| |
| |
| Acknowledgment | |
| |
| |
| |
| Introduction: The Market Context | |
| |
| |
| |
| Capital and the Capital Markets | |
| |
| |
| |
| The Euromarkets (International Capital Markets) | |
| |
| |
| |
| Modern Investment Banking | |
| |
| |
| |
| The Clients of Investment Banks | |
| |
| |
| |
| About this Book | |
| |
| |
| |
| The Money Markets | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Domestic Money Markets | |
| |
| |
| |
| US Domestic Markets | |
| |
| |
| |
| The European Central Bank (ECB) | |
| |
| |
| |
| Sterling Money Markets | |
| |
| |
| |
| The Bank of Japan | |
| |
| |
| |
| Systemic Risks and Moral Hazards | |
| |
| |
| |
| Treasury Bills | |
| |
| |
| |
| Discounting Treasury Bills | |
| |
| |
| |
| US Commercial Paper | |
| |
| |
| |
| Credit Risk on USCP | |
| |
| |
| |
| Bankers� Acceptances | |
| |
| |
| |
| The Eurocurrency Markets | |
| |
| |
| |
| Eurocurrency Loans and Deposits | |
| |
| |
| |
| Eurocurrency Interest and Day-Count | |
| |
| |
| |
| Eurocurrency Certificates of Deposit | |
| |
| |
| |
| CD Yield-to-Maturity | |
| |
| |
| |
| Euro-Commercial Paper | |
| |
| |
| |
| Repos and Reverses | |
| |
| |
| |
| Repo: Case Study | |
| |
| |
| |
| Other Features of Repos | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| The Foreign Exchange Market | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Market Structure | |
| |
| |
| |
| FX Dealers and Brokers | |
| |
| |
| |
| Spot Foreign Exchange Deals | |
| |
| |
| |
| Sterling and Euro Quotations | |
| |
| |
| |
| Factors Affecting Spot FX Rates | |
| |
| |
| |
| Spot FX Trading | |
| |
| |
| |
| Spot Position Keeping | |
| |
| |
| |
| FX Risk Control | |
| |
| |
| |
| Cross-Currency Rates | |
| |
| |
| |
| Outright Forward FX Rates | |
| |
| |
| |
| Outright Forward FX Hedge: Case Study | |
| |
| |
| |
| Forward FX Formula | |
| |
| |
| |
| FX or Forward Swaps | |
| |
| |
| |
| FX Swap Two-Way Quotations | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Major Government Bond Markets | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Introduction to Government Bonds | |
| |
| |
| |
| Sovereign Risk | |
| |
| |
| |
| US Government Notes and Bonds | |
| |
| |
| |
| US Treasury Quotations | |
| |
| |
| |
| US Treasury Strips | |
| |
| |
| |
| Bond Pricing | |
| |
| |
| |
| Pricing Coupon Bonds: Examples | |
| |
| |
| |
| Detailed Bond Valuation: US Treasury | |
| |
| |
| |
| Bond Yield | |
| |
| |
| |
| Reinvestment Assumptions | |
| |
| |
| |
| Annual and Semi-Annual Bond Yields | |
| |
| |
| |
| UK Government Bonds | |
| |
| |
| |
| Japanese Government Bonds (JGBs) | |
| |
| |
| |
| Eurozone Government Bonds | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Bond Price Sensitivity | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Bond Market Laws | |
| |
| |
| |
| Other Factors Affecting Price Sensitivity | |
| |
| |
| |
| Macaulay�s Duration | |
| |
| |
| |
| Calculating Macaulay�s Duration | |
| |
| |
| |
| Duration of a Zero | |
| |
| |
| |
| Modified Duration | |
| |
| |
| |
| Price Value of a Basis Point | |
| |
| |
| |
| Convexity | |
| |
| |
| |
| Measuring Convexity | |
| |
| |
| |
| Convexity Behaviour | |
| |
| |
| |
| Portfolio Duration | |
| |
| |
| |
| Dedication | |
| |
| |
| |
| Immunization | |
| |
| |
| |
| Duration-Based Hedges | |
| |
| |
| |
| Convexity Effects on Duration Hedges | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| The Yield Curve | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Real and Nominal Interest Rates | |
| |
| |
| |
| Compounding Periods | |
| |
| |
| |
| The Yield Curve Defined | |
| |
| |
| |
| Theories of Yield Curves | |
| |
| |
| |
| Zero Coupon or Spot Rates | |
| |
| |
| |
| Bootstrapping | |
| |
| |
| |
| Spot Rates and the Par Curve | |
| |
| |
| |
| Pricing Models Using Spot Rates | |
| |
| |
| |
| Forward Rates | |
| |
| |
| |
| Discount Factors | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Credit Spreads and Securitization | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Basics of Credit Spreads | |
| |
| |
| |
| The Role of the Ratings Agencies | |
| |
| |
| |
| Credit Spreads and Default Probabilities | |
| |
| |
| |
| Credit Default Swaps | |
| |
| |
| |
| Index Credit Default Swaps | |
| |
| |
| |
| Basket Default Swaps | |
| |
| |
| |
| Credit-Linked Notes | |
| |
| |
| |
| Securitization and CDOs | |
| |
| |
| |
| Rationale for Securitization | |
| |
| |
| |
| Synthetic CDOs | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Equity Markets and Equity Investment | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Comparing Corporate Debt and Equity | |
| |
| |
| |
| Additional Features of Common Stock | |
| |
| |
| |
| Hybrid Securities | |
| |
| |
| |
| Equity Investment Styles | |
| |
| |
| |
| Efficient Markets | |
| |
| |
| |
| Modern Portfolio Theory (MPT) | |
| |
| |
| |
| Primary Markets for Common Stock | |
| |
| |
| |
| Subsequent Common Stock Issues | |
| |
| |
| |
| Secondary Markets: Major Stock Markets | |
| |
| |
| |
| Depository Receipts | |
| |
| |
| |
| Stock Lending | |
| |
| |
| |
| Portfolio (Basket) Trading | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Equity Fundamental Analysis | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Principles of Common Stock Valuation | |
| |
| |
| |
| The Balance Sheet Equation | |
| |
| |
| |
| The Income Statement | |
| |
| |
| |
| Earnings Per Share (EPS) | |
| |
| |
| |
| Dividend Per Share (DPS) | |
| |
| |
| |
| Ratio Analysis | |
| |
| |
| |
| Liquidity Ratios | |
| |
| |
| |
| Profitability Ratios | |
| |
| |
| |
| Leverage Ratios | |
| |
| |
| |
| Investor Ratios and Valuation | |
| |
| |
| |
| Applying Valuation Multiples | |
| |
| |
| |
| Firm or Enterprise Value Multiples | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Cash Flow Models in Equity Valuation | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| The Basic Dividend Discount Model | |
| |
| |
| |
| Constant Dividend Growth Models | |
| |
| |
| |
| The Implied Return on a Share | |
| |
| |
| |
| Dividend Yield and Dividend Growth | |
| |
| |
| |
| Price/Earnings Ratio | |
| |
| |
| |
| Stage Dividend Discount Models | |
| |
| |
| |
| Two-Stage Model: Example | |
| |
| |
| |
| The Capital Asset Pricing Model (CAPM) | |
| |
| |
| |
| Beta | |
| |
| |
| |
| Estimating the Market Risk Premium | |
| |
| |
| |
| The Equity Risk Premium Controversy | |
| |
| |
| |
| CAPM and Portfolio Theory | |
| |
| |
| |
| Free Cash Flow Valuation | |
| |
| |
| |
| Forecasting Free Cash Flows | |
| |
| |
| |
| Weighted Average Cost of Capital (WACC) | |
| |
| |
| |
| Residual Value | |
| |
| |
| |
| WACC and Leverage | |
| |
| |
| |
| Assets Beta Method | |
| |
| |
| |
| Company Value and Leverage | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Interest Rate Forwards and Futures | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Forward Rate Agreements (FRAs) | |
| |
| |
| |
| FRA Application: Case Study | |
| |
| |
| |
| Borrowing Costs with an FRA Hedge | |
| |
| |
| |
| FRA Market Quotations | |
| |
| |
| |
| The Forward Interest Rate | |
| |
| |
| |
| Financial Futures | |
| |
| |
| |
| CME Eurodollar Futures | |
| |
| |
| |
| Eurodollar Futures Quotations | |
| |
| |
| |
| Futures Margining | |
| |
| |
| |
| Margining Example: Euribor Futures on Eurex | |
| |
| |
| |
| Hedging with Interest Rate Futures: Case Study | |
| |
| |
| |
| Futures Strips | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Appendix: Statistics on Derivatives Markets | |
| |
| |
| |
| Bond Futures | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Definitions | |
| |
| |
| |
| The CBOT 30-Year US Treasury Bonds Futures | |
| |
| |
| |
| Invoice Amount and Conversion Factors | |
| |
| |
| |
| Long Gilt and Euro-Bund Futures | |
| |
| |
| |
| Forward Bond Price | |
| |
| |
| |
| Carry Cost | |
| |
| |
| |
| The Implied Repo Rate | |
| |
| |
| |
| The Cheapest to Deliver (CTD) Bond | |
| |
| |
| |
| CTD Behaviour | |
| |
| |
| |
| Hedging with Bond Futures | |
| |
| |
| |
| Basis Risk | |
| |
| |
| |
| Hedging Non-CTD Bonds | |
| |
| |
| |
| Using Futures in Portfolio Management | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Interest Rate Swaps | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Swap Definitions | |
| |
| |
| |
| The Basic Interest Rate Swap Illustrated | |
| |
| |
| |
| Typical Swap Applications | |
| |
| |
| |
| Interest Rate Swap: Detailed Case Study | |
| |
| |
| |
| Interest Rate Swap Terms | |
| |
| |
| |
| Comparative Advantage | |
| |
| |
| |
| Swap Quotations and Spreads | |
| |
| |
| |
| Determinants of Swap Spreads | |
| |
| |
| |
| Hedging Swaps with Treasuries | |
| |
| |
| |
| Cross-Currency Swaps: Case Study | |
| |
| |
| |
| Cross-Currency Swap Revaluation | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Appendix: Swap Variants | |
| |
| |
| |
| Interest Rate Swap Valuation | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Valuing a Swap at Inception | |
| |
| |
| |
| Valuing the Swap Components | |
| |
| |
| |
| Swap Revaluation | |
| |
| |
| |
| Revaluation Between Payment Dates | |
| |
| |
| |
| The Forward Rate Method | |
| |
| |
| |
| Forward Rate Method on a Spreadsheet | |
| |
| |
| |
| Swap Rates and LIBOR Rates | |
| |
| |
| |
| Pricing a Swap from Futures | |
| |
| |
| |
| Hedging Interest Rate Risk on Swaps | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Equity Index Futures and Swaps | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Index Futures | |
| |
| |
| |
| Margining Procedures | |
| |
| |
| |
| Final Settlement and Spread Trades | |
| |
| |
| |
| Hedging with Index Futures: Case Study | |
| |
| |
| |
| Hedge Efficiency | |
| |
| |
| |
| Other Uses of Index Futures | |
| |
| |
| |
| Pricing an Equity Forward Contract | |
| |
| |
| |
| Index Futures Fair Value | |
| |
| |
| |
| The Basis | |
| |
| |
| |
| Index Arbitrage Trade | |
| |
| |
| |
| Running an Arbitrage Desk | |
| |
| |
| |
| Features of Index Futures | |
| |
| |
| |
| Equity Swaps | |
| |
| |
| |
| Managing the Risks on Equity Swaps | |
| |
| |
| |
| Structuring Equity Swaps | |
| |
| |
| |
| Benefits and Applications of Equity Swaps | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Fundamentals of Options | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Definitions | |
| |
| |
| |
| Basic Option Trading Strategies | |
| |
| |
| |
| Long Call: Expiry Payoff Profile | |
| |
| |
| |
| Short Call: Expiry Payoff Profile | |
| |
| |
| |
| Long Put: Expiry Payoff Profile | |
| |
| |
| |
| Short Put: Expiry Payoff Profile | |
| |
| |
| |
| Summary: Intrinsic and Time Value | |
| |
| |
| |
| CBOE Stock Options | |
| |
| |
| |
| CME S&P 500 Index Options | |
| |
| |
| |
| Stock Options on LIFFE | |
| |
| |
| |
| FT-SE 100 Index Options | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Appendix: Exotic Options | |
| |
| |
| |
| Option Valuation Models | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Fundamental Principles: European Options | |
| |
| |
| |
| Synthetic Forwards and Futures | |
| |
| |
| |
| American Options and Early Exercise | |
| |
| |
| |
| Binomial Trees | |
| |
| |
| |
| Expanding the Tree | |
| |
| |
| |
| Black-Scholes Model | |
| |
| |
| |
| Black-Scholes Assumptions | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Appendix: Measuring Historic Volatility | |
| |
| |
| |
| Option Pricing and Risks | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Intrinsic and Time Value Behaviour | |
| |
| |
| |
| Volatility Assumption and Option Pricing | |
| |
| |
| |
| DELTA (?OR ?) | |
| |
| |
| |
| Delta Behaviour | |
| |
| |
| |
| GAMMA (?OR ?) | |
| |
| |
| |
| Readjusting the Delta Hedge | |
| |
| |
| |
| Gamma Behaviour | |
| |
| |
| |
| THETA (?) | |
| |
| |
| |
| Vega | |
| |
| |
| |
| Rho (p) and Summary of Greeks | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Appendix: Delta and Gamma Hedging | |
| |
| |
| |
| Option Strategies | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| Hedging with Put Options | |
| |
| |
| |
| Covered Call Writing | |
| |
| |
| |
| Collars | |
| |
| |
| |
| Bull and Bear Spreads | |
| |
| |
| |
| Other Spread Trades | |
| |
| |
| |
| Volatility Revisited | |
| |
| |
| |
| Volatility Trading: Straddles and Strangles | |
| |
| |
| |
| Current Payoff Profiles | |
| |
| |
| |
| Profits and Risks on Straddles | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| |
| Additional Option Applications | |
| |
| |
| |
| Chapter Overview | |
| |
| |
| |
| OTC and Exchange-traded Currency Options | |
| |
| |
| |
| Hedging FX Exposures with Options: Case Study | |
| |
| |
| |
| Pricing Currency Options | |
| |
| |
| |
| Interest Rate Options | |
| |
| |
| |
| Exchange-Traded Interest Rate Options | |
| |
| |
| |
| Caps, Floors, and Collars | |
| |
| |
| |
| Interest Rate Cap: Case Study | |
| |
| |
| |
| Pricing Caps and Floors: Black Model | |
| |
| |
| |
| Swaptions | |
| |
| |
| |
| Interest Rate Strategies | |
| |
| |
| |
| Convertible Bonds | |
| |
| |
| |
| CB Measures of Value | |
| |
| |
| |
| Conversion Premium and Parity | |
| |
| |
| |
| Convertible Arbitrage | |
| |
| |
| |
| Chapter Summary | |
| |
| |
| Glossary of Financial Terms | |
| |
| |
| Index | |