Mastering Financial Calculations A step-by-step guide to the mathematics of financial market instruments

by Steiner, Bob

• ISBN13: 9780273750581
• ISBN10: 0273750585
• Edition: 3rd
• Format: Paperback
• Copyright: 2012-01-26
• Publisher: FT Press

Summary

The step-by-step guide to the math of financial market instruments: all calculations for any capital market, FX, or money market product. A new edition, updated for the latest products and calculations. Covers all the essentials, including discounting, NPV, effective yields, and cash flow analysis: ideal even for those with limited math backgrounds. Using worked examples, walks readers through key calculations for money markets, futures, interest rates, currency swaps, bonds, foreign exchange, options and more Fully updated for today's newest products and calculations, Mastering Financial Calculations, Third Edition covers all the math financial professionals and students need to work with the full range of products in the capital markets, foreign exchange and money markets. Leading financial instructor Bob Steiner explains key financial concepts and mathematical techniques clearly and comprehensively, giving readers a firm understanding of the fundamentals even if they have weak mathematical backgrounds. Steiner begins with core concepts including discounting, net present value, effective yields and cash flow analysis. Next, using worked examples, he walks step-by-step through the essential calculations and financial techniques associated with money markets and futures, interest rate and currency swaps, bonds, foreign exchange, options, and more. This book will be an indispensable resource for every professional working with today's financial products, including traders, fund managers, corporate treasurers, accountants, and risk managers -- and for every student who wants to begin applying financial calculations with speed and confidence.

Author Biography

Bob Steiner is the founder/managing director of Markets International, an independent training company. A former treasury officer and financial consultant he’s also the author of Key Financial Market Concepts, now in its second edition.

Table of Contents

Foreword	p. xi
Introduction	p. xiii
The Basics
Financial Arithmetic Basics	p. 3
Some opening remarks on formulas	p. 4
Use of an HP calculator	p. 4
Simple and compound interest	p. 5
Nominal and effective rates	p. 10
Future value / present value; time value of money	p. 12
Discount factors	p. 15
Cashflow analysis, NPV, IRR and time-weighted rate of returns	p. 16
Annuities	p. 20
Using an HP calculator for cashflow analysis	p. 22
Interpolation and extrapolation	p. 27
Exercises	p. 29
Statistics Basics	p. 33
Averages - arithmetic and geometric means, weighted averages, median and mode	p. 34
Variance, standard deviation and volatility	p. 38
Correlation and covariance	p. 44
Histograms, probability density and the normal probability function	p. 47
Confidence levels and the normal probability table	p. 50
Exercises	p. 53
Interest Rate Instruments
The Money Market	p. 57
Overview	p. 58
Day/year conventions	p. 64
Money market instruments	p. 66
Money market calculations	p. 71
Discount instruments	p. 73
CDs paying more than one coupon	p. 76
Value dates	p. 79
Exercises	p. 80
Forward-Forward Interest Rates and Forward Rate Agreements (FRAs)	p. 83
Forward-forwards, FRAs and futures	p. 84
Applications of FRAs	p. 95
Exercises	p. 98
Interest Rate Futures	p. 101
Overview	p. 102
Exchange structure and margins	p. 108
Futures compared with FRAs	p. 109
Pricing and hedging FRAs with futures	p. 111
Trading with interest rate futures	p. 117
Exercises	p. 124
Bond Market Calculations	p. 127
Overview of capital market instruments	p. 128
Features and variations	p. 130
Introduction to bond pricing	p. 134
Different yield measures and price calculations	p. 149
A summary of the various approaches to price / yield	p. 160
Duration, modified duration and convexity	p. 162
Bond futures	p. 169
Cash-and-carry arbitrage	p. 177
Exercises	p. 184
Repos, Buy/Sell-backs and Securities Lending	p. 189
Introduction	p. 190
Classic repo	p. 192
Margin calls	p. 195
General collateral (GC) and specials	p. 200
Other features	p. 202
Buy/Sell-back	p. 209
Close-out and repricing	p. 214
Securities lending	p. 219
Comparison between the different transactions	p. 225
Uses of repo and securities lending	p. 225
Exercises	p. 230
Zero-coupon Rates and Yield Curves	p. 235
Zero-coupon yields, par yields and bootstrapping	p. 236
Forward-forward yields	p. 241
Summary	p. 242
Longer-dated FRAs	p. 244
Exercises	p. 245
Foreign Exchange
Foreign Exchange	p. 249
Introduction	p. 250
Spot exchange rates	p. 250
Forward exchange rates	p. 256
Cross-rate forwards	p. 269
Short dates	p. 270
Calculation summary	p. 273
Value dates	p. 274
Forward-forwards	p. 275
Non-deliverable forwards (NDFs)	p. 277
Time options	p. 278
Long-dated forwards	p. 279
Arbitraging and creating FRAs	p. 280
Discounting future foreign exchange risk	p. 283
Exercises	p. 286
Swaps and Options
Interest Rate and Currency Swaps	p. 293
Basic concepts and applications	p. 294
Overnight index swap (OIS)	p. 298
Pricing	p. 302
Valuing swaps	p. 310
Hedging an interest rate swap	p. 316
Amortising and forward-start swaps	p. 317
Currency swaps	p. 319
Exercises	p. 323
Options	p. 326
Overview	p. 328
The ideas behind option pricing	p. 330
Pricing models	p. 332
OTC options vs. exchange-traded options	p. 332
Value dates for FX options	p. 343
Trading with calls and puts	p. 343
More trading strategies	p. 349
Hedging with options	p. 358
Some "packaged" options	p. 359
The Greek letters	p. 362
Some exotic options	p. 374
Credit derivatives, synthetic CDOs and first-to-default baskets	p. 378
Exercises	p. 384
Equities
Equities	p. 389
Introduction	p. 390
Ratios	p. 393
Valuation	p. 398
Stock splits and rights issues	p. 403
Stock indices	p. 405
Single stock futures	p. 408
Stock index futures	p. 410
Exercises	p. 411
Gold and Other Commodities
Gold and Other Commodities	p. 415
Gold	p. 416
Gold borrowing, forwards, swaps and GOFO	p. 418
Other commodities	p. 424
Forward pricing and convenience yield	p. 425
Commodity futures and EFP (Exchange For Physical)	p. 429
FRAs, swaps and options	p. 434
Exercises	p. 436
Hints and Answers to Exercises
Hints and Answers to Exercises	p. 441
Hints on exercises	p. 442
Answers to exercises	p. 459
Using an HP calculator	p. 513
A summary of market day/year conventions and government bond markets	p. 522
A summary of calculation procedures	p. 525
Glossary	p. 547
ISO (SWIFT) currency codes	p. 578
Select Bibliography	p. 585
Index	p. 587
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