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An Introduction to International Capital Markets: Products, Strategies, Participants, Second Edition

Book Description

Fully revised and updated from the hugely popular first edition, this book is an accessible and convenient one-volume introduction to international capital markets, ideal for those entering or planning to enter investment banking or asset management. As well as serving as an invaluable reference tool for professionals already working in the industry looking to extend their knowledge base it will also benefit all those working in trading, sales and support roles.

Describing how the key products and markets work, who the principle participants are and their overall goals and objectives, Andrew Chisholm provides a thorough overview of the global capital markets. The book covers a wide range of equity, debt, foreign exchange and credit instruments as well as the principal derivative products. In a step-by-step fashion, making extensive use of real world cases and examples, it explains money markets, foreign exchange, bond markets, cash equity markets, equity valuation techniques, swaps, forwards, futures, credit derivatives, options, option risk management and convertible bonds. An extensive glossary also explains concisely many of the 'jargon' expressions used in the financial markets.

Boasting an international focus, examples are drawn from major international markets around the world. It makes extensive use of numerical examples and case studies to help explain a wide range of cash and derivative products used in the capital markets business. It covers both debt and equity products and includes new material on credit products such as collateralized debt obligations and credit derivative structures; equity fundamental analysis, portfolio theory and convertible bonds. Market data has been fully updated from the first edition and recent events such as the 'credit crisis' are discussed.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Praise
  5. Acknowledgements
  6. Chapter 1 - Introduction: The Market Context
    1. 1.1 CAPITAL AND THE CAPITAL MARKETS
    2. 1.2 THE EUROMARKETS (INTERNATIONAL CAPITAL MARKETS)
    3. 1.3 MODERN INVESTMENT BANKING
    4. 1.4 THE CLIENTS OF INVESTMENT BANKS
    5. 1.5 ABOUT THIS BOOK
  7. Chapter 2 - The Money Markets
    1. 2.1 CHAPTER OVERVIEW
    2. 2.2 DOMESTIC MONEY MARKETS
    3. 2.3 US DOMESTIC MARKETS
    4. 2.4 THE EUROPEAN CENTRAL BANK (ECB)
    5. 2.5 STERLING MONEY MARKETS
    6. 2.6 THE BANK OF JAPAN
    7. 2.7 SYSTEMIC RISKS AND MORAL HAZARDS
    8. 2.8 TREASURY BILLS
    9. 2.9 DISCOUNTING TREASURY BILLS
    10. 2.10 US COMMERCIAL PAPER
    11. 2.11 CREDIT RISK ON USCP
    12. 2.12 BANKERS’ ACCEPTANCES
    13. 2.13 THE EUROCURRENCY MARKETS
    14. 2.14 EUROCURRENCY LOANS AND DEPOSITS
    15. 2.15 EUROCURRENCY INTEREST AND DAY-COUNT
    16. 2.16 EUROCURRENCY CERTIFICATES OF DEPOSIT
    17. 2.17 CD YIELD-TO-MATURITY
    18. 2.18 EURO-COMMERCIAL PAPER
    19. 2.19 REPOS AND REVERSES
    20. 2.20 REPO: CASE STUDY
    21. 2.21 OTHER FEATURES OF REPOS
    22. 2.22 CHAPTER SUMMARY
  8. Chapter 3 - The Foreign Exchange Market
    1. 3.1 CHAPTER OVERVIEW
    2. 3.2 MARKET STRUCTURE
    3. 3.3 FX DEALERS AND BROKERS
    4. 3.4 SPOT FOREIGN EXCHANGE DEALS
    5. 3.5 STERLING AND EURO QUOTATIONS
    6. 3.6 FACTORS AFFECTING SPOT FX RATES
    7. 3.7 SPOT FX TRADING
    8. 3.8 SPOT POSITION KEEPING
    9. 3.9 FX RISK CONTROL
    10. 3.10 CROSS-CURRENCY RATES
    11. 3.11 OUTRIGHT FORWARD FX RATES
    12. 3.12 OUTRIGHT FORWARD FX HEDGE: CASE STUDY
    13. 3.13 FORWARD FX FORMULA
    14. 3.14 FX OR FORWARD SWAPS
    15. 3.15 FX SWAP TWO-WAY QUOTATIONS
    16. 3.16 CHAPTER SUMMARY
  9. Chapter 4 - Major Government Bond Markets
    1. 4.1 CHAPTER OVERVIEW
    2. 4.2 INTRODUCTION TO GOVERNMENT BONDS
    3. 4.3 SOVEREIGN RISK
    4. 4.4 US GOVERNMENT NOTES AND BONDS
    5. 4.5 US TREASURY QUOTATIONS
    6. 4.6 US TREASURY STRIPS
    7. 4.7 BOND PRICING
    8. 4.8 PRICING COUPON BONDS: EXAMPLES
    9. 4.9 DETAILED BOND VALUATION: US TREASURY
    10. 4.10 BOND YIELD
    11. 4.11 REINVESTMENT ASSUMPTIONS
    12. 4.12 ANNUAL AND SEMI-ANNUAL BOND YIELDS
    13. 4.13 UK GOVERNMENT BONDS
    14. 4.14 JAPANESE GOVERNMENT BONDS (JGBS)
    15. 4.15 EUROZONE GOVERNMENT BONDS
    16. 4.16 CHAPTER SUMMARY
  10. Chapter 5 - Bond Price Sensitivity
    1. 5.1 CHAPTER OVERVIEW
    2. 5.2 BOND MARKET LAWS
    3. 5.3 OTHER FACTORS AFFECTING PRICE SENSITIVITY
    4. 5.4 MACAULAY’S DURATION
    5. 5.5 CALCULATING MACAULAY’S DURATION
    6. 5.6 DURATION OF A ZERO
    7. 5.7 MODIFIED DURATION
    8. 5.8 PRICE VALUE OF A BASIS POINT
    9. 5.9 CONVEXITY
    10. 5.10 MEASURING CONVEXITY
    11. 5.11 CONVEXITY BEHAVIOUR
    12. 5.12 PORTFOLIO DURATION
    13. 5.13 DEDICATION
    14. 5.14 IMMUNIZATION
    15. 5.15 DURATION-BASED HEDGES
    16. 5.16 CONVEXITY EFFECTS ON DURATION HEDGES
    17. 5.17 CHAPTER SUMMARY
  11. Chapter 6 - The Yield Curve
    1. 6.1 CHAPTER OVERVIEW
    2. 6.2 REAL AND NOMINAL INTEREST RATES
    3. 6.3 COMPOUNDING PERIODS
    4. 6.4 THE YIELD CURVE DEFINED
    5. 6.5 THEORIES OF YIELD CURVES
    6. 6.6 ZERO COUPON OR SPOT RATES
    7. 6.7 BOOTSTRAPPING
    8. 6.8 SPOT RATES AND THE PAR CURVE
    9. 6.9 PRICING MODELS USING SPOT RATES
    10. 6.10 FORWARD RATES
    11. 6.11 DISCOUNT FACTORS
    12. 6.12 CHAPTER SUMMARY
  12. Chapter 7 - Credit Spreads and Securitization
    1. 7.1 CHAPTER OVERVIEW
    2. 7.2 BASICS OF CREDIT SPREADS
    3. 7.3 THE ROLE OF THE RATINGS AGENCIES
    4. 7.4 CREDIT SPREADS AND DEFAULT PROBABILITIES
    5. 7.5 CREDIT DEFAULT SWAPS
    6. 7.6 INDEX CREDIT DEFAULT SWAPS
    7. 7.7 BASKET DEFAULT SWAPS
    8. 7.8 CREDIT-LINKED NOTES
    9. 7.9 SECURITIZATION AND CDOs
    10. 7.10 RATIONALE FOR SECURITIZATION
    11. 7.11 SYNTHETIC CDOs
    12. 7.12 CHAPTER SUMMARY
  13. Chapter 8 - Equity Markets and Equity Investment
    1. 8.1 CHAPTER OVERVIEW
    2. 8.2 COMPARING CORPORATE DEBT AND EQUITY
    3. 8.3 ADDITIONAL FEATURES OF COMMON STOCK
    4. 8.4 HYBRID SECURITIES
    5. 8.5 EQUITY INVESTMENT STYLES
    6. 8.6 EFFICIENT MARKETS
    7. 8.7 MODERN PORTFOLIO THEORY (MPT)
    8. 8.8 PRIMARY MARKETS FOR COMMON STOCK
    9. 8.9 SUBSEQUENT COMMON STOCK ISSUES
    10. 8.10 SECONDARY MARKETS: MAJOR STOCK MARKETS
    11. 8.11 DEPOSITORY RECEIPTS
    12. 8.12 STOCK LENDING
    13. 8.13 PORTFOLIO (BASKET) TRADING
    14. 8.14 CHAPTER SUMMARY
  14. Chapter 9 - Equity Fundamental Analysis
    1. 9.1 CHAPTER OVERVIEW
    2. 9.2 PRINCIPLES OF COMMON STOCK VALUATION
    3. 9.3 THE BALANCE SHEET EQUATION
    4. 9.4 THE INCOME STATEMENT
    5. 9.5 EARNINGS PER SHARE (EPS)
    6. 9.6 DIVIDEND PER SHARE (DPS)
    7. 9.7 RATIO ANALYSIS
    8. 9.8 LIQUIDITY RATIOS
    9. 9.9 PROFITABILITY RATIOS
    10. 9.10 LEVERAGE RATIOS
    11. 9.11 INVESTOR RATIOS AND VALUATION
    12. 9.12 APPLYING VALUATION MULTIPLES
    13. 9.13 FIRM OR ENTERPRISE VALUE MULTIPLES
    14. 9.14 CHAPTER SUMMARY
  15. Chapter 10 - Cash Flow Models in Equity Valuation
    1. 10.1 CHAPTER OVERVIEW
    2. 10.2 THE BASIC DIVIDEND DISCOUNT MODEL
    3. 10.3 CONSTANT DIVIDEND GROWTH MODELS
    4. 10.4 THE IMPLIED RETURN ON A SHARE
    5. 10.5 DIVIDEND YIELD AND DIVIDEND GROWTH
    6. 10.6 PRICE/EARNINGS RATIO
    7. 10.7 STAGE DIVIDEND DISCOUNT MODELS
    8. 10.8 TWO-STAGE MODEL: EXAMPLE
    9. 10.9 THE CAPITAL ASSET PRICING MODEL (CAPM)
    10. 10.10 BETA
    11. 10.11 ESTIMATING THE MARKET RISK PREMIUM
    12. 10.12 THE EQUITY RISK PREMIUM CONTROVERSY
    13. 10.13 CAPM AND PORTFOLIO THEORY
    14. 10.14 FREE CASH FLOW VALUATION
    15. 10.15 FORECASTING FREE CASH FLOWS
    16. 10.16 WEIGHTED AVERAGE COST OF CAPITAL (WACC)
    17. 10.17 RESIDUAL VALUE
    18. 10.18 WACC AND LEVERAGE
    19. 10.19 ASSETS BETA METHOD
    20. 10.20 COMPANY VALUE AND LEVERAGE
    21. 10.21 CHAPTER SUMMARY
  16. Chapter 11 - Interest Rate Forwards and Futures
    1. 11.1 CHAPTER OVERVIEW
    2. 11.2 FORWARD RATE AGREEMENTS (FRAs)
    3. 11.3 FRA APPLICATION: CASE STUDY
    4. 11.4 BORROWING COSTS WITH AN FRA HEDGE
    5. 11.5 FRA MARKET QUOTATIONS
    6. 11.6 THE FORWARD INTEREST RATE
    7. 11.7 FINANCIAL FUTURES
    8. 11.8 CME EURODOLLAR FUTURES
    9. 11.9 EURODOLLAR FUTURES QUOTATIONS
    10. 11.10 FUTURES MARGINING
    11. 11.11 MARGINING EXAMPLE: EURIBOR FUTURES ON EUREX
    12. 11.12 HEDGING WITH INTEREST RATE FUTURES: CASE STUDY
    13. 11.13 FUTURES STRIPS
    14. 11.14 CHAPTER SUMMARY
    15. APPENDIX: STATISTICS ON DERIVATIVES MARKETS
  17. Chapter 12 - Bond Futures
    1. 12.1 CHAPTER OVERVIEW
    2. 12.2 DEFINITIONS
    3. 12.3 THE CBOT 30-YEAR US TREASURY BONDS FUTURES
    4. 12.4 INVOICE AMOUNT AND CONVERSION FACTORS
    5. 12.5 LONG GILT AND EURO-BUND FUTURES
    6. 12.6 FORWARD BOND PRICE
    7. 12.7 CARRY COST
    8. 12.8 THE IMPLIED REPO RATE
    9. 12.9 THE CHEAPEST TO DELIVER (CTD) BOND
    10. 12.10 CTD BEHAVIOUR
    11. 12.11 HEDGING WITH BOND FUTURES
    12. 12.12 BASIS RISK
    13. 12.13 HEDGING NON-CTD BONDS
    14. 12.14 USING FUTURES IN PORTFOLIO MANAGEMENT
    15. 12.15 CHAPTER SUMMARY
  18. Chapter 13 - Interest Rate Swaps
    1. 13.1 CHAPTER OVERVIEW
    2. 13.2 SWAP DEFINITIONS
    3. 13.3 THE BASIC INTEREST RATE SWAP ILLUSTRATED
    4. 13.4 TYPICAL SWAP APPLICATIONS
    5. 13.5 INTEREST RATE SWAP: DETAILED CASE STUDY
    6. 13.6 INTEREST RATE SWAP TERMS
    7. 13.7 COMPARATIVE ADVANTAGE
    8. 13.8 SWAP QUOTATIONS AND SPREADS
    9. 13.9 DETERMINANTS OF SWAP SPREADS
    10. 13.10 HEDGING SWAPS WITH TREASURIES
    11. 13.11 CROSS-CURRENCY SWAPS: CASE STUDY
    12. 13.12 CROSS-CURRENCY SWAP REVALUATION
    13. 13.13 CHAPTER SUMMARY
    14. APPENDIX: SWAP VARIANTS
  19. Chapter 14 - Interest Rate Swap Valuation
    1. 14.1 CHAPTER OVERVIEW
    2. 14.2 VALUING A SWAP AT INCEPTION
    3. 14.3 VALUING THE SWAP COMPONENTS
    4. 14.4 SWAP REVALUATION
    5. 14.5 REVALUATION BETWEEN PAYMENT DATES
    6. 14.6 THE FORWARD RATE METHOD
    7. 14.7 FORWARD RATE METHOD ON A SPREADSHEET
    8. 14.8 SWAP RATES AND LIBOR RATES
    9. 14.9 PRICING A SWAP FROM FUTURES
    10. 14.10 HEDGING INTEREST RATE RISK ON SWAPS
    11. 14.11 CHAPTER SUMMARY
  20. Chapter 15 - Equity Index Futures and Swaps
    1. 15.1 CHAPTER OVERVIEW
    2. 15.2 INDEX FUTURES
    3. 15.3 MARGINING PROCEDURES
    4. 15.4 FINAL SETTLEMENT AND SPREAD TRADES
    5. 15.5 HEDGING WITH INDEX FUTURES: CASE STUDY
    6. 15.6 HEDGE EFFICIENCY
    7. 15.7 OTHER USES OF INDEX FUTURES
    8. 15.8 PRICING AN EQUITY FORWARD CONTRACT
    9. 15.9 INDEX FUTURES FAIR VALUE
    10. 15.10 THE BASIS
    11. 15.11 INDEX ARBITRAGE TRADE
    12. 15.12 RUNNING AN ARBITRAGE DESK
    13. 15.13 FEATURES OF INDEX FUTURES
    14. 15.14 EQUITY SWAPS
    15. 15.15 MANAGING THE RISKS ON EQUITY SWAPS
    16. 15.16 STRUCTURING EQUITY SWAPS
    17. 15.17 BENEFITS AND APPLICATIONS OF EQUITY SWAPS
    18. 15.18 CHAPTER SUMMARY
  21. Chapter 16 - Fundamentals of Options
    1. 16.1 CHAPTER OVERVIEW
    2. 16.2 DEFINITIONS
    3. 16.3 BASIC OPTION TRADING STRATEGIES
    4. 16.4 LONG CALL: EXPIRY PAYOFF PROFILE
    5. 16.5 SHORT CALL: EXPIRY PAYOFF PROFILE
    6. 16.6 LONG PUT: EXPIRY PAYOFF PROFILE
    7. 16.7 SHORT PUT: EXPIRY PAYOFF PROFILE
    8. 16.8 SUMMARY: INTRINSIC AND TIME VALUE
    9. 16.9 CBOE STOCK OPTIONS
    10. 16.10 CME S&P 500 INDEX OPTIONS
    11. 16.11 STOCK OPTIONS ON LIFFE
    12. 16.12 FT-SE 100 INDEX OPTIONS
    13. 16.13 CHAPTER SUMMARY
    14. APPENDIX: EXOTIC OPTIONS
  22. Chapter 17 - Option Valuation Models
    1. 17.1 CHAPTER OVERVIEW
    2. 17.2 FUNDAMENTAL PRINCIPLES: EUROPEAN OPTIONS
    3. 17.3 SYNTHETIC FORWARDS AND FUTURES
    4. 17.4 AMERICAN OPTIONS AND EARLY EXERCISE
    5. 17.5 BINOMIAL TREES
    6. 17.6 EXPANDING THE TREE
    7. 17.7 BLACK-SCHOLES MODEL
    8. 17.8 BLACK-SCHOLES ASSUMPTIONS
    9. 17.9 CHAPTER SUMMARY
    10. APPENDIX: MEASURING HISTORIC VOLATILITY
  23. Chapter 18 - Option Pricing and Risks
    1. 18.1 CHAPTER OVERVIEW
    2. 18.2 INTRINSIC AND TIME VALUE BEHAVIOUR
    3. 18.3 VOLATILITY ASSUMPTION AND OPTION PRICING
    4. 18.4 DELTA (D OR d)
    5. 18.5 DELTA BEHAVIOUR
    6. 18.6 GAMMA (G OR g)
    7. 18.7 READJUSTING THE DELTA HEDGE
    8. 18.8 GAMMA BEHAVIOUR
    9. 18.9 THETA (T)
    10. 18.10 VEGA
    11. 18.11 RHO (p) AND SUMMARY OF GREEKS
    12. 18.12 CHAPTER SUMMARY
    13. APPENDIX: DELTA AND GAMMA HEDGING
  24. Chapter 19 - Option Strategies
    1. 19.1 CHAPTER OVERVIEW
    2. 19.2 HEDGING WITH PUT OPTIONS
    3. 19.3 COVERED CALL WRITING
    4. 19.4 COLLARS
    5. 19.5 BULL AND BEAR SPREADS
    6. 19.6 OTHER SPREAD TRADES
    7. 19.7 VOLATILITY REVISITED
    8. 19.8 VOLATILITY TRADING: STRADDLES AND STRANGLES
    9. 19.9 CURRENT PAYOFF PROFILES
    10. 19.10 PROFITS AND RISKS ON STRADDLES
    11. 19.11 CHAPTER SUMMARY
  25. Chapter 20 - Additional Option Applications
    1. 20.1 CHAPTER OVERVIEW
    2. 20.2 OTC AND EXCHANGE-TRADED CURRENCY OPTIONS
    3. 20.3 HEDGING FX EXPOSURES WITH OPTIONS: CASE STUDY
    4. 20.4 PRICING CURRENCY OPTIONS
    5. 20.5 INTEREST RATE OPTIONS
    6. 20.6 EXCHANGE-TRADED INTEREST RATE OPTIONS
    7. 20.7 CAPS, FLOORS, AND COLLARS
    8. 20.8 INTEREST RATE CAP: CASE STUDY
    9. 20.9 PRICING CAPS AND FLOORS: BLACK MODEL
    10. 20.10 SWAPTIONS
    11. 20.11 INTEREST RATE STRATEGIES
    12. 20.12 CONVERTIBLE BONDS
    13. 20.13 CB MEASURES OF VALUE
    14. 20.14 CONVERSION PREMIUM AND PARITY
    15. 20.15 CONVERTIBLE ARBITRAGE
    16. 20.16 CHAPTER SUMMARY
  26. Glossary of Financial Terms
  27. Index