9780471487005

Pricing Money provides a highly practical introduction to the principles of bonds and fixed income and is aimed at readers who have little prior knowledge. The book is written in a style that is not overly mathematical or theoretical but takes a practical approach focusing on the aspects of pricing and trading fixed-income securities that are most relevant to the day-to-day activities of people working in the markets. Starting at a basic level the author explains the concepts and principles behind fixed income in an informative way using every day examples that can be understood by the layman. It includes a listing of the terms used; the rules and conventions; the techniques for valuation and pricing and a description of the different roles within the industry. This book will be an excellent training tool for new recruits to the financial markets.

<B>J.D.A. WISEMAN </b> is a bond and swap trader at Credit Suisse First Boston, having previously been an analyst there and at J.P. Morgan. The author read mathematics at Queens' College, Cambridge, and lives in London.

Preface

xiii

Acknowledgements

xv

Part 1: A Beginner's Toolkit

1

(110)

Money markets

3

(14)

What is money?

3

(1)

Why there is a money market?

4

(2)

Choosing a maturity

6

(1)

Repo

7

(2)

Central-bank money-market operations

9

(1)

Two money markets

10

(2)

The euro

12

(1)

Writing money

13

(2)

Settlement details

15

(1)

Summary

16

(1)

Government bonds

17

(18)

Introduction

17

(1)

The concept of yield

18

(1)

Example yield calculations

19

(3)

Coupon and yield

22

(1)

The yield curve

23

(1)

Primary dealers

24

(1)

Government bond markets

24

(2)

Repo as part of the government-bond market

26

(1)

Accrued interest

27

(1)

STRIPS

27

(2)

Other tradable government debt

29

(2)

Non-government debt

31

(1)

Rating agencies

32

(1)

Summary

33

(2)

Futures

35

(16)

The gold miner's problem

35

(1)

The gold miner's solution

36

(1)

Contract specification

37

(1)

Credit and margin

38

(1)

Cash settlement

39

(1)

Cash-settling other contracts

40

(1)

The fixings

41

(2)

The 3-month interest rate future

43

(1)

Price action

44

(2)

The strip and TED spreads

46

(1)

Arbitrage

47

(1)

Some trading jargon

48

(2)

Summary

50

(1)

Swaps

51

(12)

Introduction

51

(2)

An example

53

(2)

Asset swaps

55

(1)

A typical swap in detail

56

(2)

Credit risk in swaps

58

(1)

Trading jargon

59

(1)

Swaps and interest rate futures

60

(1)

Myth and reality

61

(1)

Summary

62

(1)

Options

63

(8)

Introduction

63

(1)

Puts and calls

63

(2)

What is the option worth?

65

(1)

Combinations

66

(1)

Underlyings

66

(1)

Embedded options

67

(1)

Implied volatility

68

(1)

Summary

69

(2)

Foreign exchange

71

(6)

The basic rationale

71

(1)

Size and conventions

72

(1)

Forwards

72

(1)

Shake the dice

73

(2)

Summary

75

(2)

Players

77

(12)

Governments

77

(1)

Pseudo-government issuers

78

(1)

Non-financial corporations

79

(1)

Pension funds

79

(2)

Insurers

81

(1)

Mutual funds

82

(1)

Hedge funds

83

(1)

Commercial banks

83

(2)

Mortgage lenders

85

(1)

Central banks

86

(1)

Private investors

87

(1)

Summary

87

(2)

People

89

(8)

Introduction

89

(1)

Proprietary traders

89

(2)

Market makers

91

(1)

Brokers

92

(1)

Salespeople

93

(1)

Researchers

94

(1)

Back office and middle office

94

(1)

Investment bankers

94

(1)

Summary

95

(2)

Price action

97

(14)

Why do prices move?

97

(2)

Necessity never made a good bargain

99

(1)

Stability and leverage

100

(1)

Fixed-income prices

101

(2)

A stylised crash in fixed income

103

(1)

Forwards, zeros and par yields

104

(4)

Trading the crash

108

(1)

Market irrationality

109

(1)

Summary

110

(1)

Part 2: More detail

111

(58)

Swaps revisited

113

(12)

Introduction

113

(1)

Credit risk in swaps

113

(1)

Reducing the credit risk

114

(2)

Cross-currency basis swaps

116

(1)

The price of a basis swap

117

(1)

A cross-currency issue

118

(3)

Reducing credit risk in basis swaps

121

(1)

Forward rate agreements

122

(1)

Summary

122

(3)

Non-government issuance

125

(14)

Introduction

125

(1)

Bringing a deal to market

126

(2)

The syndicate

128

(1)

Book-building: taking orders

129

(1)

Pricing a swapped deal

130

(1)

Pricing an unswapped deal

131

(1)

Some legal details

132

(2)

Free to trade

134

(1)

An example issue

135

(1)

Opportunistic reopenings

136

(1)

Summary

137

(2)

Yield, duration, repo and forward bond prices

139

(16)

Measuring risk

139

(1)

Yields: compounding frequencies

140

(2)

Duration continued

142

(2)

Definition of DV01

144

(1)

How coupon affects duration and DV01

144

(1)

An example yield curve

145

(2)

A 3s10s flattener

147

(1)

A flattener generates cash

148

(1)

A forward flattener

148

(1)

What happens if nothing happens?

149

(1)

Weighting the forward flattener

150

(1)

A barbell

151

(1)

Carry and slide

152

(1)

Summary

153

(2)

Bond futures

155

(10)

Introduction

155

(1)

Specification

156

(1)

Delivery day

157

(1)

The delivery process

158

(1)

Cheapest to deliver: at par

159

(1)

Cheapest to deliver: far from par

160

(1)

CTD calculations before delivery

161

(1)

Delivery tail

162

(1)

Summary

163

(2)

Basic fixed-income arithmetic

165

(4)

The proportion of a year

165

(2)

Yield to price and price to yield

167

(1)

Semi to annual: halve and square

167

(1)

Forward yield

168

(1)

Forward asset swap

168

(1)

Summary

168

(1)

Index

169

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Pricing Money A Beginner's Guide to Money, Bonds, Futures and Swaps

0471487007

Summary

Author Biography

Table of Contents

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