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Handbook of Financial Engineering Using Derivatives to Manage Risk

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ISBN-10: 027374240X

ISBN-13: 9780273742401

Edition: 3rd 2013 (Revised)

Authors: Lawrence Galitz

List price: $100.00
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Financial engineering and the use of derivatives are critical for any corporation that needs to manage financial risk. This text explains the tools and techniques needed in financial engineering.
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Book details

List price: $100.00
Edition: 3rd
Copyright year: 2013
Publisher: Financial Times/Prentice Hall
Publication date: 4/18/2013
Binding: Paperback
Pages: 768
Size: 6.50" wide x 9.75" long x 1.75" tall
Weight: 2.838
Language: English

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