts (2) 141
Introduction 141
Problems with Historical Volatility 141
Implied Volatility 142
Black-Scholes Model Assumptions 143
Value of a Call Option 143
Value of a Put Option 144
Equity Index and Currency Options 145
Pricing Interest Rate Options 146
Chapter Summary 148
15 Option Sensitivities: The 'Greeks' 149
Introduction 149
Delta (¿ or ¿) 149
Delta Behaviour 150
Delta as the Hedge Ratio 151
The Effects of Changes in Delta 152
Readjusting the Delta Hedge 153
Gamma (¿ or ¿) 153
Gamma and the Spot Price of the Underlying 154
Gamma and Time to Expiry 155
Theta (¿) 156
Vega or Kappa (¿) 157
Rho (¿) 158
Summary of Greeks 159
Chapter Summary 160
16 Option Trading Strategies (1) 161
Introduction 161
Bull Spread 161
Bull Position with Digital Options 162
Spot Price and Con Value 163
Bear Spread 164
The Greeks for the Bear Spread 165
Put or Bear Ratio Spread 166
Long Straddle 167
Long Straddle Current Payoff Profile 168
Potential Risks with a Long Straddle 169
Chapter Summary 170
17 Option Trading Strategies (2) 171
Introduction 171
Chooser Option 171
Short Straddle 172
Short Straddle Current Payoff Profile 172
Potential Profits with a Short Straddle 175
Managing the Risk on a Short Straddle 175
Short Strangle 177
New Ways of Trading Volatility 177
Calendar or Time Spread 178
Chapter Summary 179
18 Convertible and Exchangeable Bonds 181
Introduction 181
Investors in Convertible Bonds 181
Issuers of Convertible Bonds 182
CB Measures of Value 183
Conversion Premium and Parity 184
Other Factors Affecting CB Value 185
Convertible Arbitrage 186
Convertible Arbitrage Example 186
Profits and Risks with the CB Arbitrage Trade 187
Mandatorily Convertibles and Exchangeables 188
Structuring a Mandatorily Exchangeable (ME) Bond 189
Chapter Summary 190
19 Structured Securities 193
Introduction 193
Capital Protection Equity-Linked Notes 193
Expiry Value of 100% Capital Protection Notes 195
100% Participation Equity-Linked Notes 196
Capped Participation Equity-Linked Notes 197
Average Price Notes 199
Locking in Interim Gains: Cliquet Options 200
Securitization and CDOs 201
The Basic CDO Structure 202
Rationale for Securitization 203
Synthetic CDOs 203
Chapter Summary 205
20 Clearing, Settlement and Operational Risk 207
Introduction 207
Risk Management in General 207
Settlement of Exchange-Traded Derivatives 208
Major Clearing Houses 209
Confirmation and Settlement of OTC Deals 210
Controlling Counterparty Risk on OTC Derivatives 211
Operational Risk 211
Best Practice in Operational Risk Management 213
Chapter Summary 213
Appendix A: Financial Calculations 215
Appendix B: Exotic Options 235
Appendix C: Glossary of Terms 239
Index 255
| Erscheinungsjahr: | 2010 |
|---|---|
| Fachbereich: | Betriebswirtschaft |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| Inhalt: | 288 S. |
| ISBN-13: | 9780470749371 |
| ISBN-10: | 0470749377 |
| Sprache: | Englisch |
| Herstellernummer: | 14574937000 |
| Einband: | Gebunden |
| Autor: | Chisholm, Andrew M |
| Auflage: | 2nd edition |
| Hersteller: |
Wiley
John Wiley & Sons |
| Maße: | 251 x 176 x 25 mm |
| Von/Mit: | Andrew M Chisholm |
| Erscheinungsdatum: | 23.08.2010 |
| Gewicht: | 0,649 kg |
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