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Fixed Income Markets: Management, Trading and Hedging, 2nd Edition

Book Description

A comprehensive, in-depth look at global debt capital markets in the post-crisis world

Fully updated with comprehensive coverage of the post-crisis debt markets and their impact on key industry issues, Fixed Income Markets: Management, Trading, and Hedging, Second Edition offers insights into derivative pricing, cross-currency hedging, and new liquidity legislation. Written by Choudhry, Moskovic, and Wong, Fixed Income Markets is an indispensable read for anyone working in bond markets, interest-rate markets, and credit derivatives markets looking to better understand today's debt markets.

This acclaimed book takes a unique look into the leading practices in bond markets as well as post-credit-crunch impacts on pricing that are rarely captured in textbooks. The new edition provides expanded coverage on a wide range of topics within hedging, derivatives, bonds, rebalancing, and global debt capital markets. New topics include:

  • Dynamic hedging practices and cross-currency hedging

  • Collateralized and uncollateralized derivatives, and their impact on valuation

  • Callable bonds, pricing, trading, and regulatory aspects related to liquidity

  • Rebalancing as a method for capturing contingencies and other complex imbedded risks

  • As a bonus, the book includes reference information for statistical concepts and fixed income pricing, as well as a full glossary and index. Written in Choudhry's usual accessible style, Fixed Income Markets is a comprehensive and in-depth account of the global debt capital markets in today's post-crisis world.

    Table of Contents

    1. Foreword
    2. Preface
      1. Acknowledgments
    3. About the Authors
    4. PART ONE Introduction to Bonds
      1. CHAPTER 1 The Bond Instrument
        1. Bond-Market Basics
        2. Capital Market Participants
        3. Investors
        4. World Bond Markets
        5. Overview of the Main Bond Markets
        6. Time Value of Money
        7. Bond Pricing and Yield: The Traditional Approach
        8. Bond Yield
        9. Selected Bibliography and References
        10. Notes
      2. CHAPTER 2 Bond Instruments and Interest-Rate Risk
        1. Duration, Modified Duration, and Convexity
        2. Appendices
        3. Appendix 2.1 Formal Derivation of Modified-Duration Measure
        4. Appendix 2.2 Measuring Convexity
        5. Appendix 2.3 Taylor Expansion of the Price/Yield Function
        6. Selected Bibliography and References
        7. Notes
      3. CHAPTER 3 Bond Pricing, Spot, and Forward Rates
        1. Basic Concepts
        2. Coupon Bonds
        3. Bond Price in Continuous Time
        4. Forward Rates
        5. Term Structure Hypotheses
        6. Evidence on the Expectations Hypothesis
        7. Appendices
        8. Appendix 3.1 The Integral
        9. Appendix 3.2 The Derivation of the Bond Price Equation in Continuous Time
        10. Notes
        11. Selected Bibliography and References
      4. CHAPTER 4 Interest-Rate Modelling
        1. Background
        2. One-Factor Term-Structure Models
        3. Choosing a Term-Structure Model
        4. Appendix
        5. Appendix 4.1 Geometric Brownian Motion
        6. Notes
        7. Selected Bibliography and References
      5. CHAPTER 5 Fitting the Yield Curve
        1. Yield-Curve Smoothing
        2. Non-parametric Methods
        3. Comparing Curves
        4. Yield Curve Construction: A Practical Guide
        5. Appendices
        6. Appendix 5.1 Linear Regression: Ordinary Least Squares
        7. Appendix 5.2 Regression Splines
        8. Notes
        9. Selected Bibliography and References
    5. PART TWO Selected Market Instruments
      1. CHAPTER 6 The Money Markets
        1. Overview
        2. Securities Quoted on a Yield Basis
        3. The Repo Instrument
        4. Money-Market Derivatives
        5. Short-Term Interest-Rate Futures
        6. Appendices
        7. Appendix 6.1
        8. Notes
        9. Selected Bibliography and References
      2. CHAPTER 7 Hybrid Securities and Structured Securities
        1. Floating-Rate Notes
        2. Indexed Amortising Note
        3. Synthetic Convertible Note
        4. Interest-Differential Notes
        5. Convertible Bonds
        6. Contingent Convertible Securities
        7. References
      3. CHAPTER 8 Bonds with Embedded Options and Option-Adjusted Spread Analysis
        1. Understanding Embedded-Option Elements in a Bond
        2. The Binomial Tree of Short-Term Interest Rates
        3. Price Volatility of Bonds with Embedded Options
        4. Correct Way to Risk-Manage a Callable Note
        5. Appendices
        6. Appendix 8.1 Calculating Interest Rate Paths Using Microsoft Excel
        7. Notes
        8. Selected Bibliography and References
      4. CHAPTER 9 Inflation-Indexed Bonds and Derivatives
        1. Basic Concepts
        2. Index-Linked Bond Yields
        3. Inflation-Indexed Derivatives
        4. Applications
        5. Appendices
        6. Appendix 9.1 Current Issuers of Public-Sector Indexed Securities
        7. Appendix 9.2 U.S. Treasury Inflation-Indexed Securities (TIPS)
        8. Notes
        9. Selected Bibliography and References
      5. CHAPTER 10 Introduction to Securitisation and Asset-Backed Securities
        1. The Concept of Securitisation
        2. The Process of Securitisation
        3. Securitising Mortgages
        4. ABS Structures: A Primer on Performance Metrics and Test Measures
        5. The Securitisation Market Post-2007
        6. Special Purpose Vehicles (SPVs)
        7. Summary and Conclusions
        8. Notes
        9. Selected Bibliography and References
    6. PART THREE Derivative Instruments
      1. Recommended Reading
      2. CHAPTER 11 Forwards and Futures Valuation
        1. Introduction
        2. Forwards
        3. Futures
        4. Forwards and Futures
        5. Cash Flow Differences
        6. Relationship between Forward and Future Price
        7. The Forward-Spot Parity
        8. The Basis and Implied Repo Rate
        9. Notes
        10. Selected Bibliography and References
      3. CHAPTER 12 Bond Futures Contracts
        1. Background
        2. Bond Futures Contracts
        3. Futures Pricing
        4. Hedging Using Futures
        5. The Margin Process
        6. Appendix
        7. Appendix 12.1 The Conversion Factor for the Long Gilt Future
        8. Notes
        9. Selected Bibliography and References
      4. CHAPTER 13 Swaps
        1. Interest-Rate Swaps
        2. Generic Swap Valuation
        3. Asset Swaps
        4. An Overview of Interest-Rate Swap Applications
        5. Bloomberg Screens
        6. Appendix
        7. Appendix 13.1 Calculating Futures Strip Rates and Implied Swap Rates
        8. Notes
        9. Selected Bibliography and References
      5. CHAPTER 14 Credit Derivatives I: Instruments and Applications
        1. Credit Risk
        2. Credit Risk and Credit Derivatives
        3. Applications
        4. Credit Event
        5. Credit Derivative Instruments
        6. Credit-Linked Notes
        7. Sidebar: Uncollateralised CDS
        8. The iTraxx Index Note
        9. Applications for Portfolio Managers
        10. Risks in Credit Default Swaps
        11. Big Bang in CDS
        12. Conclusion
        13. Appendix
        14. Appendix 14.1 Bond Credit Ratings
        15. Notes
        16. Selected Bibliography and References
      6. CHAPTER 15 Credit Derivatives II: Pricing, Valuation, and the Basis
        1. Introduction
        2. Asset Swap Pricing
        3. Pricing Models
        4. Notes
        5. Selected Bibliography and References
      7. CHAPTER 16 Options I
        1. Background
        2. Option Instruments
        3. Option Pricing: Setting the Scene
        4. Option Pricing
        5. The Black-Scholes Option Model
        6. Interest-Rate Options and the Black Model
        7. Comment on the Black-Scholes Model
        8. A Final Word on Option Models
        9. Appendices
        10. Appendix 16.2 Lognormal Distribution of Returns
        11. Appendix 16.3 Black-Scholes Model in Microsoft Excel
        12. Notes
        13. Selected Bibliography and References
      8. CHAPTER 17 Options II
        1. Behaviour of Option Prices
        2. Assessing Time Value
        3. American Options
        4. Measuring Option Risk: The Greeks
        5. Delta
        6. Gamma
        7. Theta
        8. Vega
        9. Rho
        10. Lambda
        11. The Option Smile
        12. Notes
        13. Selected Bibliography and References
    7. PART FOUR Bond Trading and Hedging
      1. CHAPTER 18 Value-at-Risk and Credit VaR
        1. Introducing Value-at-Risk
        2. Explaining Value-at-Risk
        3. Value-at-Risk for Fixed-Income Derivative Instruments
        4. Stress Testing
        5. Value-at-Risk Methodology for Credit Risk
        6. Appendix 18.1 Assumption of Normality
        7. Notes
        8. Selected Bibliography and References
      2. CHAPTER 19 Government Bond Analysis, the Yield Curve, and Relative-Value Trading
        1. The Determinants of Yield
        2. Practical Uses of Redemption Yield and Duration
        3. Implied Spot Rates and Market Zero-Coupon Yields
        4. Yield-Spread Trades
        5. Coupon Spread
        6. Butterfly Trades
        7. Case Study: Spread Trade
        8. Notes
        9. Selected Bibliography and References
      3. CHAPTER 20 Approaches to Trading and Hedging
        1. Futures Trading
        2. Yield Curves and Relative Value
        3. Yield-Spread Trades
        4. Hedging Bond Positions
        5. Bond Analysis Using Spot Rates and Forward Rates in Continuous Time
        6. Bond Prices as a Function of Spot and Forward Rates
        7. Appendices
        8. Appendix 20.1 Summary of Derivation of Optimum Hedge Equation
        9. Appendix 20.2 Forward-Rate Structure in Conventional Yield-Curve Environment
        10. Notes
        11. Selected Bibliography
      4. CHAPTER 21 Derivatives Risk Management: Convexity, Collateral, and Correlation
        1. Abstract
        2. Why Correlation Occurs in the Markets
        3. Correlation and Causation
        4. How Can We Define Correlation?
        5. Measuring Correlation
        6. Correlation Swaps, Pricing, and Their Risks
        7. Quantos, Pricing, and their Risks
        8. Differences between Instantaneous and Terminal Volatilities and Correlations
        9. Hedging a Portfolio of Correlation Swaps and Quantos
        10. Uncollateralised Derivatives and Note Discounting
        11. Explanation of the Risk-Neutral Measure
        12. What Does Discounting Really Represent?
        13. Pricing an Uncollateralised Cash Flow
        14. Graph of PV from Different CSAs
        15. Senior Unsecured Bonds: Equivalence to Uncollateralised Derivatives
        16. Funding a Trading Book
        17. A Diversion: St. Petersburg Paradox and Credit Risk
        18. Making Money for Whom?
        19. Chapter Summary
    8. APPENDIX A Statistical Concepts
      1. Mean and Standard Deviation
    9. APPENDIX B Basic Tools
      1. Summation and Product Operators
      2. Standard Brownian Motion and the Dynamics of the Asset-Price Process
      3. The Integral Calculus
      4. Stochastic Integrals
    10. APPENDIX C Introduction to the Mathematics of Fixed-Income Pricing
      1. Bond Pricing
      2. Yield to Maturity (YTM)
      3. Expectation Hypothesis
      4. Notes
      5. References
    11. APPENDIX D About the Companion Website
      1. Description of the Content
    12. Glossary
    13. Index
    14. End User License Agreement