Professional Risk Manager's Guide to Financial Instruments »

The Professional Risk Managers' International Association (PRMIA) is a higher standard for risk professionals with more than 50,000 members from over 180 countries. A non-profit, member-led association of professionals, PRMIA is dedicated to advancing the standards of the profession worldwide through the free exchange of ideas. PRMIA offers the only globally endorsed Professional Risk Manager (PRMTM) certification program, pursued by over 2,500 active candidates in more than 95 countries.

Carol Alexander is Professor of Risk Management and Director of Research at the ICMA Centre, UK and Chair of the Academic Advisory Council of PRMIA.

Elizabeth Sheedy is an Associate Professor at the Macquarie Applied Finance Centre in Sydney, Australia.

Techniques for pricing, hedging and trading The Professional Risk Managers' Guide to Financial Instruments will show you how manage the risk of the complex instruments offered to investors. Sponsored by PRMIA and edited by risk management experts Carol Alexander and Elizabeth Sheedy, this authoritative resource features contributions from eleven global experts who explore the major financial instruments, the valuation methods most appropriate for each, and strategies for assessing the associated market risks.

The Professional Risk Managers' Guide to Financial Instruments offers step-by-step guidance in:

• The main types of bonds
• Futures and forward contracts
• Caps, floors, and interest rate options
• Swaps and swaptions
• Convertible bonds and other hybrid instruments
• Options, including exotic and path dependent pay-offs
• Using instruments for hedging and speculation

The Professional Risk Managers' International Association (PRMIA) is a higher standard for risk professionals with more than 50, 000 members from over 180 countries. A non-profit, member-led association of professionals, PRMIA is dedicated to advancing the standards of the profession worldwide through the free exchange of ideas. PRMIA offers the only globally endorsed Professional Risk Manager (PRMTM) certification program, pursued by over 2, 500 active candidates in more than 95 countries.

Carol Alexander is Professor of Risk Management and Director of Research at the ICMA Centre, UK and Chair of the Academic Advisory Council of PRMIA.

Elizabeth Sheedy is an Associate Professor at the Macquarie Applied Finance Centre in Sydney, Australia.

About the Contributors     ix
General Characteristics of Bonds     1
Definition of a Bullet Bond     1
Terminology and Convention     2
Market Quotes     8
Non-Bullet Bonds     12
Conclusions     19
Reference     19
Note     19
The Analysis of Bonds     21
Features of Bonds     22
Non-Conventional Bonds     25
Pricing a Conventional Bond     27
Market Yield     37
Relationship between Bond Yield and Bond Price     42
Duration     46
Hedging Bond Positions     60
Convexity     62
Summary of Market Risk Associated with Bonds     67
References and Bibliography     70
Notes     70
Futures and Forwards     73
Introduction     74
Stock Index Futures     76
Currency Forwards and Futures     86
Commodity Futures     95
Forward Rate Agreements     96
Short-Term Interest-Rate Futures     99
T-Bond Futures     108
Stack and Strip Hedges     116
Conclusions     118
References     119
Notes     119
Swaps     121
What Is a Swap?     122
Types of Swaps     125
Engineering Interest Rate Swaps     132
Risks of Swaps     137
Other Swaps     138
Uses of Swaps     139
Swap Conventions     140
Conclusions     141
Notes     141
Vanilla Options     143
Stock Options - Characteristics and Payoff Diagrams     143
American versus European Options     146
Strategies Involving a Single Option and a Stock     147
Spread Strategies     148
Other Strategies     150
References     155
Credit Derivatives     157
Introduction     157
Credit Default Swaps     163
Credit-Linked Notes     171
Total Return Swaps     174
Credit Options     182
Synthetic Collateralized Debt Obligations     183
General Applications of Credit Derivatives     191
Unintended Risks in Credit Derivatives     197
Conclusions     198
References     199
Notes      199
Caps, Floors, and Swaptions     201
Caps, Floors, and Collars: Definition and Terminology     201
Pricing Caps, Floors, and Collars     203
Uses of Caps, Floors, and Collars     207
Swaptions: Definition and Terminology     213
Pricing Swaptions     214
Uses of Swaptions     216
Conclusions     217
References     217
Notes     218
Convertible Bonds     219
Introduction     219
Characteristics of Convertibles     223
Capital Structure Implications (for Banks)     235
Mandatory Convertibles     237
Valuation and Risk Assessment     239
Conclusion     244
References     245
Notes     245
Simple Exotics     247
Introduction     247
A Short History     248
Classifying Exotics     250
Notation     252
Digital Options     253
Two Asset Options     260
Quantos     263
Second-Order Contracts     267
Decision Options     270
Average Options     271
Options on Baskets of Assets     275
Barrier and Related Options     277
Other Path-Dependent Options     286
Resolution Methods     288
Conclusions     290
References     292
Index     293