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The Financial Times Handbook of Financial Engineering: Using Derivatives to Manage Risk, 3rd Edition

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The Financial Times Handbook of Financial Engineering: Using Derivatives to Manage Risk, 3rd Edition


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  • Copyright 2013
  • Dimensions: 6-1/4 X 9-1/4
  • Pages: 768
  • Edition: 3rd
  • Book
  • ISBN-10: 0-273-74240-X
  • ISBN-13: 978-0-273-74240-1

The Financial Times Handbook of Financial Engineering clearly explains the tools of financial engineering, showing you the formulas behind the tools, illustrating how they are applied, priced and hedged.

All applications in this book are illustrated with fully-worked practical examples, and recommended tactics and techniques are tested using recent data.

Sample Content

Table of Contents


Chapter One    Introduction

   1.1 Forty years of evolution

1.2 What is financial engineering?

1.3 The nature of risk

1.4 Financial engineering and risk

1.5 Layout of this book

Chapter Two    The Cash Markets

   2.1 Overview of financial markets

2.2 The foreign exchange market

2.3 The money markets

2.4 The bond markets

2.5 The equities markets

2.6 The commodities markets

2.7 Cash instruments vs. derivatives

2.8 Capital adequacy requirements

Chapter Three    Forward Rates

   3.1 Forward exchange rates

3.2 Forward interest rates

3.3 Do forward rates predict future spot rates?

3.4 Spot and forward rates in practice

Chapter Four   FRAs

   4.1 What is an FRA?

4.2 Definitions

4.3 Terminology

4.4 The settlement process

4.5 Hedging with FRAs

4.6 Pricing FRAs

4.7 Behaviour of FRA prices

Chapter Five    Financial Futures

   5.1 A brief history of futures markets

5.2 What is a financial future?

5.3 Futures trading – from pits to screens

5.4 Buying and selling

5.5 The clearing mechanism

5.6 Futures margins

5.7 Physical delivery versus cash settlement

5.8 Futures and cash markets compared

5.9 The advantages of futures

Chapter Six   Short-Term Interest Rate Futures

   6.1 Definitions

6.2 STIR contracts pricing

6.3 Basis

6.4 Convergence

6.5 Behaviour of futures prices

6.6 Basic hedging example

6.7 Short-term futures contracts compared

6.8 Comparison of futures and FRAs

6.9 Spread positions

Chapter Seven   Bond and Stock Index Futures

   7.1 Definition of bond futures contracts

7.2 The cheapest to deliver bond

7.3 Cash and carry pricing for bond futures

7.4 The implied repo rate

7.5 The delivery mechanism

7.6 Basic hedging with bond futures

7.7 Stock indices and stock index futures

7.8 Definition of stock index futures contracts

7.9 Advantages of using stock index futures

7.10 Cash and carry pricing for stock index futures

7.11 Stock index futures prices in practice

7.12 Turning cash into share portfolios and share portfolios into cash

Chapter Eight Swaps

   8.1 Definition of interest rate and cross-currency swaps

8.2 Development of the swap market

8.3 Interest rate swaps

8.4 Non-standard interest rate swaps

8.5 Overnight indexed swaps

8.6 Cross-currency swaps

8.7 Basic applications for swaps

8.8 Asset swaps

8.9 CMS and CMT swaps

8.10 Inflation swaps

8.11 Equity swaps

8.12 Commodity swaps

8.13 Volatility and variance swaps

8.14 Exotic swaps

8.15 ISDA documentation

8.16 Changes in market infrastructure after the credit crisis

Chapter Nine   Pricing and Valuing Swaps

9.1Principles of swap valuation and pricing

9.2 Discount factors and the discount function

9.3Calculating discount factors from swap and forward rates

9.4 Generating the discount function

9.5 Relationship between zero, swap, and forward rates

9.6 Valuation and pricing of interest rate swaps

9.7 Valuation and pricing of currency swaps

9.8 Cancelling a swap

9.9 Hedging swaps with futures

9.10 The convexity correction

9.11 Credit risk of swaps

9.12 Collateralised vs. Non-collateralised swaps

9.13 LIBOR-OIS discounting

Chapter Ten Options – Basics and Pricing

   10.1 Why options are different

10.2 Definitions

10.3 Options terminology

10.4 Value and profit profiles at maturity

10.5 Pricing options

10.6 The behaviour of financial prices

10.7 The Black Scholes model

10.8 The binomial approach

10.9 The Monte Carlo approach

10.10 Finite difference methods.

Chapter TenA Options – Volatility and the Greeks

   10A.1 Volatility

10A.2 Volatility smiles and skews

10A.3 The VIX

10A.4 Value profiles prior to maturity

10A.5 How options behave

10A.6 Delta hedging

Chapter Eleven Options - From Building Blocks to Portfolios

   11.1 The building block approach

11.2 Option spreads ‑ horizontal, vertical, and diagonal

11.3 Volatility structures

11.4 Arbitrage structures

Chapter Twelve    Interest Rate and Exotic Options

12.1 Why interest rate options are different

12.2 Caps, floors, and collars

12.3 Swaptions

12.4 Cancellable and extendible swaps

12.5Pricing interest rate options

12.6 Compound options

12.7 Exotic options

12.8 Path-dependent options

12.9 Digital options

12.10 Multivariate options

12.11 Other exotic options

12.12 Pricing exotic options

12.13 Price comparisons between exotic options

12.14 Embedded options

Chapter Thirteen Introducing Credit Derivatives

13.1 Development of the credit derivatives market

13.2 Motivations for using credit derivatives

13.3 Introducing Credit Default Swaps (CDS)

13.4 Market conventions

13.5 Credit events and Determination Committees

13.6 Capital structure, recovery rates, reference and deliverable obligations

13.7 Settlement methods and auctions

13.8 Other aspects of CDS


Chapter ThirteenA CDS Pricing and Credit Indices

13A.1 A Simple CDS Pricing Model

13A.2 Obtaining Default Probabilities

13A.3 Developing a Multi-period Framework

13A.4 The ISDA CDS Standard Model

13A.5 Bootstrapping Default Probabilities

13A.6 8Calculating Up-front Payments

13A.7 Mark-to-market and CDS Valuation

13A.8 PV01 and SDV01

13A.9 How Credit Indices Developed

13A.10 The CDX and iTraxx Credit Indices

13A.11 Market Quotations and Statistics

13A.12 Other Credit Indices

13A.13 Index Tranches


Chapter Fourteen   Applications for Financial Engineering

   14.1 Applications of financial engineering

14.2 Sources of financial risk

14.3 Accounting and economic risk

14.4 Defining hedging objectives

14.5 Measuring hedge efficiency

14.6 The finance division as a profit centre

Chapter Fifteen Managing Currency Risk

   15.1 Forwards and futures solutions

15.2 Options are chameleons

15.3 How FX options are different

15.4 The scenario

15.5 Comparing hedging strategies

15.6 Basic option hedges

15.7 Selling options within a hedging programme

15.8 Collars, range-forwards, forward-bands, cylinders

15.9Spread hedges

15.10 Participating forwards

15.11 Ratio forwards

15.12 Break-forwards, FOXs, forward-reversing options

15.13 Flexi-forwards

15.14 Using exotic options

15.15 Selling options outside a hedging programme

15.16 Dynamic hedging

15.17 Which strategy is best?

Chapter Sixteen    Managing Interest-Rate Risk using FRAs, Futures and Swaps

   16.1 Using FRAs

16.2 Using short-term interest rate futures

16.3 Calculating the hedge ratio

16.4 Stack vs. strip hedges

16.5 Different kinds of basis risk

16.6 Managing the convergence basis

16.7 Interpolated hedges

16.8 Combining the techniques

16.9 FRAs vs. futures

16.10 Using swaps

16.11 Hedging bond and swap portfolios

16.12 Hedging bond portfolios with bond futures

Chapter Seventeen Managing Interest-Rate Risk – Using Options and Option-Based Instruments

17.1 Interest rate guarantees

17.2 Using caps, floors, and collars

17.3 Collars, participating caps, spread-hedges, and other variations

17.4 Using captions and swaptions

17.5 Comparison of interest risk management tools

Chapter Eighteen   Managing Equity Risk

   18.1 Bull and bear strategies

18.2 Return enhancement

18.3 Value protection strategies

18.4 Vertical, horizontal, and diagonal spreads

18.5 Other option strategies

18.6 Using stock index futures and options

18.7 Portfolio insurance

18.8 Guaranteed equity funds

18.9 Warrants and convertibles

18.10 Exotic equity derivatives

Chapter Nineteen   Managing Commodity Risk

   19.1 Commodity risk

19.2 Creating commodity derivatives

19.3 Using commodity derivatives

19.4 Hybrid commodity derivatives

Chapter Twenty    Managing Credit Risk

20.1 Hedging default risk

20.2 Hedging credit risk

20.3 Generating income

20.4 Trading strategies using CDS

20.5 Implementing directional views

20.6 Monetising relative credit views

20.7 Basis trades

20.8 Curve trades

20.9 Index trades

Chapter Twenty-One  StructuredProducts

   21.1 Understanding structured products

21.2 How structured products are built

21.3 Features of structured products

21.4 Principal-protected notes

21.5 Buffered and capped notes

21.6 Leveraged structures

21.7 Path-dependent structures

21.8 Digital and range-accrual structures

21.9 Correlation structures

21.10 Redeeming structured products prior to maturity



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