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The Financial Times Handbook of Financial Engineering, 3rd Edition

Book Description

The Financial Times Handbook of Financial Engineering clearly explains the tools of financial engineering, showing you the formulas behind the tools, illustrating how they are applied, priced and hedged.

 

All applications in this book are illustrated with fully-worked practical examples, and recommended tactics and techniques are tested using recent data.

Table of Contents

  1. Cover
  2. Title Page
  3. Contents
  4. Dedication
  5. About the author
  6. Acknowledgements
  7. Publisher’s acknowledgments
  8. Preface to the second edition
  9. Preface to the third edition
  10. PART I: TOOLS
    1. 1 Introduction
      1. 1.1 Forty years of evolution
      2. 1.2 What is financial engineering?
      3. 1.3 The nature of risk
      4. 1.4 Financial engineering and risk
      5. 1.5 Layout of this book
    2. 2 The cash markets
      1. 2.1 Overview of financial markets
      2. 2.2 The foreign exchange market
      3. 2.3 The money markets
      4. 2.4 The bond markets
      5. 2.5 The equities markets
      6. 2.6 The commodities markets
      7. 2.7 Cash instruments versus derivatives
      8. 2.8 Capital adequacy requirements
    3. 3 Forward rates
      1. 3.1 Forward exchange rates
      2. 3.2 Forward interest rates
      3. 3.3 Do forward rates predict future spot rates?
      4. 3.4 Spot and forward rates in practice
    4. 4 FRAs
      1. 4.1 What is an FRA?
      2. 4.2 Definitions
      3. 4.3 Terminology
      4. 4.4 The settlement process
      5. 4.5 Hedging with FRAs
      6. 4.6 Pricing FRAs
      7. 4.7 Behaviour of FRA rates
    5. 5 Financial futures
      1. 5.1 A brief history of futures markets
      2. 5.2 What is a financial future?
      3. 5.3 Futures trading – from pits to screens
      4. 5.4 Buying and selling
      5. 5.5 The clearing mechanism
      6. 5.6 Futures margins
      7. 5.7 Physical delivery versus cash settlement
      8. 5.8 Futures and cash markets compared
      9. 5.9 The advantages of futures
    6. 6 Short-term interest rate futures
      1. 6.1 Definitions
      2. 6.2 STIR contracts pricing
      3. 6.3 Basis
      4. 6.4 Convergence
      5. 6.5 Behaviour of futures prices
      6. 6.6 Basic hedging example
      7. 6.7 Short-term futures contracts compared
      8. 6.8 Comparisons of futures and FRAs
      9. 6.9 Spread positions
    7. 7 Bond and stock index futures
      1. 7.1 Definition of bond futures contracts
      2. 7.2 The cheapest-to-deliver bond
      3. 7.3 Cash-and-carry pricing for bond futures
      4. 7.4 The implied repo rate
      5. 7.5 The delivery mechanism
      6. 7.6 Basic hedging with bond futures
      7. 7.7 Stock indices and stock index futures
      8. 7.8 Definition of stock index futures contracts
      9. 7.9 Advantages of using stock index futures
      10. 7.10 Cash-and-carry pricing for stock index futures
      11. 7.11 Stock index futures prices in practice
      12. 7.12 Turning cash into share portfolios and share portfolios into cash
    8. 8 Swaps
      1. 8.1 Definition of interest rate and cross-currency swaps
      2. 8.2 Development of the swap market
      3. 8.3 Interest rate swaps
      4. 8.4 Non-standard interest rate swaps
      5. 8.5 Overnight indexed swaps
      6. 8.6 Cross-currency swaps
      7. 8.7 Basic applications for swaps
      8. 8.8 Asset swaps
      9. 8.9 CMS and CMT swaps
      10. 8.10 Inflation swaps
      11. 8.11 Equity and dividend swaps
      12. 8.12 Commodity swaps
      13. 8.13 Volatility and variance swaps
      14. 8.14 Exotic swaps
      15. 8.15 ISDA documentation
      16. 8.16 Changes in market infrastructure after the credit crisis
    9. 9 Pricing and valuing swaps
      1. 9.1 Principles of swap valuation and pricing
      2. 9.2 Discount factors and the discount function
      3. 9.3 Calculating discount factors from swap and forward rates
      4. 9.4 Generating the discount function
      5. 9.5 Relationship between zero, swap and forward rates
      6. 9.6 Valuation and pricing of interest rate swaps
      7. 9.7 Valuation and pricing of currency swaps
      8. 9.8 Cancelling a swap
      9. 9.9 Hedging swaps with futures
      10. 9.10 The convexity correction
      11. 9.11 Credit risk of swaps
      12. 9.12 Collateralised vs. non-collateralised swaps
      13. 9.13 LIBOR-OIS discounting
    10. 10 Options – basics and pricing
      1. 10.1 Why options are different
      2. 10.2 Definitions
      3. 10.3 Options terminology
      4. 10.4 Value and profit profiles at maturity
      5. 10.5 Pricing options
      6. 10.6 The behaviour of financial prices
      7. 10.7 The Black–Scholes model
      8. 10.8 The binomial approach
      9. 10.9 The Monte Carlo approach
      10. 10.10 Finite difference methods
    11. 11 Options – volatility and the Greeks
      1. 11.1 Volatility
      2. 11.2 Volatility smiles and skews
      3. 11.3 The VIX
      4. 11.4 Value profiles prior to maturity
      5. 11.5 How options behave – the Greeks
      6. 11.6 Delta hedging
    12. 12 Options – from building blocks to portfolios
      1. 12.1 The building block approach
      2. 12.2 Option spreads – vertical, horizontal and diagonal
      3. 12.3 Volatility structures
      4. 12.4 Range structures
      5. 12.5 Arbitrage structures
    13. 13 Options – interest rate and exotic options
      1. 13.1 Why interest rate options are different
      2. 13.2 Caps, floors and collars
      3. 13.3 Swaptions
      4. 13.4 Cancellable and extendible swaps
      5. 13.5 Pricing interest rate options
      6. 13.6 Compound options
      7. 13.7 Exotic options
      8. 13.8 Path-dependent options
      9. 13.9 Digital options
      10. 13.10 Multivariate options
      11. 13.11 Other exotic options
      12. 13.12 Pricing exotic options
      13. 13.13 Price comparisons between exotic options
      14. 13.14 Embedded options
    14. 14 Introducing credit derivatives
      1. 14.1 Development of the credit derivatives market
      2. 14.2 Motivations for using credit derivatives
      3. 14.3 Introducing credit default swaps (CDS)
      4. 14.4 Market conventions
      5. 14.5 Credit events and determination committees
      6. 14.6 Capital structure, recovery rates, reference and deliverable obligations
      7. 14.7 Settlement methods and auctions
      8. 14.8 Other aspects of CDS
    15. 15 CDS pricing and credit indices
      1. 15.1 A simple CDS pricing model
      2. 15.2 Obtaining default probabilities
      3. 15.3 Developing a multi-period framework
      4. 15.4 The ISDA CDS Standard Model
      5. 15.5 Bootstrapping default probabilities
      6. 15.6 Calculating up-front payments
      7. 15.7 Mark-to-market and CDS valuation
      8. 15.8 PV01 and SDV01
      9. 15.9 How credit indices developed
      10. 15.10 The CDX and iTraxx credit indices
      11. 15.11 Market quotations and statistics
      12. 15.12 Other credit indices
      13. 15.13 Index tranches
  11. PART II: TECHNIQUES
    1. 16 Applications for financial engineering
      1. 16.1 Applications of financial engineering
      2. 16.2 Sources of financial risk
      3. 16.3 Accounting and economic risk
      4. 16.4 Defining hedging objectives
      5. 16.5 Measuring hedge efficiency
      6. 16.6 The finance division as a profit centre
    2. 17 Managing currency risk
      1. 17.1 Forwards and futures solutions
      2. 17.2 Options are chameleons
      3. 17.3 How FX options are different
      4. 17.4 The scenario
      5. 17.5 Comparing hedging strategies
      6. 17.6 Basic option hedges
      7. 17.7 Selling options within a hedging programme
      8. 17.8 Collars, range-forwards, forward-bands and cylinders
      9. 17.9 Spread hedges
      10. 17.10 Participating forwards
      11. 17.11 Ratio forwards
      12. 17.12 Break-forwards, FOXs and forward-reversing options
      13. 17.13 Flexi-forwards
      14. 17.14 Using exotic options
      15. 17.15 Selling options outside a hedging programme
      16. 17.16 Dynamic hedging
      17. 17.17 Which strategy is best?
    3. 18 Managing interest rate risk using FRAs, futures and swaps
      1. 18.1 Using FRAs
      2. 18.2 Using short-term interest rate futures
      3. 18.3 Calculating the hedge ratio
      4. 18.4 Stack vs. strip hedges
      5. 18.5 Different kinds of basis risk
      6. 18.6 Managing the convergence basis
      7. 18.7 Interpolated hedges
      8. 18.8 Combining the techniques
      9. 18.9 FRAs vs. futures
      10. 18.10 Using swaps
      11. 18.11 Hedging bond and swap portfolios
      12. 18.12 Hedging bond portfolios with bond futures
    4. 19 Managing interest rate risk – using options and option-based instruments
      1. 19.1 Interest rate guarantees
      2. 19.2 Using caps and floors
      3. 19.3 Collars, participating caps, spread hedges and other variations
      4. 19.4 Using captions and swaptions
      5. 19.5 Comparison of interest risk management tools
    5. 20 Managing equity risk
      1. 20.1 Bull and bear strategies
      2. 20.2 Return enhancement
      3. 20.3 Value protection strategies
      4. 20.4 Vertical, horizontal and diagonal spreads
      5. 20.5 Other option strategies
      6. 20.6 Using stock index futures and options
      7. 20.7 Portfolio insurance
      8. 20.8 Guaranteed equity funds
      9. 20.9 Warrants and convertibles
      10. 20.10 Exotic equity derivatives
    6. 21 Managing commodity risk
      1. 21.1 Commodity risk
      2. 21.2 Creating commodity derivatives
      3. 21.3 Using commodity derivatives
      4. 21.4 Hybrid commodity derivatives
    7. 22 Managing credit risk
      1. 22.1 Hedging default risk
      2. 22.2 Hedging credit risk
      3. 22.3 Generating income
      4. 22.4 Trading strategies using CDS
      5. 22.5 Implementing directional views
      6. 22.6 Monetising relative credit views
      7. 22.7 Basis trades
      8. 22.8 Curve trades
      9. 22.9 Index trades
    8. 23 Structured products
      1. 23.1 Understanding structured products
      2. 23.2 How structured products are built
      3. 23.3 Features of structured products
      4. 23.4 Principal-protected notes
      5. 23.5 Buffered and capped notes
      6. 23.6 Leveraged structures
      7. 23.7 Path-dependent structures
      8. 23.8 Digital and range-accrual structures
      9. 23.9 Correlation structures
      10. 23.10 Redeeming structured products prior to maturity
      11. 23.11 Finalé
  12. Index
  13. Imprint