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In the newly revised Second Edition of Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives, renowned finance trainer Sunil Parameswaran delivers a comprehensive introduction to the full range of financial products commonly offered in the financial markets.
Using clear, worked examples of everything from basic equity and debt securities to complex instruments--like derivatives and mortgage-backed securities - the author outlines the structure and dynamics of the free-market system and explores the environment in which financial instruments are traded. This one-of-a-kind book also includes:
* New discussions on interest rate derivatives, bonds with embedded options, mutual funds, ETFs, pension plans, financial macroeconomics, orders and exchanges, and Excel functions for finance
* Supplementary materials to enhance the reader's ability to apply the material contained within
* A foundational exploration of interest rates and the time value of money
Fundamentals of Financial Instruments is the ideal resource for business school students at the undergraduate and graduate levels, as well as anyone studying financial management or the financial markets. It also belongs on the bookshelves of executive education students and finance professionals seeking a refresher on the fundamentals of their industry.
Using clear, worked examples of everything from basic equity and debt securities to complex instruments--like derivatives and mortgage-backed securities - the author outlines the structure and dynamics of the free-market system and explores the environment in which financial instruments are traded. This one-of-a-kind book also includes:
* New discussions on interest rate derivatives, bonds with embedded options, mutual funds, ETFs, pension plans, financial macroeconomics, orders and exchanges, and Excel functions for finance
* Supplementary materials to enhance the reader's ability to apply the material contained within
* A foundational exploration of interest rates and the time value of money
Fundamentals of Financial Instruments is the ideal resource for business school students at the undergraduate and graduate levels, as well as anyone studying financial management or the financial markets. It also belongs on the bookshelves of executive education students and finance professionals seeking a refresher on the fundamentals of their industry.
In the newly revised Second Edition of Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives, renowned finance trainer Sunil Parameswaran delivers a comprehensive introduction to the full range of financial products commonly offered in the financial markets.
Using clear, worked examples of everything from basic equity and debt securities to complex instruments--like derivatives and mortgage-backed securities - the author outlines the structure and dynamics of the free-market system and explores the environment in which financial instruments are traded. This one-of-a-kind book also includes:
* New discussions on interest rate derivatives, bonds with embedded options, mutual funds, ETFs, pension plans, financial macroeconomics, orders and exchanges, and Excel functions for finance
* Supplementary materials to enhance the reader's ability to apply the material contained within
* A foundational exploration of interest rates and the time value of money
Fundamentals of Financial Instruments is the ideal resource for business school students at the undergraduate and graduate levels, as well as anyone studying financial management or the financial markets. It also belongs on the bookshelves of executive education students and finance professionals seeking a refresher on the fundamentals of their industry.
Using clear, worked examples of everything from basic equity and debt securities to complex instruments--like derivatives and mortgage-backed securities - the author outlines the structure and dynamics of the free-market system and explores the environment in which financial instruments are traded. This one-of-a-kind book also includes:
* New discussions on interest rate derivatives, bonds with embedded options, mutual funds, ETFs, pension plans, financial macroeconomics, orders and exchanges, and Excel functions for finance
* Supplementary materials to enhance the reader's ability to apply the material contained within
* A foundational exploration of interest rates and the time value of money
Fundamentals of Financial Instruments is the ideal resource for business school students at the undergraduate and graduate levels, as well as anyone studying financial management or the financial markets. It also belongs on the bookshelves of executive education students and finance professionals seeking a refresher on the fundamentals of their industry.
Über den Autor
SUNIL PARAMESWARAN, PhD, is Director and CEO of Tarheel Consultancy Services, a corporate training and management consulting firm. His professional expertise includes securities markets, financial derivatives, fixed income securities, and international finance. He obtained his doctorate from the Fuqua School of Business at Duke University in North Carolina, USA.
Inhaltsverzeichnis
Preface xxiii
Preface to the First Edition xxiv
Acknowledgments xxv
About the Author xxvi
Chapter 1 An Introduction to Financial Institutions, Instruments, and Markets 1
The Role of an Economic System 1
A Command Economy 2
AMarket Economy 2
Classification of Economic Units 4
An Economy's Relationship with the ExternalWorld 6
The Balance of Trade 8
The Current Account Balance 8
Financial Assets 9
Money 10
Money as a Unit of Account or a Standard of Value 10
Money as a Medium of Exchange 11
Money as a Store of Value 11
Money Is Perfectly Liquid 11
Equity Shares 12
Debt Securities 12
Preferred Shares 14
Foreign Exchange 14
Derivatives 14
Forward and Futures Contracts 15
Options Contracts 16
Swaps 18
Mortgages and Mortgage-backed Securities 19
Hybrid Securities 19
Primary Markets and Secondary Markets 19
Exchanges and Over-the-Counter (OTC) Markets 21
Brokers and Dealers 22
The Need for Brokers and Dealers 23
Trading Positions 24
The Buy-side and the Sell-side 25
Investment Bankers 25
Direct and Indirect Markets 26
Mutual Funds 27
Money and Capital Markets 30
The Eurocurrency Market 31
The International Bond Market 32
Globalization of Equity Markets 34
Dual Listing 35
Fungibility 37
Arbitrage 37
Arbitrage with ADRs 38
GDRs 39
Risk 39
After the Trade - Clearing and Settlement 41
Dematerialization and the Role of a Depository 42
Custodial Services 43
Globalization - The New Mantra 43
Chapter 2 Mathematics of Finance 46
Interest Rates 46
The Real Rate of Interest 46
The Fisher Equation 48
Simple Interest & Compound Interest 49
Variables and Corresponding Symbols 50
Simple Interest 50
Compound Interest 51
Properties 53
Effective Versus Nominal Rates of Interest 55
A Symbolic Derivation 56
Principle of Equivalency 56
Continuous Compounding 57
Future Value 58
Present Value 59
The Mechanics of Present Value Calculation 59
Handling a Series of Cash Flows 60
The Internal Rate of Return 61
Evaluating an Investment 63
The Future Value Approach 63
The Present Value Approach 63
The Rate of Return Approach 63
Annuities: An Introduction 64
Present Value 64
Future Value 65
Annuity Due 66
Present Value 66
Future Value 67
Perpetuities 67
The Amortization Method 68
Amortization with a Balloon Payment 70
The Equal Principal Repayment Approach 71
Types of Interest Computation 71
The Simple Interest Approach 72
The Add-on Rate Approach 72
The Discount Technique 73
Loans with a Compensating Balance 73
Time Value of Money-related Functions in Excel 73
The Future Value (FV) Function in Excel 74
The Present Value Function in Excel 75
Computing the Present and Future Values of Annuities and Annuities Due in Excel 75
Amortization Schedules and Excel 76
Chapter 3 Equity Shares, Preferred Shares, and Stock Market Indices 78
Introduction 78
Par Value Versus Book Value 79
Accounting for a Stock Issue 80
Voting Rights 80
Statutory Versus Cumulative Voting 81
Proxies 81
Dividends 82
Dividend Yield 83
Dividend Reinvestment Plans 84
Stock Dividends 85
Treasury Stock 86
Accounting for Treasury Stock 86
Splits and Reverse Splits 87
Costs Associated with Splits and Stock Dividends 89
Preemptive Rights 89
Interpreting Stated Ratios 91
Handling Fractions 91
Physical Certificates Versus Book Entry 92
Tracking Stock 92
Report Cards 93
Types of Stocks 93
Interest-sensitive Stocks 93
Risk and Return and the Concept of Diversification 94
Preferred Shares 96
Callable Preferred Stock 97
Convertible Preferred Shares 97
Cumulative Preferred Shares 98
Adjustable-Rate Preferred Shares 100
Participating Preferred Shares 100
Dividend Discount Models 100
A General Valuation Model 101
The Constant Growth Model 102
The Two-Stage Model 102
The Three-Stage Model 103
The H Model 105
Stock Market Indices 105
Price-weighted Indices 105
Changing the Divisor 107
The Importance of Price 109
Value-weighted Indices 110
Changing the Divisor 111
Changing the Base Period Capitalization 113
EquallyWeighted Indices 113
Tracking Portfolios 114
Rebalancing a Tracking Portfolio 114
EquallyWeighted Portfolios 114
Price-weighted Portfolios 116
Rights Issues 117
Value-weighted Portfolios 117
Handling a Rights Issue 119
The Free-floating Methodology 120
Well-known Global Indices 121
Margin Trading and Short-selling 121
Terminology 121
Case A: The Market Rises 124
Case B: The Market Declines 124
Case A: The Market Rises 125
Case B: The Market Declines 125
Interest and Commissions 125
Case A: The Market Rises 126
Case B: The Market Declines 126
Maintenance Margin 126
Short-selling 127
Maintenance of a Short Position 130
Shorting Against the Box 131
The Risk Factor 131
The Economic Role of Short Sales 132
The Uptick Rule 132
Chapter 4 Bonds 134
Introduction 134
Terms Used in the Bond Market 136
Face Value 136
Term to Maturity 136
Coupon 136
Yield to Maturity 137
Valuation of a Bond 137
Par, Premium, and Discount Bonds 138
Evolution of the Price 139
Zero-coupon Bonds 140
Valuing a Bond in Between Coupon Dates 141
Day-Count Conventions 142
Actual-Actual 142
The Treasury's Approach 143
Corporate Bonds 144
Accrued Interest 144
Negative Accrued Interest 145
Yields 146
The Current Yield 147
Simple Yield to Maturity 148
Yield to Maturity 148
Approximate Yield to Maturity 149
Zero-coupon Bonds and the YTM 150
Analyzing the YTM 150
The Realized Compound Yield 152
Reinvestment and Zero-Coupon Bonds 152
The Holding Period Yield 153
Taxable Equivalent Yield 153
Credit Risk 154
Bond Insurance 156
Equivalence with Zero-coupon Bonds 156
Spot Rates 156
The Coupon Effect 157
Bootstrapping 158
Forward Rates 158
The Yield Curve and The Term Structure 159
Shapes of the Term Structure 159
Theories of the Term Structure 160
The Pure or Unbiased Expectations Hypothesis 160
The Liquidity Premium Hypothesis 160
The Money Substitute Hypothesis 161
The Market Segmentation Hypothesis 161
The Preferred Habitat Theory 161
The Short Rate 162
Floating Rate Bonds 163
Simple Margin 165
Bonds with Embedded Options 165
Callable Bonds 165
Yield to Call 166
Putable Bonds 167
Convertible Bonds 168
Using Short Rates to Value Bonds 168
Price Volatility 170
A Concise Formula 171
Duration and Price Volatility 171
Properties of Duration 172
Dollar Duration 172
Convexity 172
A Concise Formula 174
Dollar Convexity 175
Properties of Convexity 175
Immunization 175
Analysis 176
Treasury Auctions 177
When Issued Trading 179
Price Quotes 179
STRIPS 179
Inflation Indexed Bonds 180
Computing Price Given Yield and Vice Versa in Excel 182
Computing Duration in Excel 185
Chapter 5 Money Markets 187
Introduction 187
Market Supervision 190
The Federal Reserve System 190
Key Dates in the Case of Cash Market Instruments 191
The Modified Following Business Day Convention 192
The End/End Rule 192
The Interbank Market 193
Types of Loans 193
LIBOR 194
LIBID 194
SONIA 194
Transitioning from LIBOR 195
Interest Computation Methods 195
Term Money Market Deposits 197
Money Market Forward Rates 197
Federal Funds 198
Federal Funds Versus Clearinghouse Funds 199
Correspondent Banks: Nostro and Vostro Accounts 200
Treasury Bills 200
Reopenings 201
Yields on Discount Securities 202
Notation 202
Discount Rates and T-bill Prices 202
The Bond Equivalent Yield (BEY) 203
Case A: Tm
The Money Market Yield 205
Case B: Tm > 182 days 205
Holding Period Return 207
Value of an 01 208
Concept of Carry 208
Concept of a Tail 208
T-Bill Related Functions in Excel 209
TBILLPRICE 209
TBILLYIELD 210
TBILLEQ 210
DISC 210
Treasury Auctions 211
Types of Auctions 211
Results of an Auction 212
Primary Dealers and Open Market Operations 213
Repurchase Agreements 213
Reverse Repos 214
General Collateral Versus Special Repos 215
Margins 215
Sale and Buyback 217
Collateral 217
Repos and Open Market Operations 217
Negotiable CDs 218
Notation 218
Cost of a CD for the Issuing Bank 221
Term CDs 221
CDs Versus Money Market Time Deposits 224
Commercial Paper 224
Letters of Credit and Bank Guarantees 225
Yankee Paper 226
Credit Rating 227
Moody's Rating Scale 227
S&P's Rating Scale 227
Fitch's Rating Scale 228
Bills of Exchange 228
Documents Against Payment (DAP) Versus Documents Against Acceptance (DAA) Transactions 230
Eligible and Noneligible Bank Bills 230
Buying and Selling Bills 230
Bankers' Acceptance 231
Acceptance Credits [...]ocurrency Deposits 232
Appendix 234
Chapter 6 Forward and Futures Contracts 235
Introduction 235
Marking to Market for a Trader in Practice 242
Delivery Options 242
Profit Diagrams 242
Value at Risk 244
The Expected Shortfall 245
Spot-Futures Equivalence 246
Products and Exchanges 247
Cash-and-carry Arbitrage 247
Reverse Cash-and-carry Arbitrage 247
Repo and Reverse Repo Rates 248
Synthetic Securities 248
Valuation 248
The Case of Assets Making Payouts 249
Physical Assets 250
Net Carry 252
Backwardation and Contango 252
The Case of Multiple Deliverable Grades 253
Risk Arbitrage 255
The Case of Multiplicative Adjustment 255
The Case of Additive Adjustment 256
Trading Volume and Open Interest 259
Delivery 261
Cash Settlement 262
Hedging and Speculation 262
Rolling a Hedge 264
Tailing a Hedge 264
The Minimum Variance Hedge Ratio 265
Estimation of the Hedge Ratio and the Hedging Effectiveness 266
Cross-hedging 266
Speculation 266
Leverage 268
Contract Value 269
Forward Versus Futures Prices 270
Hedging the Rate of Return on a Stock Portfolio 271
Changing the Beta 272
Program Trading 273
Stock Picking 275
Portfolio Insurance 277
Importance of Futures 279
Chapter 7 Options Contracts 280
Introduction 280
Notation 282
Exercising Options 282
Moneyness 285
Exchange-Traded Options 286
Option Class and Option Series 287
FLEX Options 287
Contract Assignment 288
Adjusting for Corporate Actions 288
Nonnegative Option Premia...
Preface to the First Edition xxiv
Acknowledgments xxv
About the Author xxvi
Chapter 1 An Introduction to Financial Institutions, Instruments, and Markets 1
The Role of an Economic System 1
A Command Economy 2
AMarket Economy 2
Classification of Economic Units 4
An Economy's Relationship with the ExternalWorld 6
The Balance of Trade 8
The Current Account Balance 8
Financial Assets 9
Money 10
Money as a Unit of Account or a Standard of Value 10
Money as a Medium of Exchange 11
Money as a Store of Value 11
Money Is Perfectly Liquid 11
Equity Shares 12
Debt Securities 12
Preferred Shares 14
Foreign Exchange 14
Derivatives 14
Forward and Futures Contracts 15
Options Contracts 16
Swaps 18
Mortgages and Mortgage-backed Securities 19
Hybrid Securities 19
Primary Markets and Secondary Markets 19
Exchanges and Over-the-Counter (OTC) Markets 21
Brokers and Dealers 22
The Need for Brokers and Dealers 23
Trading Positions 24
The Buy-side and the Sell-side 25
Investment Bankers 25
Direct and Indirect Markets 26
Mutual Funds 27
Money and Capital Markets 30
The Eurocurrency Market 31
The International Bond Market 32
Globalization of Equity Markets 34
Dual Listing 35
Fungibility 37
Arbitrage 37
Arbitrage with ADRs 38
GDRs 39
Risk 39
After the Trade - Clearing and Settlement 41
Dematerialization and the Role of a Depository 42
Custodial Services 43
Globalization - The New Mantra 43
Chapter 2 Mathematics of Finance 46
Interest Rates 46
The Real Rate of Interest 46
The Fisher Equation 48
Simple Interest & Compound Interest 49
Variables and Corresponding Symbols 50
Simple Interest 50
Compound Interest 51
Properties 53
Effective Versus Nominal Rates of Interest 55
A Symbolic Derivation 56
Principle of Equivalency 56
Continuous Compounding 57
Future Value 58
Present Value 59
The Mechanics of Present Value Calculation 59
Handling a Series of Cash Flows 60
The Internal Rate of Return 61
Evaluating an Investment 63
The Future Value Approach 63
The Present Value Approach 63
The Rate of Return Approach 63
Annuities: An Introduction 64
Present Value 64
Future Value 65
Annuity Due 66
Present Value 66
Future Value 67
Perpetuities 67
The Amortization Method 68
Amortization with a Balloon Payment 70
The Equal Principal Repayment Approach 71
Types of Interest Computation 71
The Simple Interest Approach 72
The Add-on Rate Approach 72
The Discount Technique 73
Loans with a Compensating Balance 73
Time Value of Money-related Functions in Excel 73
The Future Value (FV) Function in Excel 74
The Present Value Function in Excel 75
Computing the Present and Future Values of Annuities and Annuities Due in Excel 75
Amortization Schedules and Excel 76
Chapter 3 Equity Shares, Preferred Shares, and Stock Market Indices 78
Introduction 78
Par Value Versus Book Value 79
Accounting for a Stock Issue 80
Voting Rights 80
Statutory Versus Cumulative Voting 81
Proxies 81
Dividends 82
Dividend Yield 83
Dividend Reinvestment Plans 84
Stock Dividends 85
Treasury Stock 86
Accounting for Treasury Stock 86
Splits and Reverse Splits 87
Costs Associated with Splits and Stock Dividends 89
Preemptive Rights 89
Interpreting Stated Ratios 91
Handling Fractions 91
Physical Certificates Versus Book Entry 92
Tracking Stock 92
Report Cards 93
Types of Stocks 93
Interest-sensitive Stocks 93
Risk and Return and the Concept of Diversification 94
Preferred Shares 96
Callable Preferred Stock 97
Convertible Preferred Shares 97
Cumulative Preferred Shares 98
Adjustable-Rate Preferred Shares 100
Participating Preferred Shares 100
Dividend Discount Models 100
A General Valuation Model 101
The Constant Growth Model 102
The Two-Stage Model 102
The Three-Stage Model 103
The H Model 105
Stock Market Indices 105
Price-weighted Indices 105
Changing the Divisor 107
The Importance of Price 109
Value-weighted Indices 110
Changing the Divisor 111
Changing the Base Period Capitalization 113
EquallyWeighted Indices 113
Tracking Portfolios 114
Rebalancing a Tracking Portfolio 114
EquallyWeighted Portfolios 114
Price-weighted Portfolios 116
Rights Issues 117
Value-weighted Portfolios 117
Handling a Rights Issue 119
The Free-floating Methodology 120
Well-known Global Indices 121
Margin Trading and Short-selling 121
Terminology 121
Case A: The Market Rises 124
Case B: The Market Declines 124
Case A: The Market Rises 125
Case B: The Market Declines 125
Interest and Commissions 125
Case A: The Market Rises 126
Case B: The Market Declines 126
Maintenance Margin 126
Short-selling 127
Maintenance of a Short Position 130
Shorting Against the Box 131
The Risk Factor 131
The Economic Role of Short Sales 132
The Uptick Rule 132
Chapter 4 Bonds 134
Introduction 134
Terms Used in the Bond Market 136
Face Value 136
Term to Maturity 136
Coupon 136
Yield to Maturity 137
Valuation of a Bond 137
Par, Premium, and Discount Bonds 138
Evolution of the Price 139
Zero-coupon Bonds 140
Valuing a Bond in Between Coupon Dates 141
Day-Count Conventions 142
Actual-Actual 142
The Treasury's Approach 143
Corporate Bonds 144
Accrued Interest 144
Negative Accrued Interest 145
Yields 146
The Current Yield 147
Simple Yield to Maturity 148
Yield to Maturity 148
Approximate Yield to Maturity 149
Zero-coupon Bonds and the YTM 150
Analyzing the YTM 150
The Realized Compound Yield 152
Reinvestment and Zero-Coupon Bonds 152
The Holding Period Yield 153
Taxable Equivalent Yield 153
Credit Risk 154
Bond Insurance 156
Equivalence with Zero-coupon Bonds 156
Spot Rates 156
The Coupon Effect 157
Bootstrapping 158
Forward Rates 158
The Yield Curve and The Term Structure 159
Shapes of the Term Structure 159
Theories of the Term Structure 160
The Pure or Unbiased Expectations Hypothesis 160
The Liquidity Premium Hypothesis 160
The Money Substitute Hypothesis 161
The Market Segmentation Hypothesis 161
The Preferred Habitat Theory 161
The Short Rate 162
Floating Rate Bonds 163
Simple Margin 165
Bonds with Embedded Options 165
Callable Bonds 165
Yield to Call 166
Putable Bonds 167
Convertible Bonds 168
Using Short Rates to Value Bonds 168
Price Volatility 170
A Concise Formula 171
Duration and Price Volatility 171
Properties of Duration 172
Dollar Duration 172
Convexity 172
A Concise Formula 174
Dollar Convexity 175
Properties of Convexity 175
Immunization 175
Analysis 176
Treasury Auctions 177
When Issued Trading 179
Price Quotes 179
STRIPS 179
Inflation Indexed Bonds 180
Computing Price Given Yield and Vice Versa in Excel 182
Computing Duration in Excel 185
Chapter 5 Money Markets 187
Introduction 187
Market Supervision 190
The Federal Reserve System 190
Key Dates in the Case of Cash Market Instruments 191
The Modified Following Business Day Convention 192
The End/End Rule 192
The Interbank Market 193
Types of Loans 193
LIBOR 194
LIBID 194
SONIA 194
Transitioning from LIBOR 195
Interest Computation Methods 195
Term Money Market Deposits 197
Money Market Forward Rates 197
Federal Funds 198
Federal Funds Versus Clearinghouse Funds 199
Correspondent Banks: Nostro and Vostro Accounts 200
Treasury Bills 200
Reopenings 201
Yields on Discount Securities 202
Notation 202
Discount Rates and T-bill Prices 202
The Bond Equivalent Yield (BEY) 203
Case A: Tm
The Money Market Yield 205
Case B: Tm > 182 days 205
Holding Period Return 207
Value of an 01 208
Concept of Carry 208
Concept of a Tail 208
T-Bill Related Functions in Excel 209
TBILLPRICE 209
TBILLYIELD 210
TBILLEQ 210
DISC 210
Treasury Auctions 211
Types of Auctions 211
Results of an Auction 212
Primary Dealers and Open Market Operations 213
Repurchase Agreements 213
Reverse Repos 214
General Collateral Versus Special Repos 215
Margins 215
Sale and Buyback 217
Collateral 217
Repos and Open Market Operations 217
Negotiable CDs 218
Notation 218
Cost of a CD for the Issuing Bank 221
Term CDs 221
CDs Versus Money Market Time Deposits 224
Commercial Paper 224
Letters of Credit and Bank Guarantees 225
Yankee Paper 226
Credit Rating 227
Moody's Rating Scale 227
S&P's Rating Scale 227
Fitch's Rating Scale 228
Bills of Exchange 228
Documents Against Payment (DAP) Versus Documents Against Acceptance (DAA) Transactions 230
Eligible and Noneligible Bank Bills 230
Buying and Selling Bills 230
Bankers' Acceptance 231
Acceptance Credits [...]ocurrency Deposits 232
Appendix 234
Chapter 6 Forward and Futures Contracts 235
Introduction 235
Marking to Market for a Trader in Practice 242
Delivery Options 242
Profit Diagrams 242
Value at Risk 244
The Expected Shortfall 245
Spot-Futures Equivalence 246
Products and Exchanges 247
Cash-and-carry Arbitrage 247
Reverse Cash-and-carry Arbitrage 247
Repo and Reverse Repo Rates 248
Synthetic Securities 248
Valuation 248
The Case of Assets Making Payouts 249
Physical Assets 250
Net Carry 252
Backwardation and Contango 252
The Case of Multiple Deliverable Grades 253
Risk Arbitrage 255
The Case of Multiplicative Adjustment 255
The Case of Additive Adjustment 256
Trading Volume and Open Interest 259
Delivery 261
Cash Settlement 262
Hedging and Speculation 262
Rolling a Hedge 264
Tailing a Hedge 264
The Minimum Variance Hedge Ratio 265
Estimation of the Hedge Ratio and the Hedging Effectiveness 266
Cross-hedging 266
Speculation 266
Leverage 268
Contract Value 269
Forward Versus Futures Prices 270
Hedging the Rate of Return on a Stock Portfolio 271
Changing the Beta 272
Program Trading 273
Stock Picking 275
Portfolio Insurance 277
Importance of Futures 279
Chapter 7 Options Contracts 280
Introduction 280
Notation 282
Exercising Options 282
Moneyness 285
Exchange-Traded Options 286
Option Class and Option Series 287
FLEX Options 287
Contract Assignment 288
Adjusting for Corporate Actions 288
Nonnegative Option Premia...
Details
| Erscheinungsjahr: | 2022 |
|---|---|
| Fachbereich: | Management |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| Seiten: | 560 |
| Inhalt: | 560 S. |
| ISBN-13: | 9781119816614 |
| ISBN-10: | 1119816610 |
| Sprache: | Englisch |
| Einband: | Gebunden |
| Autor: | Parameswaran, Sunil K |
| Auflage: | 2nd edition |
| Hersteller: | Wiley |
| Maße: | 260 x 183 x 35 mm |
| Von/Mit: | Sunil K Parameswaran |
| Erscheinungsdatum: | 22.03.2022 |
| Gewicht: | 1,241 kg |
Über den Autor
SUNIL PARAMESWARAN, PhD, is Director and CEO of Tarheel Consultancy Services, a corporate training and management consulting firm. His professional expertise includes securities markets, financial derivatives, fixed income securities, and international finance. He obtained his doctorate from the Fuqua School of Business at Duke University in North Carolina, USA.
Inhaltsverzeichnis
Preface xxiii
Preface to the First Edition xxiv
Acknowledgments xxv
About the Author xxvi
Chapter 1 An Introduction to Financial Institutions, Instruments, and Markets 1
The Role of an Economic System 1
A Command Economy 2
AMarket Economy 2
Classification of Economic Units 4
An Economy's Relationship with the ExternalWorld 6
The Balance of Trade 8
The Current Account Balance 8
Financial Assets 9
Money 10
Money as a Unit of Account or a Standard of Value 10
Money as a Medium of Exchange 11
Money as a Store of Value 11
Money Is Perfectly Liquid 11
Equity Shares 12
Debt Securities 12
Preferred Shares 14
Foreign Exchange 14
Derivatives 14
Forward and Futures Contracts 15
Options Contracts 16
Swaps 18
Mortgages and Mortgage-backed Securities 19
Hybrid Securities 19
Primary Markets and Secondary Markets 19
Exchanges and Over-the-Counter (OTC) Markets 21
Brokers and Dealers 22
The Need for Brokers and Dealers 23
Trading Positions 24
The Buy-side and the Sell-side 25
Investment Bankers 25
Direct and Indirect Markets 26
Mutual Funds 27
Money and Capital Markets 30
The Eurocurrency Market 31
The International Bond Market 32
Globalization of Equity Markets 34
Dual Listing 35
Fungibility 37
Arbitrage 37
Arbitrage with ADRs 38
GDRs 39
Risk 39
After the Trade - Clearing and Settlement 41
Dematerialization and the Role of a Depository 42
Custodial Services 43
Globalization - The New Mantra 43
Chapter 2 Mathematics of Finance 46
Interest Rates 46
The Real Rate of Interest 46
The Fisher Equation 48
Simple Interest & Compound Interest 49
Variables and Corresponding Symbols 50
Simple Interest 50
Compound Interest 51
Properties 53
Effective Versus Nominal Rates of Interest 55
A Symbolic Derivation 56
Principle of Equivalency 56
Continuous Compounding 57
Future Value 58
Present Value 59
The Mechanics of Present Value Calculation 59
Handling a Series of Cash Flows 60
The Internal Rate of Return 61
Evaluating an Investment 63
The Future Value Approach 63
The Present Value Approach 63
The Rate of Return Approach 63
Annuities: An Introduction 64
Present Value 64
Future Value 65
Annuity Due 66
Present Value 66
Future Value 67
Perpetuities 67
The Amortization Method 68
Amortization with a Balloon Payment 70
The Equal Principal Repayment Approach 71
Types of Interest Computation 71
The Simple Interest Approach 72
The Add-on Rate Approach 72
The Discount Technique 73
Loans with a Compensating Balance 73
Time Value of Money-related Functions in Excel 73
The Future Value (FV) Function in Excel 74
The Present Value Function in Excel 75
Computing the Present and Future Values of Annuities and Annuities Due in Excel 75
Amortization Schedules and Excel 76
Chapter 3 Equity Shares, Preferred Shares, and Stock Market Indices 78
Introduction 78
Par Value Versus Book Value 79
Accounting for a Stock Issue 80
Voting Rights 80
Statutory Versus Cumulative Voting 81
Proxies 81
Dividends 82
Dividend Yield 83
Dividend Reinvestment Plans 84
Stock Dividends 85
Treasury Stock 86
Accounting for Treasury Stock 86
Splits and Reverse Splits 87
Costs Associated with Splits and Stock Dividends 89
Preemptive Rights 89
Interpreting Stated Ratios 91
Handling Fractions 91
Physical Certificates Versus Book Entry 92
Tracking Stock 92
Report Cards 93
Types of Stocks 93
Interest-sensitive Stocks 93
Risk and Return and the Concept of Diversification 94
Preferred Shares 96
Callable Preferred Stock 97
Convertible Preferred Shares 97
Cumulative Preferred Shares 98
Adjustable-Rate Preferred Shares 100
Participating Preferred Shares 100
Dividend Discount Models 100
A General Valuation Model 101
The Constant Growth Model 102
The Two-Stage Model 102
The Three-Stage Model 103
The H Model 105
Stock Market Indices 105
Price-weighted Indices 105
Changing the Divisor 107
The Importance of Price 109
Value-weighted Indices 110
Changing the Divisor 111
Changing the Base Period Capitalization 113
EquallyWeighted Indices 113
Tracking Portfolios 114
Rebalancing a Tracking Portfolio 114
EquallyWeighted Portfolios 114
Price-weighted Portfolios 116
Rights Issues 117
Value-weighted Portfolios 117
Handling a Rights Issue 119
The Free-floating Methodology 120
Well-known Global Indices 121
Margin Trading and Short-selling 121
Terminology 121
Case A: The Market Rises 124
Case B: The Market Declines 124
Case A: The Market Rises 125
Case B: The Market Declines 125
Interest and Commissions 125
Case A: The Market Rises 126
Case B: The Market Declines 126
Maintenance Margin 126
Short-selling 127
Maintenance of a Short Position 130
Shorting Against the Box 131
The Risk Factor 131
The Economic Role of Short Sales 132
The Uptick Rule 132
Chapter 4 Bonds 134
Introduction 134
Terms Used in the Bond Market 136
Face Value 136
Term to Maturity 136
Coupon 136
Yield to Maturity 137
Valuation of a Bond 137
Par, Premium, and Discount Bonds 138
Evolution of the Price 139
Zero-coupon Bonds 140
Valuing a Bond in Between Coupon Dates 141
Day-Count Conventions 142
Actual-Actual 142
The Treasury's Approach 143
Corporate Bonds 144
Accrued Interest 144
Negative Accrued Interest 145
Yields 146
The Current Yield 147
Simple Yield to Maturity 148
Yield to Maturity 148
Approximate Yield to Maturity 149
Zero-coupon Bonds and the YTM 150
Analyzing the YTM 150
The Realized Compound Yield 152
Reinvestment and Zero-Coupon Bonds 152
The Holding Period Yield 153
Taxable Equivalent Yield 153
Credit Risk 154
Bond Insurance 156
Equivalence with Zero-coupon Bonds 156
Spot Rates 156
The Coupon Effect 157
Bootstrapping 158
Forward Rates 158
The Yield Curve and The Term Structure 159
Shapes of the Term Structure 159
Theories of the Term Structure 160
The Pure or Unbiased Expectations Hypothesis 160
The Liquidity Premium Hypothesis 160
The Money Substitute Hypothesis 161
The Market Segmentation Hypothesis 161
The Preferred Habitat Theory 161
The Short Rate 162
Floating Rate Bonds 163
Simple Margin 165
Bonds with Embedded Options 165
Callable Bonds 165
Yield to Call 166
Putable Bonds 167
Convertible Bonds 168
Using Short Rates to Value Bonds 168
Price Volatility 170
A Concise Formula 171
Duration and Price Volatility 171
Properties of Duration 172
Dollar Duration 172
Convexity 172
A Concise Formula 174
Dollar Convexity 175
Properties of Convexity 175
Immunization 175
Analysis 176
Treasury Auctions 177
When Issued Trading 179
Price Quotes 179
STRIPS 179
Inflation Indexed Bonds 180
Computing Price Given Yield and Vice Versa in Excel 182
Computing Duration in Excel 185
Chapter 5 Money Markets 187
Introduction 187
Market Supervision 190
The Federal Reserve System 190
Key Dates in the Case of Cash Market Instruments 191
The Modified Following Business Day Convention 192
The End/End Rule 192
The Interbank Market 193
Types of Loans 193
LIBOR 194
LIBID 194
SONIA 194
Transitioning from LIBOR 195
Interest Computation Methods 195
Term Money Market Deposits 197
Money Market Forward Rates 197
Federal Funds 198
Federal Funds Versus Clearinghouse Funds 199
Correspondent Banks: Nostro and Vostro Accounts 200
Treasury Bills 200
Reopenings 201
Yields on Discount Securities 202
Notation 202
Discount Rates and T-bill Prices 202
The Bond Equivalent Yield (BEY) 203
Case A: Tm
The Money Market Yield 205
Case B: Tm > 182 days 205
Holding Period Return 207
Value of an 01 208
Concept of Carry 208
Concept of a Tail 208
T-Bill Related Functions in Excel 209
TBILLPRICE 209
TBILLYIELD 210
TBILLEQ 210
DISC 210
Treasury Auctions 211
Types of Auctions 211
Results of an Auction 212
Primary Dealers and Open Market Operations 213
Repurchase Agreements 213
Reverse Repos 214
General Collateral Versus Special Repos 215
Margins 215
Sale and Buyback 217
Collateral 217
Repos and Open Market Operations 217
Negotiable CDs 218
Notation 218
Cost of a CD for the Issuing Bank 221
Term CDs 221
CDs Versus Money Market Time Deposits 224
Commercial Paper 224
Letters of Credit and Bank Guarantees 225
Yankee Paper 226
Credit Rating 227
Moody's Rating Scale 227
S&P's Rating Scale 227
Fitch's Rating Scale 228
Bills of Exchange 228
Documents Against Payment (DAP) Versus Documents Against Acceptance (DAA) Transactions 230
Eligible and Noneligible Bank Bills 230
Buying and Selling Bills 230
Bankers' Acceptance 231
Acceptance Credits [...]ocurrency Deposits 232
Appendix 234
Chapter 6 Forward and Futures Contracts 235
Introduction 235
Marking to Market for a Trader in Practice 242
Delivery Options 242
Profit Diagrams 242
Value at Risk 244
The Expected Shortfall 245
Spot-Futures Equivalence 246
Products and Exchanges 247
Cash-and-carry Arbitrage 247
Reverse Cash-and-carry Arbitrage 247
Repo and Reverse Repo Rates 248
Synthetic Securities 248
Valuation 248
The Case of Assets Making Payouts 249
Physical Assets 250
Net Carry 252
Backwardation and Contango 252
The Case of Multiple Deliverable Grades 253
Risk Arbitrage 255
The Case of Multiplicative Adjustment 255
The Case of Additive Adjustment 256
Trading Volume and Open Interest 259
Delivery 261
Cash Settlement 262
Hedging and Speculation 262
Rolling a Hedge 264
Tailing a Hedge 264
The Minimum Variance Hedge Ratio 265
Estimation of the Hedge Ratio and the Hedging Effectiveness 266
Cross-hedging 266
Speculation 266
Leverage 268
Contract Value 269
Forward Versus Futures Prices 270
Hedging the Rate of Return on a Stock Portfolio 271
Changing the Beta 272
Program Trading 273
Stock Picking 275
Portfolio Insurance 277
Importance of Futures 279
Chapter 7 Options Contracts 280
Introduction 280
Notation 282
Exercising Options 282
Moneyness 285
Exchange-Traded Options 286
Option Class and Option Series 287
FLEX Options 287
Contract Assignment 288
Adjusting for Corporate Actions 288
Nonnegative Option Premia...
Preface to the First Edition xxiv
Acknowledgments xxv
About the Author xxvi
Chapter 1 An Introduction to Financial Institutions, Instruments, and Markets 1
The Role of an Economic System 1
A Command Economy 2
AMarket Economy 2
Classification of Economic Units 4
An Economy's Relationship with the ExternalWorld 6
The Balance of Trade 8
The Current Account Balance 8
Financial Assets 9
Money 10
Money as a Unit of Account or a Standard of Value 10
Money as a Medium of Exchange 11
Money as a Store of Value 11
Money Is Perfectly Liquid 11
Equity Shares 12
Debt Securities 12
Preferred Shares 14
Foreign Exchange 14
Derivatives 14
Forward and Futures Contracts 15
Options Contracts 16
Swaps 18
Mortgages and Mortgage-backed Securities 19
Hybrid Securities 19
Primary Markets and Secondary Markets 19
Exchanges and Over-the-Counter (OTC) Markets 21
Brokers and Dealers 22
The Need for Brokers and Dealers 23
Trading Positions 24
The Buy-side and the Sell-side 25
Investment Bankers 25
Direct and Indirect Markets 26
Mutual Funds 27
Money and Capital Markets 30
The Eurocurrency Market 31
The International Bond Market 32
Globalization of Equity Markets 34
Dual Listing 35
Fungibility 37
Arbitrage 37
Arbitrage with ADRs 38
GDRs 39
Risk 39
After the Trade - Clearing and Settlement 41
Dematerialization and the Role of a Depository 42
Custodial Services 43
Globalization - The New Mantra 43
Chapter 2 Mathematics of Finance 46
Interest Rates 46
The Real Rate of Interest 46
The Fisher Equation 48
Simple Interest & Compound Interest 49
Variables and Corresponding Symbols 50
Simple Interest 50
Compound Interest 51
Properties 53
Effective Versus Nominal Rates of Interest 55
A Symbolic Derivation 56
Principle of Equivalency 56
Continuous Compounding 57
Future Value 58
Present Value 59
The Mechanics of Present Value Calculation 59
Handling a Series of Cash Flows 60
The Internal Rate of Return 61
Evaluating an Investment 63
The Future Value Approach 63
The Present Value Approach 63
The Rate of Return Approach 63
Annuities: An Introduction 64
Present Value 64
Future Value 65
Annuity Due 66
Present Value 66
Future Value 67
Perpetuities 67
The Amortization Method 68
Amortization with a Balloon Payment 70
The Equal Principal Repayment Approach 71
Types of Interest Computation 71
The Simple Interest Approach 72
The Add-on Rate Approach 72
The Discount Technique 73
Loans with a Compensating Balance 73
Time Value of Money-related Functions in Excel 73
The Future Value (FV) Function in Excel 74
The Present Value Function in Excel 75
Computing the Present and Future Values of Annuities and Annuities Due in Excel 75
Amortization Schedules and Excel 76
Chapter 3 Equity Shares, Preferred Shares, and Stock Market Indices 78
Introduction 78
Par Value Versus Book Value 79
Accounting for a Stock Issue 80
Voting Rights 80
Statutory Versus Cumulative Voting 81
Proxies 81
Dividends 82
Dividend Yield 83
Dividend Reinvestment Plans 84
Stock Dividends 85
Treasury Stock 86
Accounting for Treasury Stock 86
Splits and Reverse Splits 87
Costs Associated with Splits and Stock Dividends 89
Preemptive Rights 89
Interpreting Stated Ratios 91
Handling Fractions 91
Physical Certificates Versus Book Entry 92
Tracking Stock 92
Report Cards 93
Types of Stocks 93
Interest-sensitive Stocks 93
Risk and Return and the Concept of Diversification 94
Preferred Shares 96
Callable Preferred Stock 97
Convertible Preferred Shares 97
Cumulative Preferred Shares 98
Adjustable-Rate Preferred Shares 100
Participating Preferred Shares 100
Dividend Discount Models 100
A General Valuation Model 101
The Constant Growth Model 102
The Two-Stage Model 102
The Three-Stage Model 103
The H Model 105
Stock Market Indices 105
Price-weighted Indices 105
Changing the Divisor 107
The Importance of Price 109
Value-weighted Indices 110
Changing the Divisor 111
Changing the Base Period Capitalization 113
EquallyWeighted Indices 113
Tracking Portfolios 114
Rebalancing a Tracking Portfolio 114
EquallyWeighted Portfolios 114
Price-weighted Portfolios 116
Rights Issues 117
Value-weighted Portfolios 117
Handling a Rights Issue 119
The Free-floating Methodology 120
Well-known Global Indices 121
Margin Trading and Short-selling 121
Terminology 121
Case A: The Market Rises 124
Case B: The Market Declines 124
Case A: The Market Rises 125
Case B: The Market Declines 125
Interest and Commissions 125
Case A: The Market Rises 126
Case B: The Market Declines 126
Maintenance Margin 126
Short-selling 127
Maintenance of a Short Position 130
Shorting Against the Box 131
The Risk Factor 131
The Economic Role of Short Sales 132
The Uptick Rule 132
Chapter 4 Bonds 134
Introduction 134
Terms Used in the Bond Market 136
Face Value 136
Term to Maturity 136
Coupon 136
Yield to Maturity 137
Valuation of a Bond 137
Par, Premium, and Discount Bonds 138
Evolution of the Price 139
Zero-coupon Bonds 140
Valuing a Bond in Between Coupon Dates 141
Day-Count Conventions 142
Actual-Actual 142
The Treasury's Approach 143
Corporate Bonds 144
Accrued Interest 144
Negative Accrued Interest 145
Yields 146
The Current Yield 147
Simple Yield to Maturity 148
Yield to Maturity 148
Approximate Yield to Maturity 149
Zero-coupon Bonds and the YTM 150
Analyzing the YTM 150
The Realized Compound Yield 152
Reinvestment and Zero-Coupon Bonds 152
The Holding Period Yield 153
Taxable Equivalent Yield 153
Credit Risk 154
Bond Insurance 156
Equivalence with Zero-coupon Bonds 156
Spot Rates 156
The Coupon Effect 157
Bootstrapping 158
Forward Rates 158
The Yield Curve and The Term Structure 159
Shapes of the Term Structure 159
Theories of the Term Structure 160
The Pure or Unbiased Expectations Hypothesis 160
The Liquidity Premium Hypothesis 160
The Money Substitute Hypothesis 161
The Market Segmentation Hypothesis 161
The Preferred Habitat Theory 161
The Short Rate 162
Floating Rate Bonds 163
Simple Margin 165
Bonds with Embedded Options 165
Callable Bonds 165
Yield to Call 166
Putable Bonds 167
Convertible Bonds 168
Using Short Rates to Value Bonds 168
Price Volatility 170
A Concise Formula 171
Duration and Price Volatility 171
Properties of Duration 172
Dollar Duration 172
Convexity 172
A Concise Formula 174
Dollar Convexity 175
Properties of Convexity 175
Immunization 175
Analysis 176
Treasury Auctions 177
When Issued Trading 179
Price Quotes 179
STRIPS 179
Inflation Indexed Bonds 180
Computing Price Given Yield and Vice Versa in Excel 182
Computing Duration in Excel 185
Chapter 5 Money Markets 187
Introduction 187
Market Supervision 190
The Federal Reserve System 190
Key Dates in the Case of Cash Market Instruments 191
The Modified Following Business Day Convention 192
The End/End Rule 192
The Interbank Market 193
Types of Loans 193
LIBOR 194
LIBID 194
SONIA 194
Transitioning from LIBOR 195
Interest Computation Methods 195
Term Money Market Deposits 197
Money Market Forward Rates 197
Federal Funds 198
Federal Funds Versus Clearinghouse Funds 199
Correspondent Banks: Nostro and Vostro Accounts 200
Treasury Bills 200
Reopenings 201
Yields on Discount Securities 202
Notation 202
Discount Rates and T-bill Prices 202
The Bond Equivalent Yield (BEY) 203
Case A: Tm
The Money Market Yield 205
Case B: Tm > 182 days 205
Holding Period Return 207
Value of an 01 208
Concept of Carry 208
Concept of a Tail 208
T-Bill Related Functions in Excel 209
TBILLPRICE 209
TBILLYIELD 210
TBILLEQ 210
DISC 210
Treasury Auctions 211
Types of Auctions 211
Results of an Auction 212
Primary Dealers and Open Market Operations 213
Repurchase Agreements 213
Reverse Repos 214
General Collateral Versus Special Repos 215
Margins 215
Sale and Buyback 217
Collateral 217
Repos and Open Market Operations 217
Negotiable CDs 218
Notation 218
Cost of a CD for the Issuing Bank 221
Term CDs 221
CDs Versus Money Market Time Deposits 224
Commercial Paper 224
Letters of Credit and Bank Guarantees 225
Yankee Paper 226
Credit Rating 227
Moody's Rating Scale 227
S&P's Rating Scale 227
Fitch's Rating Scale 228
Bills of Exchange 228
Documents Against Payment (DAP) Versus Documents Against Acceptance (DAA) Transactions 230
Eligible and Noneligible Bank Bills 230
Buying and Selling Bills 230
Bankers' Acceptance 231
Acceptance Credits [...]ocurrency Deposits 232
Appendix 234
Chapter 6 Forward and Futures Contracts 235
Introduction 235
Marking to Market for a Trader in Practice 242
Delivery Options 242
Profit Diagrams 242
Value at Risk 244
The Expected Shortfall 245
Spot-Futures Equivalence 246
Products and Exchanges 247
Cash-and-carry Arbitrage 247
Reverse Cash-and-carry Arbitrage 247
Repo and Reverse Repo Rates 248
Synthetic Securities 248
Valuation 248
The Case of Assets Making Payouts 249
Physical Assets 250
Net Carry 252
Backwardation and Contango 252
The Case of Multiple Deliverable Grades 253
Risk Arbitrage 255
The Case of Multiplicative Adjustment 255
The Case of Additive Adjustment 256
Trading Volume and Open Interest 259
Delivery 261
Cash Settlement 262
Hedging and Speculation 262
Rolling a Hedge 264
Tailing a Hedge 264
The Minimum Variance Hedge Ratio 265
Estimation of the Hedge Ratio and the Hedging Effectiveness 266
Cross-hedging 266
Speculation 266
Leverage 268
Contract Value 269
Forward Versus Futures Prices 270
Hedging the Rate of Return on a Stock Portfolio 271
Changing the Beta 272
Program Trading 273
Stock Picking 275
Portfolio Insurance 277
Importance of Futures 279
Chapter 7 Options Contracts 280
Introduction 280
Notation 282
Exercising Options 282
Moneyness 285
Exchange-Traded Options 286
Option Class and Option Series 287
FLEX Options 287
Contract Assignment 288
Adjusting for Corporate Actions 288
Nonnegative Option Premia...
Details
| Erscheinungsjahr: | 2022 |
|---|---|
| Fachbereich: | Management |
| Genre: | Wirtschaft |
| Rubrik: | Recht & Wirtschaft |
| Medium: | Buch |
| Seiten: | 560 |
| Inhalt: | 560 S. |
| ISBN-13: | 9781119816614 |
| ISBN-10: | 1119816610 |
| Sprache: | Englisch |
| Einband: | Gebunden |
| Autor: | Parameswaran, Sunil K |
| Auflage: | 2nd edition |
| Hersteller: | Wiley |
| Maße: | 260 x 183 x 35 mm |
| Von/Mit: | Sunil K Parameswaran |
| Erscheinungsdatum: | 22.03.2022 |
| Gewicht: | 1,241 kg |
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