| |
| |
| Foreword | |
| |
| |
| |
| Foreword | |
| |
| |
| |
| Preface | |
| |
| |
| |
| Overview of Financial Engineering | |
| |
| |
| |
| An Introduction to Financial Engineering | |
| |
| |
| The Scope of Financial Engineering | |
| |
| |
| The Tools of Financial Engineering | |
| |
| |
| Financial Engineering Versus Financial Analysis | |
| |
| |
| Where Financial Engineering Fits In | |
| |
| |
| The Financial Engineering Team | |
| |
| |
| Productizing the Solution | |
| |
| |
| Career Opportunities For Financial Engineers | |
| |
| |
| The Plan of the Book | |
| |
| |
| |
| Factors Contributing to the Growth of Financial Engineering | |
| |
| |
| The Environmental Factors | |
| |
| |
| Price Volatility | |
| |
| |
| Globalization of the Markets | |
| |
| |
| Tax Asymmetries | |
| |
| |
| Technological Advances | |
| |
| |
| Advances in Financial Theory | |
| |
| |
| Regulatory Change and Increased Competition | |
| |
| |
| The Cost of Information and the Cost of Transacting | |
| |
| |
| Intrafirm Factors | |
| |
| |
| Liquidity Needs | |
| |
| |
| Risk Aversion | |
| |
| |
| Agency Costs | |
| |
| |
| Quantitative Sophistication and Management Training | |
| |
| |
| Accounting Benefits | |
| |
| |
| Innovative Products of the Last Twenty Years | |
| |
| |
| The Changing Face of the Securities Industry | |
| |
| |
| |
| The Knowledge Base of the Financial Engineer | |
| |
| |
| Theory | |
| |
| |
| Mathematical and Statistical Skills | |
| |
| |
| Modeling Skills | |
| |
| |
| Product Knowledge | |
| |
| |
| Knowledge of Relevant Technology | |
| |
| |
| Accounting, Tax and Legal | |
| |
| |
| The American Association of Financial Engineers | |
| |
| |
| |
| The Conceptual Tools of the Financial Engineer | |
| |
| |
| |
| Valuation Relationships and Applications | |
| |
| |
| Cash Flows | |
| |
| |
| Time Value | |
| |
| |
| Sensitivity Analysis of Time Value | |
| |
| |
| Applications | |
| |
| |
| Spreadsheets | |
| |
| |
| Compounding | |
| |
| |
| Absolute Valuation Versus Relative Valuation | |
| |
| |
| |
| Measuring Return | |
| |
| |
| Utility | |
| |
| |
| Measuring Return: Profit versus Rates | |
| |
| |
| Rates of Return--Before and After Taxes | |
| |
| |
| Rates of Return and Compounding | |
| |
| |
| Investment Horizons | |
| |
| |
| |
| The Lognormal Distribution, Return Relatives, and Holding Period Yields | |
| |
| |
| |
| Risk: Portfolio Considerations, Investment Horizons, Leverage | |
| |
| |
| Overview | |
| |
| |
| Volatility: The Source of Price Risk | |
| |
| |
| Expressing Price Risk in Percent Form | |
| |
| |
| The Mathematics of Portfolio Analysis | |
| |
| |
| Risk Aversion and Portfolio Analysis | |
| |
| |
| Role of the Investment Horizon (the Time Dimension) | |
| |
| |
| An Intuitive Demonstration of the Importance of the Investment Horizon | |
| |
| |
| Drawdown Criterion | |
| |
| |
| The Optimal Portfolio in the Absence of a Riskless Asset | |
| |
| |
| The Riskless Asset | |
| |
| |
| Long and Short Positions and the Role of Leverage | |
| |
| |
| |
| Measuring Risk: Advanced Topics | |
| |
| |
| Measuring Exposure to Price Risk | |
| |
| |
| Managing Risk | |
| |
| |
| Insurance | |
| |
| |
| Asset/Liability Management | |
| |
| |
| Hedging | |
| |
| |
| |
| Understanding Interest Rates and Exchange Rates | |
| |
| |
| Debt Instruments: The Basics | |
| |
| |
| The Coupon | |
| |
| |
| Valuation of the Debt Instruments | |
| |
| |
| The Yield Curve | |
| |
| |
| Investment Risks in the Debt Markets | |
| |
| |
| Exchange Rates: The Basics | |
| |
| |
| Comparative Yield Curves | |
| |
| |
| |
| Speculation, Arbitrage and Market Efficiency | |
| |
| |
| The Market Mechanism at Work | |
| |
| |
| Speculation | |
| |
| |
| Arbitrage | |
| |
| |
| Efficient Markets: Friend or Foe | |
| |
| |
| |
| The Corporate Treasurer's Perspective: Reading Between the Lines | |
| |
| |
| Why Risk Management? | |
| |
| |
| Identifying Strategic Exposures | |
| |
| |
| A Little Financial Engineering Can Go a Long Way | |
| |
| |
| Analyzing the Balance Sheet | |
| |
| |
| Modeling a Firm's Exposures | |
| |
| |
| |
| The Physical Tools of the Financial Engineer | |
| |
| |
| |
| Product Development | |
| |
| |
| Products Defined | |
| |
| |
| A Model for New Product Development | |
| |
| |
| Instrument Preview | |
| |
| |
| |
| Futures and Forwards | |
| |
| |
| Futures | |
| |
| |
| Forwards | |
| |
| |
| Forward Rate Agreements (FRAs) | |
| |
| |
| FRAs and Swaps | |
| |
| |
| Summary | |
| |
| |
| |
| Euro-rate Differential Futures and Forward Exchange Agreements | |
| |
| |
| |
| Swaps | |
| |
| |
| History | |
| |
| |
| A Note on Rate Conventions | |
| |
| |
| The Structure of a Swap | |
| |
| |
| Interest Rate Swaps | |
| |
| |
| Currency Swaps | |
| |
| |
| Commodity Swap | |
| |
| |
| Variants | |
| |
| |
| Swap Dealer's Role | |
| |
| |
| |
| Single Period Options: Calls and Puts | |
| |
| |
| Calls and Puts: The Basics | |
| |
| |
| Payoff Profiles | |
| |
| |
| Hedging with Options | |
| |
| |
| Cash Settled Options | |
| |
| |
| |
| Multiperiod Options: Caps, Floors, Collars, Captions, Swaptions, and Compound Options | |
| |
| |
| Interest Rate Caps (Caps) | |
| |
| |
| Interest Rate Floors (Floors) | |
| |
| |
| Interest Rate Collars (Collars) | |
| |
| |
| Miscellaneous Interest Rate Options | |
| |
| |
| Monetizing Embedded Options | |
| |
| |
| Compound Options | |
| |
| |
| |
| Fixed Income Securities | |
| |
| |
| Primary Versus Secondary Markets | |
| |
| |
| The Cash Market for U.S. Treasury Debt | |
| |
| |
| The Cash Market for Corporate Debt and Preferred Stock | |
| |
| |
| The Cash Market for Mortgage Debt | |
| |
| |
| The International Debt Markets | |
| |
| |
| |
| Conversion of Bank Discount Yields to Bond Equivalent Yields | |
| |
| |
| |
| The Restatement of Bond Equivalent Yields | |
| |
| |
| |
| Recent Debt Market Innovations | |
| |
| |
| Zero Coupon Securities | |
| |
| |
| Multiclass Mortgage-Backed and Asset-Backed Securities | |
| |
| |
| Defeasance | |
| |
| |
| The Repo/Reverse Market | |
| |
| |
| Junk Bonds | |
| |
| |
| Shelf Registration | |
| |
| |
| Floating Rate Preferred Stock and Reverse Floating Rate Debt | |
| |
| |
| |
| Taxation of Zero Coupon Bonds | |
| |
| |
| |
| Equity and Equity-Related Instruments | |
| |
| |
| Forms of Equity in the United States | |
| |
| |
| Equity-Related Securities | |
| |
| |
| Equity Distribution | |
| |
| |
| The Role of Equity in the Corporate Capital Structure | |
| |
| |
| |
| Hybrid Securities | |
| |
| |
| Types of Hybrid Securities | |
| |
| |
| Investor Motivation | |
| |
| |
| Issuer Motivation | |
| |
| |
| |
| Financial Engineering Processes and Strategies | |
| |
| |
| |
| Asset/Liability Management | |
| |
| |
| The Evolution of Asset/Liability Management | |
| |
| |
| The Foundation Concepts | |
| |
| |
| The Changing Face of Liquidity Management | |
| |
| |
| Margin Management (the role of the Gap) | |
| |
| |
| The Investment Banker in Asset/Liability Management | |
| |
| |
| |
| Hedging and Related Risk Management Techniques | |
| |
| |
| Hedge Ratios and Their Uses | |
| |
| |
| Recent Improvements in Hedging Theory | |
| |
| |
| The Cost of Hedging | |
| |
| |
| The Building Block Approach to Hedging | |
| |
| |
| Miscellaneous Risk Management Issues and Instruments | |
| |
| |
| |
| Corporate Restructuring and the LBO | |
| |
| |
| Corporate Restructuring | |
| |
| |
| Going Private: The Leveraged Buyout | |
| |
| |
| A Typical Leveraged Buyout | |
| |
| |
| The Investment Bank in an LBO: The Financial Engineer at Work | |
| |
| |
| |
| Arbitrage and Synthetic Instruments | |
| |
| |
| Arbitrage: From the Ancient to the Modern | |
| |
| |
| Synthetic Securities | |
| |
| |
| Synthesizing Derivatives | |
| |
| |
| The Cash-and-Carry Synthetic | |
| |
| |
| Cash-and-Carry in Arbitrage: Enhancing Portfolio Return | |
| |
| |
| Creating Synthetic Long Bonds | |
| |
| |
| Using Swaps to Synthesize Positions | |
| |
| |
| Qualitative Differences Between Synthetic and Real Securities | |
| |
| |
| |
| All-in Cost | |
| |
| |
| |
| Tax-Driven Deals | |
| |
| |
| Preventing a Hostile Takeover | |
| |
| |
| Recapitalization of the Firm | |
| |
| |
| Nonprofits: Tax on Unrelated Business Income | |
| |
| |
| Meeting the Need for Short-Term Financing | |
| |
| |
| Bond Swaps | |
| |
| |
| Self-Liquidating Preferred Stock | |
| |
| |
| Where Is a White Knight When You Need One? | |
| |
| |
| Renegotiating Debt | |
| |
| |
| Taxes and Costs on Real Estate Transfers | |
| |
| |
| Real Property Taxes | |
| |
| |
| |
| Miscellaneous Equity-Based Strategies | |
| |
| |
| Dividend Capture Strategies | |
| |
| |
| Whole-Market Investing | |
| |
| |
| Asset Allocation | |
| |
| |
| Portfolio Insurance | |
| |
| |
| Program Trading | |
| |
| |
| Unbundling Stocks | |
| |
| |
| |
| The Calculation of Stock Indexes | |
| |
| |
| |
| Future Directions in Financial Engineering | |
| |
| |
| |
| Future Trends: Globalization and Technology | |
| |
| |
| The Meaning of Globalization | |
| |
| |
| A Recap of the Recent Developments Toward Financial Globalization | |
| |
| |
| Development of New Markets and Market Linkages | |
| |
| |
| Recent Advances in Settlement and Clearing | |
| |
| |
| Globalization, Financial Engineering, and Monetary Policy | |
| |
| |
| Spreadsheeting and Modeling: The Role of the Microcomputer | |
| |
| |
| Toward a New World | |
| |
| |
| |
| Articles | |
| |
| |
| |
| Legal Protections for Innovative Financial Products and Services | |
| |
| |
| Using a Copyright to Protect a Financial Product | |
| |
| |
| Using a Patent to Protect a Financial Product | |
| |
| |
| Using Unfair Competition Law to Protect a Security | |
| |
| |
| How to Obtain Protection | |
| |
| |
| Enforcement | |
| |
| |
| Advantages and Disadvantages | |
| |
| |
| Using a Trademark or Service Mark to Protect a Security | |
| |
| |
| Index | |