Introduction to Derivative Financial Instruments: Bonds, Swaps, Options, and Hedging

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ISBN: 9780071546638 | 0071546634
Cover: Hardcover
Copyright: 4/3/2008

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Written by a renowned corporate financial advisor, this timely guide offers a comprehensive treatment of derivative financial instruments, fully covering bonds, interest swaps, options, futures, Forex, and more. The author explains the strategic use of derivatives, their place in portfolio management, hedging, and the importance of managing risk.

Preface	p. xi
Innovation in Finance Through Derivative Instruments
Financial Innovation	p. 3
Service Science	p. 3
Motivation for Financial Innovation	p. 5
The Technology Side of Service Science	p. 8
Entrepreneurship	p. 12
Paper Ships: A Case Study	p. 16
Forward Freight Agreements and the Macromarkets	p. 19
Risk Management	p. 22
Derivatives	p. 29
Derivatives Definition by the FASB	p. 29
Derivatives Definition by the IASB	p. 33
Notional Principal Amount and Underlying	p. 35
Options, Futures, Forwards, and Swaps in a Nutshell	p. 39
Exotic Derivatives	p. 43
Synthetic Financial Instruments	p. 45
Structured Financial Instruments	p. 49
Strategic Use of Derivatives	p. 53
Capitalizing on Creativity	p. 53
The Customization of Financial Products	p. 56
Over-the-Counter Derivatives Transactions	p. 59
Risk Appetite and Risk Aversion	p. 63
Learning a Lesson from George Soros	p. 67
Learning a Lesson from Henry Kaufman	p. 69
High Technology for Processes and Products	p. 72
Hedging	p. 75
The Search for Effective Hedges	p. 75
Hedging Practices	p. 78
Types of Hedging Instruments	p. 82
Right and Wrong Hedges	p. 84
Management Intent	p. 88
Hedge Accounting	p. 91
Beware of Assumed Exposure and Illiquidity
Liquidity, Solvency, and Derivatives Exposure	p. 97
Liquidity and Solvency	p. 97
A Quadrillion in Derivatives Exposure	p. 100
Unexpected Consequences	p. 104
The Criticality of Market Positions	p. 108
Free Fall of the Bond Market in 1994: A Case Study	p. 111
Bubbles and Ponzi Games	p. 113
Impact of Megamergers on Exposure	p. 116
The Daunting Task of Capital Adequacy	p. 121
Capital Adequacy Dynamics	p. 121
Management Accounting for Recognized but Not Realized Gains and Losses	p. 124
Capital at Risk and Level of Confidence	p. 128
Quantitative Impact Studies, and Second Thoughts about Capital Adequacy	p. 133
Basel II's Unexpected Headwinds	p. 136
The Effect of Leveraging on Capital Adequacy	p. 141
The Origin of Legislation for Marking-to-Market	p. 144
Options
The Use of Options	p. 149
The Strategic Use of Options	p. 149
Intrinsic Value and Time Value	p. 152
Styles of Options: American, European, Asian, and Others	p. 155
Complex Options	p. 158
Straddles, Strangles, and Butterflies	p. 162
Interest Rate, Yield-Based, and Foreign Currency Options	p. 165
Option Spreading; Long Calls, Short Calls	p. 169
Option Hedges	p. 172
Risks Associated with Options	p. 175
The Pricing of Options	p. 179
Pricing Derivatives: A General Perspective	p. 179
Object of Prediction and Effect of Volatility	p. 182
Options Premiums and Options Pricing	p. 186
Binomial and Lognormal Models	p. 189
The Black-Scholes Model	p. 194
Advantages and Shortcomings of the Black-Scholes Model	p. 197
Testing the Black-Scholes Model	p. 200
Option Traders, Buyers, and Writers	p. 203
Trading Derivative Instruments	p. 203
Options Trading	p. 206
Flexibly Structured Options	p. 209
Buyers' Strategies	p. 211
Writing Options	p. 214
Trading in Synthetic Options	p. 217
Spreads Trading	p. 219
Exercise, Settlement, and Technical Support	p. 222
Risk Control for Options
The Greeks: Delta, Gamma, Theta, Kappa, Rho	p. 227
The Challenge of Measuring Risk and Return	p. 227
The Greeks in a Nutshell	p. 230
Delta Hedging	p. 233
Gamma Hedging	p. 237
Theta, Kappa, Rho	p. 239
Credit Risk and Market Risk with Options	p. 243
Selling Market Risk and Buying Credit Risk	p. 243
Market Risk Control in a Nutshell	p. 246
GM's Put Options for Fiat Auto: A Case Study	p. 250
Credit Risk Control in a Nutshell	p. 251
Credit Improvement and Credit Deterioration	p. 254
The Mispricing of Credit Risk	p. 257
Credit-Risk-Free Debt Options	p. 261
Credit Spreads and Credit Options	p. 264
Futures, Forwards, and Swaps
Futures and Forwards	p. 271
Futures, Forwards, and the Investor	p. 271
Futures and Margin Requirements	p. 274
Futures Trading: A Case Study with Oil	p. 276
Price Discovery through Futures	p. 279
Forward Contracts	p. 282
Forward Positions: An Example with FRAs	p. 285
Synthetic Futures	p. 289
Warrants	p. 290
Swaps	p. 295
Swaps Defined	p. 295
Players, Milestones, and Flavors of Standard Swaps	p. 298
Interest Rate Swaps	p. 301
Swap Spreads	p. 303
Swaptions	p. 305
Asset Swaps and Equity Swaps	p. 308
Total Return Swaps	p. 311
Credit Default Swaps	p. 313
Differential Swaps	p. 316
Risks Assumed with Swaps	p. 318
Interest Rate Risk Management through Derivatives	p. 321
Being Ahead of the Interest Rate Curve	p. 321
The Term Structure of Interest Rates	p. 325
The Contribution of Interest Rate Derivatives	p. 329
Accounting for Interest Rate Derivatives	p. 332
Internal Interest Rate Swaps	p. 334
The Synergy between Interest Rates and Currency Rates	p. 338
Interest Rate Risk and Its Measurement	p. 342
Interest Rate Spreads Associated with Credit Risk	p. 345
Index	p. 349
Table of Contents provided by Ingram. All Rights Reserved.

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Introduction to Derivative Financial Instruments: Bonds, Swaps, Options, and Hedging

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