Contents......Page 7
Preface......Page 13
Part One: Innovation in Finance Through Derivative Instruments......Page 21
Service Science......Page 23
Motivation for Financial Innovation......Page 25
The Technology Side of Service Science......Page 28
Entrepreneurship......Page 32
Paper Ships: A Case Study......Page 36
Forward Freight Agreements and the Macromarkets......Page 39
Risk Management......Page 42
Derivatives Definition by the FASB......Page 49
Derivatives Definition by the IASB......Page 53
Notional Principal Amount and Underlying......Page 55
Options, Futures, Forwards, and Swaps in a Nutshell......Page 59
Exotic Derivatives......Page 63
Synthetic Financial Instruments......Page 65
Structured Financial Instruments......Page 69
Capitalizing on Creativity......Page 73
The Customization of Financial Products......Page 76
Over-the-Counter Derivatives Transactions......Page 79
Risk Appetite and Risk Aversion......Page 83
Learning a Lesson from George Soros......Page 87
Learning a Lesson from Henry Kaufman......Page 89
High Technology for Processes and Products......Page 92
The Search for Effective Hedges......Page 95
Hedging Practices......Page 98
Types of Hedging Instruments......Page 102
Right and Wrong Hedges......Page 104
Management Intent......Page 108
Hedge Accounting......Page 111
Part Two: Beware of Assumed Exposure and Illiquidity......Page 115
Liquidity and Solvency......Page 117
A Quadrillion in Derivatives Exposure......Page 120
Unexpected Consequences......Page 124
The Criticality of Market Positions......Page 128
Free Fall of the Bond Market in 1994: A Case Study......Page 131
Bubbles and Ponzi Games......Page 133
Impact of Megamergers on Exposure......Page 136
Capital Adequacy Dynamics......Page 141
Management Accounting for Recognized but Not Realized Gains and Losses......Page 144
Capital at Risk and Level of Confidence......Page 148
Quantitative Impact Studies, and Second Thoughts about Capital Adequacy......Page 153
Basel II's Unexpected Headwinds......Page 156
The Effect of Leveraging on Capital Adequacy......Page 161
The Origin of Legislation for Marking-to-Market......Page 164
Part Three: Options......Page 167
The Strategic Use of Options......Page 169
Intrinsic Value and Time Value......Page 172
Styles of Options: American, European, Asian, and Others......Page 175
Complex Options......Page 178
Straddles, Strangles, and Butterflies......Page 182
Interest Rate, Yield-Based, and Foreign Currency Options......Page 185
Option Spreading; Long Calls, Short Calls......Page 189
Option Hedges......Page 192
Risks Associated with Options......Page 195
Pricing Derivatives: A General Perspective......Page 199
Object of Prediction and Effect of Volatility......Page 202
Options Premiums and Options Pricing......Page 206
Binomial and Lognormal Models......Page 209
The Black-Scholes Model......Page 214
Advantages and Shortcomings of the Black-Scholes Model......Page 217
Testing the Black-Scholes Model......Page 220
Trading Derivative Instruments......Page 223
Options Trading......Page 226
Flexibly Structured Options......Page 229
Buyers' Strategies......Page 231
Writing Options......Page 234
Trading in Synthetic Options......Page 237
Spreads Trading......Page 239
Exercise, Settlement, and Technical Support......Page 242
Part Four: Risk Control for Options......Page 245
The Challenge of Measuring Risk and Return......Page 247
The Greeks in a Nutshell......Page 250
Delta Hedging......Page 253
Gamma Hedging......Page 257
Theta, Kappa, Rho......Page 259
Selling Market Risk and Buying Credit Risk......Page 263
Market Risk Control in a Nutshell......Page 266
GM's Put Options for Fiat Auto: A Case Study......Page 270
Credit Risk Control in a Nutshell......Page 271
Credit Improvement and Credit Deterioration......Page 274
The Mispricing of Credit Risk......Page 277
Credit-Risk-Free Debt Options......Page 281
Credit Spreads and Credit Options......Page 284
Part Five: Futures, Forwards, and Swaps......Page 289
Futures, Forwards, and the Investor......Page 291
Futures and Margin Requirements......Page 294
Futures Trading: A Case Study with Oil......Page 296
Price Discovery through Futures......Page 299
Forward Contracts......Page 302
Forward Positions: An Example with FRAs......Page 305
Synthetic Futures......Page 309
Warrants......Page 310
Swaps Defined......Page 315
Players, Milestones, and Flavors of Standard Swaps......Page 318
Interest Rate Swaps......Page 321
Swap Spreads......Page 323
Swaptions......Page 325
Asset Swaps and Equity Swaps......Page 328
Total Return Swaps......Page 331
Credit Default Swaps......Page 333
Differential Swaps......Page 336
Risks Assumed with Swaps......Page 338
Being Ahead of the Interest Rate Curve......Page 341
The Term Structure of Interest Rates......Page 345
The Contribution of Interest Rate Derivatives......Page 349
Accounting for Interest Rate Derivatives......Page 352
Internal Interest Rate Swaps......Page 354
The Synergy between Interest Rates and Currency Rates......Page 358
Interest Rate Risk and Its Measurement......Page 362
Interest Rate Spreads Associated with Credit Risk......Page 365
B......Page 369
C......Page 370
E......Page 371
G......Page 372
I......Page 373
M......Page 374
O......Page 375
R......Page 377
S......Page 378
W......Page 380
Z......Page 381