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Preface | p. xiii |
Acknowledgments | p. xvii |
List of Abbreviations | p. xix |
An Introduction to Swaps | p. 1 |
Overview | p. 1 |
Swaps | p. 3 |
Fixed-Floating Swaps | p. 4 |
Basis Swaps | p. 28 |
Cross-Currency Swaps | p. 34 |
The Risk Characteristics and the Traditional Uses of Swaps | p. 40 |
Interest Rate Risk | p. 40 |
PV01 | p. 43 |
Spread Risk | p. 48 |
A Closer Look at Swap Spreads | p. 50 |
Currency Risk | p. 57 |
Counterparty Risk | p. 58 |
Traditional Uses of Swaps | p. 63 |
New Issue Hedging | p. 63 |
Asset Swaps | p. 68 |
Balance Sheet Management | p. 70 |
The Pricing of Swaps | p. 76 |
Where Do Swap Rates Come From? | p. 76 |
The Link Between Swap Rates and Eurodollar Futures | p. 79 |
The Futures Convexity Bias | p. 84 |
Moving On: Bootstrapping the Curve and Creating a Swap Model | p. 86 |
A Stylized Example | p. 89 |
PV01s in Our Stylized Example | p. 102 |
Moving On: Pricing Up Nonstandard Swaps | p. 102 |
Mark-to-Markets | p. 104 |
Unwinds | p. 111 |
Assignments | p. 112 |
Forward Starting Swaps | p. 113 |
Caps and Floors | p. 135 |
An Introduction to Caps and Floors | p. 135 |
Cap-Floor Parity | p. 137 |
Uses of Caps and Floors | p. 138 |
An Embedded Cap Trade | p. 140 |
Valuing Caps and Floors | p. 142 |
Vol | p. 144 |
Valuing Caps and Floors in Our Stylized Model | p. 147 |
Variations of Standard Caps and Floors | p. 150 |
Swaptions | p. 166 |
An Introduction to Swaptions | p. 166 |
The Value of Swaptions at Expiration | p. 168 |
Swaption Parity | p. 169 |
Uses of Swaptions | p. 170 |
Valuing Swaptions Using Black's Formula | p. 172 |
Swaption Vol | p. 174 |
Pricing Swaptions in Our Stylized Example | p. 175 |
The Link Between Caps/Floors and Swaptions | p. 178 |
Questioning Black's Model for Interest Rate Options | p. 180 |
Are Interest Rates Lognormal? | p. 181 |
Swaption Prices and Implied Vol | p. 184 |
Skew | p. 184 |
The Normal Model | p. 193 |
Background | p. 193 |
The Model | p. 194 |
Pricing Under the Normal Model | p. 195 |
Relationship Between Normal Implied Vol and Lognormal Implied Vol for At-the-Money Swaptions | p. 198 |
Explaining Skew: The Relationship Between Normal Implied Vol and Lognormal Implied Vol for Off-the-Money Swaptions | p. 205 |
The Normal Model: The Industry Standard | p. 206 |
Other Models Used to Price Interest Plate Options | p. 208 |
Bermudan Swaptions | p. 209 |
Optimal Exercise of Bermudan Swaptions | p. 211 |
Valuation of Bermudan Swaptions | p. 217 |
Swaps with Embedded Options | p. 230 |
An Underlying Concept | p. 230 |
Cancelable Swaps | p. 232 |
Some Uses of Cancelable Swaps | p. 234 |
Solving for the Fixed Rate in Cancelable Swaps | p. 235 |
Bermudan Cancelables | p. 242 |
Index Amortizing Swaps | p. 248 |
An Explanation of the Trade | p. 250 |
Pricing Index Amortizing Swaps | p. 252 |
Relationship Between Index Amortizing Swaps and Cancelable Swaps | p. 253 |
Knockout Swaps | p. 256 |
Swaps with Convexity Adjustments | p. 262 |
LIBOR in Arrears Swaps | p. 262 |
CMS Swaps | p. 273 |
Structured Notes | p. 292 |
The Rise of the Structured Note Market | p. 294 |
A Glossary of Structured Notes | p. 295 |
Size of the Market | p. 299 |
What Are Structured Notes? | p. 300 |
In the Beginning … Floating Rate Notes | p. 305 |
A Prime Floating Rate Note | p. 305 |
Capped Floaters | p. 308 |
An Example: Pricing Up a Capped Floater | p. 309 |
Inverse Floaters | p. 310 |
An Example: Pricing Up a Leveraged Inverse Floater | p. 315 |
Orange County | p. 321 |
Range Notes | p. 324 |
LEANs | p. 324 |
Binary Accrual Notes | p. 326 |
Regulatory Response | p. 331 |
Non-Inversion Notes | p. 332 |
The Pricing of Non-Inversion Notes | p. 333 |
Relative Value and Macro Trades | p. 353 |
Carry and Roll-Down Analysis | p. 354 |
Curve Trades | p. 361 |
Yield Curve Trades for Longer Holding Periods | p. 367 |
Forward Yield Curve Trades | p. 373 |
Conditional Yield Curve Trades | p. 376 |
Trading Swap Spreads | p. 382 |
Spread Trades for Longer Holding Periods | p. 385 |
Spread of Spread Trades | p. 387 |
Conditional Spread Trades | p. 389 |
Asset Swaps Revisited | p. 394 |
Asset Swap Math | p. 398 |
Asset Swaps Today | p. 400 |
More Recent Product Innovations | p. 414 |
An Introduction to Correlation Trades: Caps Versus Payer Redux | p. 415 |
Forward Vol Trades | p. 416 |
Preliminary | p. 417 |
Description of Forward Vol | p. 419 |
Heuristic Pricing of Forward Vol Trades | p. 421 |
Will the Forward Price Be Higher or Lower Than the Spot Price? | p. 424 |
Are Forward Vol Trades Truly a Pure View on Vol? | p. 425 |
Bermudan Cancelable Swaps Revisited | p. 426 |
Curve Options | p. 427 |
Why Did Curve Options Come About? | p. 430 |
Implied Correlation | p. 433 |
Implied Volatility Versus Realized Volatility | p. 434 |
Supply and Demand of Curve Options | p. 436 |
The Pricing of Curve Options | p. 437 |
A Couple of Trades | p. 442 |
Delta Hedging Curve Options | p. 450 |
So Why Did 30-Year Swap Spreads Go Negative - and What Does That Have to Do with Curve Options? | p. 453 |
Appendixes | p. 463 |
Refresher in Option Pricing | p. 463 |
The Basics | p. 463 |
Boundaries on Option Prices | p. 468 |
European Put-Call Parity | p. 474 |
Binomial Pricing | p. 475 |
Multiperiod Extensions | p. 481 |
The Black-Scholes Formula | p. 483 |
Option Sensitivities | p. 488 |
Delta | p. 488 |
Gamma | p. 492 |
Vega | p. 497 |
Theta | p. 499 |
Binary Options | p. 500 |
Delta of Binary Options | p. 503 |
Vega of Binary Options | p. 508 |
Packages | p. 510 |
A Brief Review of Some Fixed Income Topics | p. 519 |
Present Value | p. 519 |
Duration | p. 520 |
Macaulay Duration | p. 520 |
Modified Duration | p. 521 |
Effective Duration | p. 522 |
A Closer Look at Day Count and Payment Conventions in Swaps | p. 523 |
A Quick Look at Mortgages | p. 529 |
The Normal Model | p. 537 |
The Relationship Between ¿_{LN} and ¿_{N} for Swaptions that Are Struck At-the-Money Forward | p. 539 |
The Relationship Between ¿_{LN} and ¿_{LN} for Off-the-Money Swaptions | p. 541 |
Option Sensitivities Under the Normal Model | p. 543 |
Solutions to Selected Problems | p. 545 |
Bibliography | p. 585 |
Index | p. 589 |
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