Capital Market Instruments: Analysis and Valuation, Volume 1

Front Cover
FT Press, 2002 - Business & Economics - 422 pages
1 Review
The authors have applied their practical knowledge to produce a text that is concise yet thorough. It will be extremely valuable both as a beginner's guide and as a work of reference for those more experienced in the world of capital markets.Ian B. Abrams, Managing Director, Mizuho International plcMoorad Choudhry and his co-authors have made a noteworthy contribution to the literature on financial economics with this book, and I hope that this exciting and interesting new work spurs readers on to their own research and investigation.Jane Douglas-Jones, Managing Editor, FOWMoorad Choudhry and his co-authors have produced a book that provides excellent and comprehensive coverage of a wide range of traditional and modern derivative securities. Given its content and user-friendly style, it is sure to become required reading for many courses in finance.Brian A. Eales, Department of Economics, London Guildhall University'The complexity of the markets made simple is a goal this book achieves with enthusiasm - an excellent guide suitable for practitioners at all levels.'Huw Williams, VP, Head of Sales, EAME Structured Finance Services, JPMorganChaseThis is a well-crafted book and
 

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Contents

1ntroduction to financial market instruments
3
Derivative instruments
7
Securities and derivatives
9
Marketdetermined interest rates and the time value of money
11
The time value of money
14
Money market instruments and foreign exchange
25
Securities quoted on a yield basis
26
Securities quoted on a discount basis
29
Interest rate risk
224
Collateralized debt obligations
227
CDO structures
229
Motivation behind CDO issue
234
Analysis and evaluation
236
Expected loss
239
Pricing
240
Shortterm interest rate derivatives
247

Foreign exchange
33
Fixedincome securities I
41
Accrued interest clean and dirty bond prices
52
the current approach
55
Bond pricing in continuous time
60
Forward rates
65
The term structure of interest rates
67
Term structure hypotheses
77
Fixedincome securities II interest rate risk
83
Duration
84
Modified duration
87
Convexity
90
Appendix 51 Measuring convexity
95
Appendix 52 Taylor expansion of the priceyield function
97
Fixedincome securities III optionadjusted spread analysis
99
A theoretical framework
100
The methodology in practice
106
Appendix 61 Calculating interest rate paths
109
Interest rate modelling
111
Onefactor term structure models
115
Further onefactor term structure models
118
The HeathJarrowMorton model
120
Choosing a term structure model
124
Fitting the yield curve
128
Nonparametric methods
132
Comparing curves
136
Spline methodology and fitting the yield curve
138
Bootstrapping
139
the cubic Bspline
140
Mathematical tools
147
Bsplines
153
Conclusion
156
1nflationindexed bonds
157
Indexlinked bond yields
160
Analysis of real interest rates
169
Appendix 101 Current issuers of publicsector indexed securities
171
Appendix 102 US Treasury inflationindexed securities
172
Mortgagebacked securities I
177
Assetbacked bonds
179
Securitizing mortgages
184
Mortgagebacked securities
189
Cash flow patterns
192
Collateralized mortgage securities
197
Nonagency CMO bonds
202
Commercial mortgagebacked securities
204
Introduction to the evaluation and analysis of mortgagebacked bonds
207
Mortgagebacked securities II
217
Forward contracts
253
Shortterm interest rate futures
254
Appendix 141 The forward interest rate and futures implied forward rate
263
Appendix 142 Arbitrage proof of the futures price being equal to the forward price
264
Swaps
267
Interest rate swaps
268
Zerocoupon swap pricing
273
Nonvanilla interest rate swaps
280
Currency swaps
283
Swaptions
286
Overview of interest rate swap applications
291
Options I
298
Option instruments
303
setting the scene
305
Options II
308
The BlackScholes option model
310
Interest rate options and the Black model
318
Comment on the BlackScholes model
320
A final word on option models
322
Appendix 171 Summary of basic statistical concepts
323
Appendix 172 Lognormal distribution of returns
324
Appendix 173 The BlackScholes model in Microsoft Excel
325
Options III
328
the Greeks
330
The option smile
338
Caps and floors
340
Credit derivatives
342
Summary
350
Pricing of credit derivatives
351
Credit spread modelling
355
Credit spread products
360
Appendix 191 Terms and definitions
365
1ntroduction to equity instrument analysis
369
Valuation of shares
374
Dividend policy
378
1ntroduction to financial ratio analysis
381
Ratio analysis
384
Managementlevel ratio analysis
388
Corporate valuation
392
Appendix 211 Capital asset pricing model
394
RATE computer software
399
Using the zero curve models
400
Calculation methods
406
Instrument valuation
410
Static data and dropdown lists
412
Index
415
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About the author (2002)

Moorad Choudhry is a vice-president in structured finance services with JPMorgan in London. He started his City career in 1989 at the London Stock Exchange, before joining the sterling eurobond desk at Hoare Govett Securities Limited. He was later employed as a gilt-edged market-maker and treasury trader at ABN Amro Hoare Govett Sterling Bonds Limited. From there he moved to Hambros Bank Limited, where he set up and ran the Treasury division's sterling proprietary trading desk. He also worked as a strategy and risk management consultant to some of the world's leading investment banks, before joining JPMorgan in 2000. Moorad has an MA in econometrics from Reading University and an MBA from Henley Management College. He has lectured at London Guildhall University, and is a Senior Fellow at the Centre for Mathematical Trading and Finance, City University Business School.

Didier Joannas is a regional director with SunGard Trading and Risk Systems in Hong Kong. He was previously employed as a quantitative analyst and arbitrage trader on the gilt-edged market-making desk at ABN Amro Hoare Govett Sterling Bonds Limited and ABN Amro Securities (UK) Limited. He obtained his doctorate in applied mathematics and aerodynamics at the University of St Etienne in France before joining Avions Marcel Dassault, the company behind such projects as the Ariane space rocket and the Rafale supersonic jet fighter. He then worked for Viel & Cie bond option brokers in Paris before joining ABN Amro Hoare Govett Sterling Bonds Limited in London in 1994.

Richard Pereira is a member of the credit derivatives and securitization team at Dresdner Kleinwort Wasserstein in London. He obtained a first-class degree in mathematics from Imperial College, University of London, before training as a Chartered Accountant. He then worked as a management consultant specializing in market and credit risk, and has been involved in advisory work at a number of investment banks. Richard joined Dresdner Kleinwort Wasserstein in 2001.

Rod Pienaar works as a business analyst with Deutsche Bank in London, as part of a project group providing systems analysis to the corporate and investment banking division. Rod obtained his undergraduate degree in business and commerce at the University of Witwatersrand in Johannesburg before training as a Chartered Accountant. He then moved to London where he worked as a management consultant specializing in market risk analysis, before joining Deutsche Bank in 2000.

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