Introduction to Derivative Financial Instruments: Bonds, Swaps, Options, and Hedging

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2008-04-03
  • Publisher: McGraw-Hill Education
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Written by a renowned corporate financial advisor, this timely guide offers a comprehensive treatment of derivative financial instruments, fully covering bonds, interest swaps, options, futures, Forex, and more. The author explains the strategic use of derivatives, their place in portfolio management, hedging, and the importance of managing risk.

Author Biography

Dimitris N. Chorafas has worked internationally as an advisor to financial institutions and industrial corporations since 1961.

Table of Contents

Prefacep. xi
Innovation in Finance Through Derivative Instruments
Financial Innovationp. 3
Service Sciencep. 3
Motivation for Financial Innovationp. 5
The Technology Side of Service Sciencep. 8
Entrepreneurshipp. 12
Paper Ships: A Case Studyp. 16
Forward Freight Agreements and the Macromarketsp. 19
Risk Managementp. 22
Derivativesp. 29
Derivatives Definition by the FASBp. 29
Derivatives Definition by the IASBp. 33
Notional Principal Amount and Underlyingp. 35
Options, Futures, Forwards, and Swaps in a Nutshellp. 39
Exotic Derivativesp. 43
Synthetic Financial Instrumentsp. 45
Structured Financial Instrumentsp. 49
Strategic Use of Derivativesp. 53
Capitalizing on Creativityp. 53
The Customization of Financial Productsp. 56
Over-the-Counter Derivatives Transactionsp. 59
Risk Appetite and Risk Aversionp. 63
Learning a Lesson from George Sorosp. 67
Learning a Lesson from Henry Kaufmanp. 69
High Technology for Processes and Productsp. 72
Hedgingp. 75
The Search for Effective Hedgesp. 75
Hedging Practicesp. 78
Types of Hedging Instrumentsp. 82
Right and Wrong Hedgesp. 84
Management Intentp. 88
Hedge Accountingp. 91
Beware of Assumed Exposure and Illiquidity
Liquidity, Solvency, and Derivatives Exposurep. 97
Liquidity and Solvencyp. 97
A Quadrillion in Derivatives Exposurep. 100
Unexpected Consequencesp. 104
The Criticality of Market Positionsp. 108
Free Fall of the Bond Market in 1994: A Case Studyp. 111
Bubbles and Ponzi Gamesp. 113
Impact of Megamergers on Exposurep. 116
The Daunting Task of Capital Adequacyp. 121
Capital Adequacy Dynamicsp. 121
Management Accounting for Recognized but Not Realized Gains and Lossesp. 124
Capital at Risk and Level of Confidencep. 128
Quantitative Impact Studies, and Second Thoughts about Capital Adequacyp. 133
Basel II's Unexpected Headwindsp. 136
The Effect of Leveraging on Capital Adequacyp. 141
The Origin of Legislation for Marking-to-Marketp. 144
The Use of Optionsp. 149
The Strategic Use of Optionsp. 149
Intrinsic Value and Time Valuep. 152
Styles of Options: American, European, Asian, and Othersp. 155
Complex Optionsp. 158
Straddles, Strangles, and Butterfliesp. 162
Interest Rate, Yield-Based, and Foreign Currency Optionsp. 165
Option Spreading; Long Calls, Short Callsp. 169
Option Hedgesp. 172
Risks Associated with Optionsp. 175
The Pricing of Optionsp. 179
Pricing Derivatives: A General Perspectivep. 179
Object of Prediction and Effect of Volatilityp. 182
Options Premiums and Options Pricingp. 186
Binomial and Lognormal Modelsp. 189
The Black-Scholes Modelp. 194
Advantages and Shortcomings of the Black-Scholes Modelp. 197
Testing the Black-Scholes Modelp. 200
Option Traders, Buyers, and Writersp. 203
Trading Derivative Instrumentsp. 203
Options Tradingp. 206
Flexibly Structured Optionsp. 209
Buyers' Strategiesp. 211
Writing Optionsp. 214
Trading in Synthetic Optionsp. 217
Spreads Tradingp. 219
Exercise, Settlement, and Technical Supportp. 222
Risk Control for Options
The Greeks: Delta, Gamma, Theta, Kappa, Rhop. 227
The Challenge of Measuring Risk and Returnp. 227
The Greeks in a Nutshellp. 230
Delta Hedgingp. 233
Gamma Hedgingp. 237
Theta, Kappa, Rhop. 239
Credit Risk and Market Risk with Optionsp. 243
Selling Market Risk and Buying Credit Riskp. 243
Market Risk Control in a Nutshellp. 246
GM's Put Options for Fiat Auto: A Case Studyp. 250
Credit Risk Control in a Nutshellp. 251
Credit Improvement and Credit Deteriorationp. 254
The Mispricing of Credit Riskp. 257
Credit-Risk-Free Debt Optionsp. 261
Credit Spreads and Credit Optionsp. 264
Futures, Forwards, and Swaps
Futures and Forwardsp. 271
Futures, Forwards, and the Investorp. 271
Futures and Margin Requirementsp. 274
Futures Trading: A Case Study with Oilp. 276
Price Discovery through Futuresp. 279
Forward Contractsp. 282
Forward Positions: An Example with FRAsp. 285
Synthetic Futuresp. 289
Warrantsp. 290
Swapsp. 295
Swaps Definedp. 295
Players, Milestones, and Flavors of Standard Swapsp. 298
Interest Rate Swapsp. 301
Swap Spreadsp. 303
Swaptionsp. 305
Asset Swaps and Equity Swapsp. 308
Total Return Swapsp. 311
Credit Default Swapsp. 313
Differential Swapsp. 316
Risks Assumed with Swapsp. 318
Interest Rate Risk Management through Derivativesp. 321
Being Ahead of the Interest Rate Curvep. 321
The Term Structure of Interest Ratesp. 325
The Contribution of Interest Rate Derivativesp. 329
Accounting for Interest Rate Derivativesp. 332
Internal Interest Rate Swapsp. 334
The Synergy between Interest Rates and Currency Ratesp. 338
Interest Rate Risk and Its Measurementp. 342
Interest Rate Spreads Associated with Credit Riskp. 345
Indexp. 349
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