Title:
Financial engineering and arbitrage in the financial markets
Author:
Dubil, Robert.
ISBN:
9780470746011
Personal Author:
Publication Information:
Chichester, West Sussex, UK : John Wiley, 2011.
Physical Description:
xii, 367 p. ; 26 cm.
Series:
Wiley finance
Wiley finance series.
General Note:
Formerly CIP.
Contents:
Machine generated contents note: 1.Purpose and Structure of Financial Markets -- 1.1.Overview of Financial Markets -- 1.2.Risk Sharing -- 1.3.Transactional Structure of Financial Markets -- 1.4.Arbitrage: Pure Versus Relative Value -- 1.5.Financial Institutions: Transforming Intermediaries vs Broker-Dealers -- 1.6.Primary (Issuance) and Secondary (Resale) Markets -- 1.7.Market Players: Hedgers vs Speculators -- 1.8.Preview of the Book -- pt. I RELATIVE VALUE BUILDING BLOCKS -- 2.Spot Markets -- 2.1.Bonds and Annual Bond Math -- 2.1.1.Zero-Coupon Bond -- 2.1.2.Coupon Bond -- 2.1.3.Amortizing Bond -- 2.1.4.Floating Rate Bond -- 2.2.Intra-Year Compounding and Day-Count -- 2.2.1.Intra-Year Compounding -- 2.2.2.Day-Count -- 2.2.3.Accrued Interest -- 2.3.Term Structure of Interest Rates and the Discount Factor Bootstrap -- 2.3.1.Term Structure -- 2.3.2.Discount Factor Bootstrap -- 2.3.3.Valuation of an Arbitrary Bond -- 2.4.Interest Rate Risk: Duration and Convexity --
Contents note continued: 2.4.1.Duration -- 2.4.2.Portfolio Duration -- 2.4.3.Convexity -- 2.4.4.Other Risk Measures -- 2.5.Equity, Commodity, and Currency Math -- 2.5.1.Equities -- 2.5.2.Currencies -- 2.6.Short Selling -- 2.6.1.Buying on Margin -- 2.6.2.Short Selling in a Margin Account -- 2.6.3.Short Selling of Bonds -- 3.Futures Markets -- 3.1.Fundamentals of Futures and Forwards -- 3.2.Futures Mechaaics -- 3.2.1.Physical Commodity Futures -- 3.2.2.Interest Rate Futures -- 3.2.3.Stock Index Futures -- 3.2.4.Currency Futures and Forwards -- 3.3.Cash-and-Carry Arbitrage -- 3.3.1.Commodities -- 3.3.2.Stock Indexes -- 3.3.3.Currencies -- 3.4.Futures Not Subject to Cash-and-Carry -- 3.5.Yield Curve Construction with Interest Rate Futures -- 3.5.1.Certainty Equivalence of Eurodollar Futures -- 3.5.2.Forward Rate Agreements -- 3.5.3.Building Spot Zeros -- 3.5.4.Recovering the Forwards -- 3.5.5.Including Repo Rates in the Calculation of the Forwards -- 4.Swap Markets --
Contents note continued: 4.1.Fundamentals of Swaps -- 4.1.1.The Dual Nature of Swaps -- 4.1.2.Implication for Pricing and Hedging -- 4.2.Interest Rate Swaps -- 4.2.1.Definition of an Interest Rate Swap -- 4.2.2.Valuation of Interest Rate Swaps -- 4.2.3.Hedging of Interest Rate Swaps -- 4.3.Cross-Currency Swaps -- 4.3.1.Definition of a Fixed-for-Fixed Cross-Currency Swap -- 4.3.2.Valuation and Settlement of Cross-Currency Swaps -- 4.3.3.Cross-Currency Swaps as Packages of Off-Market FX Forwards -- 4.3.4.Multicurrency and Combination Cross-Currency Swaps -- 4.4.Equity, Commodity, and Exotic Swaps -- 4.4.1.Equity Swaps -- 4.4.2.Commodity Swaps -- 4.4.3.Volatility Swaps -- 4.4.4.Index Principal Swaps -- 5.Options on Prices and Hedge-Based Valuation -- 5.1.Call and Put Payoffs at Expiry -- 5.2.Composite Payoffs at Expiry -- 5.2.1.Straddles and Strangles -- 5.2.2.Spreads and Combinations -- 5.3.Option Values Prior to Expiry --
Contents note continued: 5.4.Options and Forwards, Risk Sharing and Put---Call Parity -- 5.5.Currency Options -- 5.6.Binomial Option Pricing -- 5.6.1.One-Step Examples -- 5.7.Black---Scholes Model and Extensions -- 5.7.1.Black---Scholes with No Dividends -- 5.7.2.Dividends -- 5.7.3.Options on Currency Rates -- 5.7.4.Black---Scholes Delta, Gamma, and Vega -- 5.8.Residual Risk of Options: Gamma, Vega, and Volatility -- 5.8.1.Implied Volatility -- 5.8.2.Volatility Smiles and Skews -- 5.9.A Real-Life Option Pricing Exercise -- 5.9.1.Consistency Checks: Put---Call Parity, Black---Scholes, and Binomial -- 6.Options on Non-Price Variables -- 6.1.Black Models For Bond Price Options, Caps/Floors, and European Swaptions -- 6.1.1.Options on Bond Prices -- 6.1.2.Cap and Floor Definitions -- 6.1.3.Relationship of Caps and Floors to FRAs and Swaps -- 6.1.4.A Cap Application -- 6.1.5.Pricing of Caps and Floors -- 6.1.6.European Swaption Definitions -- 6.1.7.Options to Cancel Swaps --
Contents note continued: 6.1.8.Relationship of Swaptions to Forward Swaps -- 6.1.9.Pricing of European Swaptions -- 6.1.10.Limitations of the Black Model -- 6.2.Convexity-Adjusted Models For Libor Forwards, Quantos, and Constant Maturity Swaps -- 6.2.1.Convexity Adjustment for Eurodollar Futures -- 6.2.2.Convexity Adjustment for CMS Options -- 6.2.3.Quanto Adjustments -- 6.3.Arbitrage-Free Interest Rate Models -- 6.3.1.Short Rate Models -- 6.3.2.Trinomial Trees and Calibration -- 6.3.3.The Heath---Jarrow---Morton Model and the LIBOR Market Model -- 6.3.4.Bermudan Swaptions and Multifactor Models -- 6.4.Exotic Interest Rate Options -- 6.4.1.Periodic Caps -- 6.4.2.Digitals and Ranges -- 7.Default Risk and Credit Derivatives -- 7.1.Credit Default Swaps -- 7.1.1.Credit Default Swap -- 7.1.2.No Arbitrage: CDS vs Corporate Bond Spread -- 7.1.3.Bundled Single-Name Credit Derivatives -- 7.2.A Constant Default Probability Model -- 7.3.A Deterministic Credit Migration Model --
Contents note continued: 7.4.A Poisson Model of Single Issuer Default -- 7.4.1.Poisson Distribution -- 7.4.2.A Single Issuer Default Model -- 7.4.3.Pricing a Credit Default Swap in a Single Issuer Default Model -- 7.5.The Default Correlation of the Reference Issuer and the Protection Seller -- pt. II CASH FLOW ENGINEERING -- 8.Structured Finance -- 8.1.A Simple Classification of Structured Notes -- 8.2.Interest Rate and Yield Curve-Based Structured Products -- 8.2.1.An Inverse Floater -- 8.2.2.A Leveraged Inverse Floater -- 8.2.3.A Capped Floater -- 8.2.4.A Callable -- 8.2.5.A Range Floater -- 8.2.6.An Index Principal Swap -- 8.3.Asset Class-Linked Notes -- 8.3.1.Principal-Protected Equity-Linked Notes -- 8.3.2.A (Rainbow) Multi-Asset-Linked Note -- 8.3.3.Principal-At-Risk Notes and Commodity-Tracking ETNs -- 8.4.Insurance Risk Structured Products -- 9.Mortgage-Backed Securities -- 9.1.Mortgage Financing Basics -- 9.2.Prepayment Risk -- 9.3.Mortgage Pass-Through Securities --
Contents note continued: 9.4.Collateralized Mortgage Obligations -- 9.4.1.Sequential-Pay CMO -- 9.4.2.Planned Amortization Class CMO -- 9.4.3.Interest-only (IO) and Principal-only (PO) Classes -- 9.5.Multiclass and Non-Vanilla CMOs -- 9.5.1.A Multiclass PAC Structure with a PAC I/O and a Floater/Inverse Coupon Split -- 9.5.2.Non-Accelerating Senior and Accrual Tranches in Sequential CMOs -- 10.Collateralized Debt Obligations and Basket Credit Derivatives -- 10.1.Collateralized Debt Obligations -- 10.1.1.Cash CDO -- 10.1.2.Synthetic CDO -- 10.2.Basket Credit Derivatives -- 10.2.1.First-to-Default Basket -- 10.2.2.Nth-to-Default Basket, Arbitrage Conditions, and Hedging -- 10.2.3.Hedging of Basket Derivatives -- 10.3.Copulas and the Modeling of Default Correlation -- 10.3.1.A Gaussian Copula -- 10.3.2.General Copula Models -- 10.4.Synthetic CDO Tranche Pricing and Loss Analysis -- 10.4.1.Synthetic CDO Revisited -- 10.4.2.Synthetic CDO Pricing and Expected Loss --
Contents note continued: 10.4.3.Synthetic CDO --- Loss Rates, Ratings and the Crisis of 2008 -- 10.5.Credit Derivative Indexes -- pt. III THE PLAYERS -- 11.Individual Investors: A Survey of Modern Investment Theory -- 11.1.A Brief History of Investment Thought -- 11.2.Free Cash Flow Valuation of Companies -- 11.2.1.Free Cash Flow Definitions -- 11.2.2.Growth and the Discounting of the Cash Flows -- 11.2.3.Terminal Multiple Models of Cash Flow Discounting -- 11.3.The Modern Portfolio Theory and the CAPM -- 11.3.1.Diversification and the Efficient Frontier -- 11.3.2.Two-Fund Separation -- 11.3.3.Systematic Risk and the CAPM -- 11.3.4.Using the CAPM as a Stock Screen to Discover Alpha -- 11.4.Multifactor Index Models -- 11.4.1.The Fama---French Three-Factor Model -- 11.4.2.The Carhart Fourth Factor: the Momentum -- 11.4.3.International Index Factors -- 11.5.Fundamental Indexing -- 11.5.1.A Brief History of Fundamental Indexing -- 11.5.2.Fundamental Indexing and Rebalancing --
Contents note continued: 11.5.3.Tactical Asset Allocation -- 11.5.4.Fundamentally Indexed US Funds -- 12.Hedge Funds: Alpha, Beta, and Strategy Indexes -- 12.1.Hedge Fund Strategies -- 12.1.1.Relative Asset Value Funds -- 12.1.2.Relative Corporate/Credit Structure -- 12.1.3.Theoretical Relative Value -- 12.1.4.Statistical Relative Value Arbitrage -- 12.2.Portable Alpha and Market-Neutral Plays -- 12.3.Hedge Fund Replication and Strategy Indexes -- 13.Banks: Asset-Liability Management -- 13.1.Bank Balance Sheets and Income Statements -- 13.2.Interest-Sensitive Gap Management -- 13.3.Duration Gap Management -- 13.4.Value at Risk -- 14.Private Equity, Pension, and Sovereign Funds -- 14.1.Private Equity -- 14.1.1.Investment in Private Equity --- Limited Partnership Funds -- 14.1.2.Leverage Buyouts -- 14.1.3.Private Equity Lending --- Mezzanine Capital and Distressed Loans -- 14.1.4.Other Forms of Private Equity --- PIPEs -- 14.1.5.Venture Capital --
Contents note continued: 14.1.6.Exit Strategies --- IPOs and Secondary Sales -- 14.2.Risk Allocation for Pension Funds and Sovereign Funds -- 14.2.1.Defined Benefit Pension Funds and Endowments -- 14.2.2.The Risk Budget Allocation Process -- Acknowledgment.
Abstract:
"Many students of financial markets and institutions learn a lot of the descriptive details about types of securities and products traded, but do not gain a real insight into what drives people to trade in these markets. They leave the classroom still believing that financial trading firms primarily speculate on the direction of the market movements or earn money from fees. They fail to grasp the concept of relative value arbitrage, which drives most of the trading in today's fast and interconnected markets. This book will teach them what money and capital markets are about through a sequence of arbitrage-based numerical illustrations and exercises enriched with institutional detail. It will explain to the reader what all the people sitting on the trading floors of financial firms do and why they all sit together. The new edition builds on the logic of the first book which is that all financial markets, whether for equity, commodities, currencies or credit, have the same structural building blocks. These are in the increasing order of complexity: spot (cash) transactions (immediate exchanges of cash for asset), forward/futures (pre-agreed-upon future exchanges of cash for asset), swaps (pre-agreed-upon sets of multiple future cash flow exchanges), and options (future exchanges of cash for asset contingent on an event or price level). These contracts are like Lego blocks continuously added together or taken apart by financial engineers to create new structured securities. The main valuation principle is simple: a whole is worth the sum of its parts."--Publisher's website.