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The Trade Lifecycle: Behind the Scenes of the Trading Process, 2nd Edition

Book Description

Drive profit and manage risk with expert guidance on trade processing

The Trade Lifecycle catalogues and details the various types of trades, including the inherent cashflows and risk exposures of each. Now in its second edition, this comprehensive guide includes major new coverage of traded products, credit valuation adjustment, regulation, and the role of information technology. By reading this, you'll dissect a trade into its component parts, track it from preconception to maturity, and learn how it affects each business function of a financial institution. You will become familiar with the full extent of legal, operational, liquidity, credit, and market risks to which it is exposed. Case studies of real projects cover topics like FX exotics, commodity counterparty risk, equity settlement, bond management, and global derivatives initiatives, while the companion website features additional video training on specific topics to help you build a strong background in this fundamental aspect of finance.

Trade processing and settlement combined with control of risk has been thrust into the limelight with the recent near collapse of the global financial market. This book provides thorough, practical guidance toward processing the trade, and the risks and rewards it entails.

  • Gain deep insight into emerging subject areas

  • Understand each step of the trade process

  • Examine the individual components of a trade

  • Learn how each trade affects everything it touches

  • Every person working in a bank is highly connected to the lifecycle of a trade. It is the glue by which all departments are bound, and the aggregated success or failure of each trade determines the entire organization's survival. The Trade Lifecycle explains the fundamentals of trade processing and gives you the knowledge you need to further your success in the market.

    Table of Contents

    1. Foreword from the First Edition
      1. Why this book?
    2. Foreword to the Second Edition
    3. Preface
    4. Acknowledgements
    5. About the Author
    6. Part One: Products and the Background to Trading
      1. Chapter 1: Trading
        1. 1.1 How and why do people trade?
        2. 1.2 Factors affecting trade
        3. 1.3 Market participants
        4. 1.4 Means by which trades are transacted
        5. 1.5 When is a trade live?
        6. 1.6 Consequences of trading
        7. 1.7 Trading in the financial services industry
        8. 1.8 What do we mean by a trade?
        9. 1.9 Who works on the trade and when?
        10. 1.10 Summary
      2. Chapter 2: Risk
        1. 2.1 The concept of risk
        2. 2.2 Risk is inevitable
        3. 2.3 Quantifying risk
        4. 2.4 Methods of dealing with risk
        5. 2.5 Managing risk
        6. 2.6 Problems of unforeseen risk
        7. 2.7 Summary
      3. Chapter 3: Understanding Traded Products – Follow the Money
        1. 3.1 Spot trades
        2. 3.2 Future (forward)
        3. 3.3 Loan
        4. 3.4 Deposit
        5. 3.5 Swap
        6. 3.6 Foreign exchange swap
        7. 3.7 Equity spot
        8. 3.8 Bond spot
        9. 3.9 Option
        10. 3.10 Credit default swap
        11. 3.11 Summary
      4. Chapter 4: Asset Classes
        1. 4.1 Interest rates
        2. 4.2 Foreign exchange (Forex or FX)
        3. 4.3 Equity
        4. 4.4 Bonds and credit
        5. 4.5 Commodities
        6. 4.6 Trading across asset classes
        7. 4.7 Summary
        8. Note
      5. Chapter 5: Derivatives, Structures and Hybrids
        1. 5.1 Linear
        2. 5.2 Nonlinear
        3. 5.3 Some option terminology
        4. 5.4 Option valuation
        5. 5.5 Exotic options
        6. 5.6 Structures and hybrids
        7. 5.7 Importance of simpler products
        8. 5.8 Trade matrix
        9. 5.9 Summary
      6. Chapter 6: Liquidity, Price and Leverage
        1. 6.1 Liquidity
        2. 6.2 Price
        3. 6.3 Leverage
        4. 6.4 Summary
        5. Notes
    7. Part Two: The Trade Lifecycle
      1. Chapter 7: Anatomy of a Trade
        1. 7.1 The underlying
        2. 7.2 General
        3. 7.3 Economic
        4. 7.4 Sales
        5. 7.5 Legal
        6. 7.6 Booking
        7. 7.7 Counterparty
        8. 7.8 Timeline
        9. 7.9 Summary
      2. Chapter 8: Trade Lifecycle
        1. 8.1 Pre execution
        2. 8.2 Execution and booking
        3. 8.3 Confirmation
        4. 8.4 Post booking
        5. 8.5 Settlement
        6. 8.6 What happens overnight
        7. 8.7 Changes during lifetime
        8. 8.8 Reporting during lifetime
        9. 8.9 Exercise
        10. 8.10 Maturity
        11. 8.11 Example trade
        12. 8.12 Summary
      3. Chapter 9: Cashflows and Asset Holdings
        1. 9.1 Holdings
        2. 9.2 Value of holding
        3. 9.3 Reconciliation
        4. 9.4 Consolidated reporting
        5. 9.5 Realised and unrealised P&L
        6. 9.6 Diversification
        7. 9.7 Bank within a bank
        8. 9.8 Custody of securities
        9. 9.9 Risks
        10. 9.10 Summary
      4. Chapter 10: Risk Management
        1. 10.1 Traders
        2. 10.2 Risk control
        3. 10.3 Trading management
        4. 10.4 Senior management
        5. 10.5 How do risks arise?
        6. 10.6 Different reasons for trades
        7. 10.7 Hedging
        8. 10.8 What happens when the trader is not around?
        9. 10.9 Types of risk
        10. 10.10 Trading strategies
        11. 10.11 Hedging strategies
        12. 10.12 Summary
      5. Chapter 11: Market Risk Control
        1. 11.1 Various methodologies
        2. 11.2 Need for risk
        3. 11.3 Allocation of risk
        4. 11.4 Monitoring of market risk
        5. 11.5 Controlling the risk
        6. 11.6 Responsibilities of the market risk control department
        7. 11.7 Limitations of market risk departments
        8. 11.8 Regulatory requirements
        9. 11.9 Summary
        10. Notes
      6. Chapter 12: Counterparty Risk Control
        1. 12.1 Reasons for non-fulfilment of obligations
        2. 12.2 Consequences of counterparty default
        3. 12.3 Counterparty risk over time
        4. 12.4 How to measure the risk
        5. 12.5 Imposing limits
        6. 12.6 Who is the counterparty?
        7. 12.7 Collateral
        8. 12.8 Activities of the counterparty risk control department
        9. 12.9 What are the risks involved in analysing credit risk?
        10. 12.10 Payment systems
        11. 12.11 Summary
        12. Notes
      7. Chapter 13: Accounting
        1. 13.1 Balance sheet
        2. 13.2 Profit and loss account
        3. 13.3 Financial reports for hedge funds and asset managers
        4. 13.4 Summary
      8. Chapter 14: P&L Attribution
        1. 14.1 Benefits
        2. 14.2 The process
        3. 14.3 Example
        4. 14.4 Summary
      9. Chapter 15: People
        1. 15.1 Revenue generation
        2. 15.2 Activities that support revenue generation
        3. 15.3 Control
        4. 15.4 Summary
      10. Chapter 16: Regulation
        1. 16.1 Purpose of regulation
        2. 16.2 What regulators require
        3. 16.3 The problems
        4. 16.4 Risk-weighted assets
        5. 16.5 Credit valuation adjustment (CVA)
        6. 16.6 Summary
        7. Notes
    8. Part Three: What Really Happens
      1. Chapter 17: Insights into the Real World of Capital Markets – Here be Dragons!
        1. 17.1 How it used to be
        2. 17.2 Clash of cultures
        3. 17.3 The equality of money
        4. 17.4 The politics of money
        5. 17.5 The good
        6. 17.6 The bad
        7. 17.7 The ugly
        8. 17.8 Where are we heading?
        9. 17.9 Summary
      2. Chapter 18: Case Studies
        1. 18.1 Case study 1 – Bonds
        2. 18.2 Case study 2 – Front office foreign exchange
        3. 18.3 Case study 3 – Equity confirmations project
        4. 18.4 Summary
      3. Chapter 19: The IT Divide
        1. 19.1 What is the IT divide?
        2. 19.2 What problems does it cause?
        3. 19.3 IT in the middle
        4. 19.4 Improper use of IT
        5. 19.5 Organisational blockers
        6. 19.6 IT blockers
        7. 19.7 How to bridge the gap
        8. 19.8 Keeping up with change
        9. 19.9 What does the business want from IT?
        10. 19.10 What IT wants from the business
        11. 19.11 Particular challenges of the financial sector
        12. 19.12 Example of a good project
        13. 19.13 Example of a bad project
        14. 19.14 Summary
      4. Chapter 20: The Role of the Quantitative Analyst
        1. 20.1 What is a quant?
        2. 20.2 Where do quants work?
        3. 20.3 Tools of the trade
        4. 20.4 Place in organisation
        5. 20.5 Where should quants sit?
        6. 20.6 The boundaries of Quantland
        7. 20.7 What does IT think of quants?
        8. 20.8 Different types of quants
        9. 20.9 Getting the job done
        10. 20.10 Summary
    9. Part Four: Behind the Scenes
      1. Chapter 21: Developing Processes for New Products (and Improving Processes for Existing Products)
        1. 21.1 What is a process?
        2. 21.2 The status quo
        3. 21.3 How processes evolve
        4. 21.4 Inventory of current systems
        5. 21.5 Coping with change
        6. 21.6 Improving the situation
        7. 21.7 Inertia
        8. 21.8 Summary
      2. Chapter 22: New Products
        1. 22.1 Origin of new products
        2. 22.2 Trial basis
        3. 22.3 New trade checklist
        4. 22.4 New product evolution
        5. 22.5 Risks
        6. 22.6 Summary
      3. Chapter 23: Testing
        1. 23.1 What is testing?
        2. 23.2 Why is testing important?
        3. 23.3 Who does testing?
        4. 23.4 When should testing be done?
        5. 23.5 What are the types of testing?
        6. 23.6 Fault logging
        7. 23.7 Risks
        8. 23.8 Summary
      4. Chapter 24: Data
        1. 24.1 Common characteristics
        2. 24.2 Database
        3. 24.3 Data
        4. 24.4 Bid/offer spread
        5. 24.5 Curves and surfaces
        6. 24.6 Market data
        7. 24.7 Back testing
        8. 24.8 How can data go wrong?
        9. 24.9 Typical data sources
        10. 24.10 How to cope with corrections to data
        11. 24.11 Data integrity
        12. 24.12 The business risks of data
        13. 24.13 Summary
        14. Notes
      5. Chapter 25: Reports
        1. 25.1 What makes a good report?
        2. 25.2 Reporting requirements
        3. 25.3 When things go wrong
        4. 25.4 Redundancy
        5. 25.5 Control
        6. 25.6 Enhancement
        7. 25.7 Security
        8. 25.8 Risks
        9. 25.9 Summary
      6. Chapter 26: Calculation
        1. 26.1 What does the calculation process actually do?
        2. 26.2 The calculation itself
        3. 26.3 Sensitivity analysis
        4. 26.4 Bootstrapping
        5. 26.5 Calculation of dates
        6. 26.6 Calibration to market
        7. 26.7 Testing
        8. 26.8 Integrating a model within a full system
        9. 26.9 Risks associated with the valuation process
        10. 26.10 Summary
        11. Notes
    10. Part Five: Summary of Risks
      1. Unforeseen Risk
    11. Appendix A: Operational Risks
      1. Confirmation
      2. Settlement
      3. Payment systems
      4. Straight through processing (STP)
      5. Provisional trades
    12. Appendix B: Human Risks
      1. Too much knowledge in one person
      2. Not enough knowledge
      3. Wrong people
      4. Not enough investment in people
      5. Reliance on short-term planning
      6. Conflicts and tensions
      7. Trading versus control functions
      8. Communication
      9. Panic
    13. Appendix C: Control Risks
      1. Market risk control
      2. Counterparty risk control
    14. Appendix D: Processing Risks
      1. Cashflow risks
      2. Data risks
      3. Reporting risks
      4. Testing risks
    15. Appendix E: Organisational Risks
      1. Business continuity planning (BCP) risks
      2. Valuation and model approval risks
      3. Management risks
      4. Documentation risks
      5. Front office risks
    16. Recommended Reading
    17. Index
    18. EULA