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| About the author | |
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| Acknowledgements | |
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| Publisher's acknowledgments | |
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| Preface to the second edition | |
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| Preface to the third edition | |
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| Tools | |
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| Introduction | |
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| Forty years of evolution | |
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| What is financial engineering? | |
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| The nature of risk | |
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| Financial engineering and risk | |
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| Layout of this book | |
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| The cash markets | |
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| Overview of financial markets | |
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| The foreign exchange market | |
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| The money markets | |
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| The bond markets | |
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| The equities markets | |
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| The commodities markets | |
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| Cash instruments versus derivatives | |
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| Capital adequacy requirements | |
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| Forward rates | |
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| Forward exchange rates | |
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| Forward interest rates | |
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| Do forward rates predict future spot rates? | |
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| Spot and forward rates in practice | |
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| FRAs | |
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| What is an FRA? | |
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| Definitions | |
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| Terminology | |
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| The settlement process | |
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| Hedging with FRAs | |
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| Pricing FRAs | |
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| Behaviour of FRA rates | |
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| Financial futures | |
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| A brief history of futures markets | |
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| What is a financial future? | |
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| Futures trading - from pits to screens | |
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| Buying and selling | |
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| The clearing mechanism | |
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| Futures margins | |
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| Physical delivery versus cash settlement | |
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| Futures and cash markets compared | |
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| The advantages of futures | |
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| Short-term interest rate futures | |
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| Definitions | |
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| STIR contracts pricing | |
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| Basis | |
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| Convergence | |
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| Behaviour of futures prices | |
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| Basic hedging example | |
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| Short-term futures contracts compared | |
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| Comparisons of futures and FRAs | |
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| Spread positions | |
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| Bond and stock index futures | |
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| Definition of bond futures contracts | |
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| The cheapest-to-deliver bond | |
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| Cash-and-carry pricing for bond futures | |
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| The implied repo rate | |
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| The delivery mechanism | |
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| Basic hedging with bond futures | |
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| Stock indices and stock index futures | |
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| Definition of stock index futures contracts | |
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| Advantages of using stock index futures | |
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| Cash-and-carry pricing for stock index futures | |
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| Stock index futures prices in practice | |
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| Turning cash into share portfolios and share portfolios into cash | |
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| Swaps | |
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| Definition of interest rate and cross-currency swaps | |
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| Development of the swap market | |
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| Interest rate swaps | |
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| Non-standard interest rate swaps | |
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| Overnight indexed swaps | |
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| Cross-currency swaps | |
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| Basic applications for swaps | |
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| Asset swaps | |
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| CMS and CMT swaps | |
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| Inflation swaps | |
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| Equity and dividend swaps | |
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| Commodity swaps | |
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| Volatility and variance swaps | |
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| Exotic swaps | |
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| ISDA documentation | |
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| Changes in market infrastructure after the credit crisis | |
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| Pricing and valuing swaps | |
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| Principles of swap valuation and pricing | |
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| Discount factors and the discount function | |
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| Calculating discount factors from swap and forward rates | |
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| Generating the discount function | |
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| Relationship between zero, swap and forward rates | |
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| Valuation and pricing of interest rate swaps | |
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| Valuation and pricing of currency swaps | |
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| Cancelling a swap | |
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| Hedging swaps with futures | |
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| The convexity correction | |
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| Credit risk of swaps | |
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| Collateralised vs. non-collateralised swaps | |
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| LIBOR-OIS discounting | |
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| Options - basics and pricing | |
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| Why options are different | |
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| Definitions | |
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| Options terminology | |
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| Value and profit profiles at maturity | |
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| Pricing options | |
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| The behaviour of financial prices | |
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| The Black-Scholes model | |
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| The binomial approach | |
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| The Monte Carlo approach | |
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| Finite difference methods | |
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| Options - volatility and the Greeks | |
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| Volatility | |
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| Volatility smiles and skews | |
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| The VIX | |
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| Value profiles prior to maturity | |
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| How options behave - the Greeks | |
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| Delta hedging | |
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| Options - from building blocks to portfolios | |
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| The building block approach | |
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| Option spreads - vertical, horizontal and diagonal | |
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| Volatility structures | |
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| Range structures | |
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| Arbitrage structures | |
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| Options - interest rate and exotic options | |
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| Why interest rate options are different | |
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| Caps, floors and collars | |
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| Swaptions | |
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| Cancellable and extendible swaps | |
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| Pricing interest rate options | |
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| Compound options | |
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| Exotic options | |
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| Path-dependent options | |
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| Digital options | |
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| Multivariate options | |
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| Other exotic options | |
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| Pricing exotic options | |
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| Price comparisons between exotic options | |
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| Embedded options | |
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| Introducing credit derivatives | |
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| Development of the credit derivatives market | |
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| Motivations for using credit derivatives | |
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| Introducing credit default swaps (CDS) | |
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| Market conventions | |
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| Credit events and determination committees | |
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| Capital structure, recovery rates, reference and deliverable obligations | |
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| Settlement methods and auctions | |
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| Other aspects of CDS | |
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| CDS pricing and credit indices | |
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| A simple CDS pricing model | |
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| Obtaining default probabilities | |
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| Developing a multi-period framework | |
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| The ISDA CDS Standard Model | |
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| Bootstrapping default probabilities | |
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| Calculating up-front payments | |
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| Mark-to-market and CDS valuation | |
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| PV01 and SDV01 | |
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| How credit indices developed | |
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| The CDX and iTraxx credit indices | |
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| Market quotations and statistics | |
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| Other credit indices | |
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| Index tranches | |
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| Techniques | |
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| Applications for financial engineering | |
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| Applications of financial engineering | |
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| Sources of financial risk | |
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| Accounting and economic risk | |
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| Defining hedging objectives | |
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| Measuring hedge efficiency | |
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| The finance division as a profit centre | |
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| Managing currency risk | |
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| Forwards and futures solutions | |
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| Options are chameleons | |
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| How FX options are different | |
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| The scenario | |
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| Comparing hedging strategies | |
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| Basic option hedges | |
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| Selling options within a hedging programme | |
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| Collars, range-forwards, forward-bands and cylinders | |
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| Spread hedges | |
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| Participating forwards | |
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| Ratio forwards | |
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| Break-forwards, FOXs and forward-reversing options | |
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| Flexi-forwards | |
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| Using exotic options | |
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| Selling options outside a hedging programme | |
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| Dynamic hedging | |
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| Which strategy is best? | |
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| Managing interest rate risk using FRAs, futures and swaps | |
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| Using FRAs | |
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| Using short-term interest rate futures | |
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| Calculating the hedge ratio | |
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| Stack vs. strip hedges | |
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| Different kinds of basis risk | |
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| Managing the convergence basis | |
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| Interpolated hedges | |
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| Combining the techniques | |
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| FRAs vs. futures | |
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| Using swaps | |
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| Hedging bond and swap portfolios | |
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| Hedging bond portfolios with bond futures | |
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| Managing interest rate risk - using options and option-based instruments | |
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| Interest rate guarantees | |
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| Using caps and floors | |
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| Collars, participating caps, spread hedges and other variations | |
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| Using captions and swaptions | |
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| Comparison of interest risk management tools | |
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| Managing equity risk | |
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| Bull and bear strategies | |
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| Return enhancement | |
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| Value protection strategies | |
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| Vertical, horizontal and diagonal spreads | |
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| Other option strategies | |
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| Using stock index futures and options | |
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| Portfolio insurance | |
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| Guaranteed equity funds | |
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| Warrants and convertibles | |
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| Exotic equity derivatives | |
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| Managing commodity risk | |
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| Commodity risk | |
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| Creating commodity derivatives | |
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| Using commodity derivatives | |
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| Hybrid commodity derivatives | |
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| Managing credit risk | |
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| Hedging default risk | |
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| Hedging credit risk | |
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| Generating income | |
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| Trading strategies using CDS | |
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| Implementing directional views | |
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| Monetising relative credit views | |
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| Basis trades | |
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| Curve trades | |
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| Index trades | |
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| Structured products | |
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| Understanding structured products | |
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| How structured products are built | |
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| Features of structured products | |
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| Principal-protected notes | |
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| Buffered and capped notes | |
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| Leveraged structures | |
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| Path-dependent structures | |
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| Digital and range-accrual structures | |
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| Correlation structures | |
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| Redeeming structured products prior to maturity | |
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| Final� | |
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| Index | |