Derivatives
- Length: 896 pages
- Edition: 1
- Language: English
- Publisher: Wiley
- Publication Date: 2021-11-24
- ISBN-10: 1119850576
- ISBN-13: 9781119850571
- Sales Rank: #1722161 (See Top 100 Books)
The complete guide to derivatives, from experts working with CFA Institute
Derivatives is the definitive guide to derivatives and derivative markets. Written by experts working with CFA Institute, this book is an authoritative reference for students and investment professionals interested in the role of derivatives within comprehensive portfolio management. General discussion of the types of derivatives and their characteristics gives way to detailed examination of each market and its contracts, including forwards, futures, options, and swaps, followed by a look at credit derivative markets and their instruments. The companion workbook (sold separately) provides problems and solutions that align with the text and allows students to test their understanding while facilitating deeper internalization of the material.
Derivatives have become essential for effective financial risk management and for creating synthetic exposure to asset classes. This book builds a conceptual framework for grasping derivative fundamentals, with systematic coverage and thorough explanations. Readers will:
- Understand the different types of derivatives and their characteristics
- Delve into the various markets and their associated contracts
- Examine the role of derivatives in portfolio management
- Learn why derivatives are increasingly fundamental to risk management
CFA Institute is the world’s premier association for investment professionals, and the governing body for CFA® Program, CIPM® Program, CFA Institute ESG Investing Certificate, and Investment Foundations® Program. Those seeking a deeper understanding of the markets, mechanisms, and use of derivatives will value the level of expertise CFA Institute brings to the discussion, providing a clear, comprehensive resource for students and professionals alike. Whether used alone or in conjunction with the companion workbook, Derivatives offers a complete course in derivatives and their use in investment management.
Foreword Preface Acknowledgments About the CFA Institute Investment Series CHAPTER 1 Derivative Markets and Instruments Learning Outcomes 1. Derivatives: Introduction, Definitions, and Uses 2. The Structure of Derivative Markets 2.1. Exchange-Traded Derivatives Markets 2.2. Over-the-Counter Derivatives Markets 3. Types of Derivatives: Introduction, Forward Contracts 3.1. Forward Commitments 4. Types of Derivatives: Futures 5. Types of Derivatives: Swaps 6. Contingent Claims: Options 6.1. Options 7. Contingent Claims: Credit Derivatives 8. Types of Derivatives: Asset-Backed Securities and Hybrids 8.1. Hybrids 9. Derivatives Underlyings 9.1. Equities 9.2. Fixed-Income Instruments and Interest Rates 9.3. Currencies 9.4. Commodities 9.5. Credit 9.6. Other 10. The Purposes and Benefits of Derivatives 10.1. Risk Allocation, Transfer, and Management 10.2. Information Discovery 10.3. Operational Advantages 10.4. Market Efficiency 11. Criticisms and Misuses of Derivatives 11.1. Speculation and Gambling 11.2. Destabilization and Systemic Risk 12. Elementary Principles of Derivative Pricing 12.1. Storage 12.2. Arbitrage Summary Problems CHAPTER 2 Basics of Derivative Pricing and Valuation Learning Outcomes 1. Introduction 2. Basic Derivative Concepts, Pricing the Underlying 2.1. Basic Derivative Concepts 2.2. Pricing the Underlying 3. The Principle of Arbitrage 3.1. The (In)Frequency of Arbitrage Opportunities 3.2. Arbitrage and Derivatives 3.3. Arbitrage and Replication 3.4. Risk Aversion, Risk Neutrality, and Arbitrage-Free Pricing 3.5. Limits to Arbitrage 4. Pricing and Valuation of Forward Contracts: Pricing vs. Valuation; Expiration; Initiation 4.1. Pricing and Valuation of Forward Commitments 5. Pricing and Valuation of Forward Contracts: Between Initiation and Expiration; Forward Rate Agreements 5.1. A Word about Forward Contracts on Interest Rates 6. Pricing and Valuation of Futures Contracts 7. Pricing and Valuation of Swap Contracts 8. Pricing and Valuation of Options 8.1. European Option Pricing 9. Lower Limits for Prices of European Options 10. Put–Call Parity, Put–Call–Forward Parity 10.1. Put–Call–Forward Parity 11. Binomial Valuation of Options 12. American Option Pricing Summary Problems CHAPTER 3 Pricing and Valuation of Forward Commitments Learning Outcomes 1. Introduction to Pricing and Valuation of Forward Commitments 1.1. Principles of Arbitrage-Free Pricing and Valuation of Forward Commitments 1.2. Pricing and Valuing Generic Forward and Futures Contracts 2. Carry Arbitrage 2.1. Carry Arbitrage Model When There Are No Underlying Cash Flows 2.2. Carry Arbitrage Model When Underlying Has Cash Flows 3. Pricing Equity Forwards and Futures 3.1. Equity Forward and Futures Contracts 3.2. Interest Rate Forward and Futures Contracts 4. Pricing Fixed-Income Forward and Futures Contracts 4.1. Comparing Forward and Futures Contracts 5. Pricing and Valuing Swap Contracts 5.1. Interest Rate Swap Contracts 6. Pricing and Valuing Currency Swap Contracts 7. Pricing and Valuing Equity Swap Contracts Summary Problems CHAPTER 4 Valuation of Contingent Claims Learning Outcomes 1. Introduction and Principles of a No-Arbitrage Approach to Valuation 1.1. Principles of a No-Arbitrage Approach to Valuation 2. Binomial Option Valuation Model 3. One-Period Binomial Model 4. Binomial Model: Two-Period (Call Options) 5. Binomial Model: Two-Period (Put Options) 6. Binomial Model: Two-Period (Role of Dividends & Comprehensive Example) 7. Interest Rate Options & Multiperiod Model 7.1. Multiperiod Model 8. Black–Scholes–Merton (BSM) Option Valuation Model, Introduction and Assumptions of the BSM Model 8.1. Introductory Material 8.2. Assumptions of the BSM Model 9. BSM Model: Components 10. BSM Model: Carry Benefits and Applications 11. Black Option Valuation Model and European Options on Futures 11.1. European Options on Futures 12. Interest Rate Options 13. Swaptions 14. Option Greeks and Implied Volatility: Delta 14.1. Delta 15. Gamma 16. Theta 17. Vega 18. Rho 19. Implied Volatility Summary Problems CHAPTER 5 Credit Default Swaps Learning Outcomes 1. Introduction 2. Basic Definitions and Concepts 2.1. Types of CDS 3. Important Features of CDS Markets and Instruments, Credit and Succession Events, and Settlement Proposals 3.1. Credit and Succession Events 3.2. Settlement Protocols 3.3. CDS Index Products 3.4. Market Characteristics 4. Basics of Valuation and Pricing 4.1. Basic Pricing Concepts 4.2. The Credit Curve and CDS Pricing Conventions 4.3. CDS Pricing Conventions 4.4. Valuation Changes in CDS during Their Lives 4.5. Monetizing Gains and Losses 5. Applications of CDS 5.1. Managing Credit Exposures 6. Valuation Differences and Basis Trading Summary Problems CHAPTER 6 Introduction to Commodities and Commodity Derivatives Learning Outcomes 1. Introduction 2. Commodity Sectors 2.1. Commodity Sectors 3. Life Cycle of Commodities 3.1. Energy 3.2. Industrial/Precious Metals 3.3. Livestock 3.4. Grains 3.5. Softs 4. Valuation of Commodities 5. Commodities Futures Markets: Participants 5.1. Futures Market Participants 6. Commodity Spot and Futures Pricing 7. Theories of Futures Returns 7.1. Theories of Futures Returns 8. Components of Futures Returns 9. Contango, Backwardation, and the Roll Return 10. Commodity Swaps 10.1. Total Return Swap 10.2. Basis Swap 10.3. Variance Swaps and Volatility Swaps 11. Commodity Indexes 11.1. S&P GSCI 11.2. Bloomberg Commodity Index 11.3. Deutsche Bank Liquid Commodity Index 11.4. Thomson Reuters/CoreCommodity CRB Index 11.5. Rogers International Commodity Index 11.6. Rebalancing Frequency 11.7. Commodity Index Summary Summary References Problems CHAPTER 7 Currency Management: An Introduction Learning Outcomes 1. Introduction 2. Review of Foreign Exchange Concepts 2.1. Spot Markets 2.2. Forward Markets 2.3. FX Swap Markets 2.4. Currency Options 3. Currency Risk and Portfolio Risk and Return 3.1. Return Decomposition 3.2. Volatility Decomposition 4. Strategic Decisions in Currency Management: Overview 4.1. The Investment Policy Statement 4.2. The Portfolio Optimization Problem 4.3. Choice of Currency Exposures 5. Strategic Decisions in Currency Management: Spectrum of Currency Risk Management Strategies 5.1. Passive Hedging 5.2. Discretionary Hedging 5.3. Active Currency Management 5.4. Currency Overlay 6. Strategic Decisions in Currency Management: Formulating a Currency Management Program 7. Active Currency Management: Based on Economic Fundamentals, Technical Analysis, and the Carry Trade 7.1. Active Currency Management Based on Economic Fundamentals 7.2. Active Currency Management Based on Technical Analysis 7.3. Active Currency Management Based on the Carry Trade 8. Active Currency Management: Based on Volatility Trading 9. Currency Management Tools: Forward Contracts, FX Swaps, and Currency Options 9.1. Forward Contracts 9.2. Currency Options 10. Currency Management Strategies 10.1. Over-/Under-Hedging Using Forward Contracts 10.2. Protective Put Using OTM Options 10.3. Risk Reversal (or Collar) 10.4. Put Spread 10.5. Seagull Spread 10.6. Exotic Options 10.7. Section Summary 11. Hedging Multiple Foreign Currencies 11.1. Cross Hedges and Macro Hedges 11.2. Minimum-Variance Hedge Ratio 11.3. Basis Risk 12. Currency Management Tools and Strategies: A Summary 13. Currency Management for Emerging Market Currencies 13.1. Special Considerations in Managing Emerging Market Currency Exposures 13.2. Non-Deliverable Forwards Summary References Problems CHAPTER 8 Options Strategies Learning Outcomes 1. Introduction 2. Position Equivalencies 2.1. Synthetic Forward Position 2.2. Synthetic Put and Call 3. Covered Calls and Protective Puts 3.1. Investment Objectives of Covered Calls 4. Investment Objectives of Protective Puts 4.1. Loss Protection/Upside Preservation 4.2. Profit and Loss at Expiration 5. Equivalence to Long Asset/Short Forward Position 5.1. Writing Puts 6. Risk Reduction Using Covered Calls and Protective Puts 6.1. Covered Calls 6.2. Protective Puts 6.3. Buying Calls and Writing Puts on a Short Position 7. Spreads and Combinations 7.1. Bull Spreads and Bear Spreads 8. Straddle 8.1. Collars 8.2. Calendar Spread 9. Implied Volatility and Volatility Skew 10. Investment Objectives and Strategy Selection 10.1. The Necessity of Setting an Objective 10.2. Criteria for Identifying Appropriate Option Strategies 11. Uses of Options in Portfolio Management 11.1. Covered Call Writing 11.2. Put Writing 11.3. Long Straddle 11.4. Collar 11.5. Calendar Spread 12. Hedging an Expected Increase in Equity Market Volatility 12.1. Establishing or Modifying Equity Risk Exposure Summary Problems CHAPTER 9 Swaps, Forwards, and Futures Strategies Learning Outcomes 1. Managing Interest Rate Risk with Swaps 1.1. Changing Risk Exposures with Swaps, Futures, and Forwards 2. Managing Interest Rate Risk with Forwards, Futures, and Fixed-Income Futures 2.1. Fixed-Income Futures 3. Managing Currency Exposure 3.1. Currency Swaps 3.2. Currency Forwards and Futures 4. Managing Equity Risk 4.1. Equity Swaps 4.2. Equity Forwards and Futures 4.3. Cash Equitization 5. Volatility Derivatives: Futures and Options 5.1. Volatility Futures and Options 6. Volatility Derivatives: Variance Swaps 7. Using Derivatives to Manage Equity Exposure and Tracking Error 7.1. Cash Equitization 8. Using Derivatives in Asset Allocation 8.1. Changing Allocations between Asset Classes Using Futures 8.2. Rebalancing an Asset Allocation Using Futures 8.3. Changing Allocations between Asset Classes Using Swaps 9. Using Derivatives to Infer Market Expectations 9.1. Using Fed Funds Futures to Infer the Expected Average Federal Funds Rate 9.2. Inferring Market Expectations Summary Problems CHAPTER 10 Introduction to Risk Management Learning Outcomes 1. Introduction 2. The Risk Management Process 3. The Risk Management Framework 4. Risk Governance – An Enterprise View 4.1. An Enterprise View of Risk Governance 5. Risk Tolerance 6. Risk Budgeting 7. Identification of Risk – Financial and Non-Financial Risk 7.1. Financial Risks 7.2. Non-Financial Risks 8. Identification of Risk – Interactions Between Risks 9. Measuring and Modifying Risk – Drivers and Metrics 9.1. Drivers 9.2. Metrics 10. Methods of Risk Modification – Prevention, Avoidance, and Acceptance 10.1. Risk Prevention and Avoidance 10.2. Risk Acceptance: Self-Insurance and Diversification 11. Methods of Risk Modification – Transfer, Shifting, Choosing a Method for Modifying 11.1. Risk Shifting 11.2. How to Choose Which Method for Modifying Risk Summary Problems CHAPTER 11 Measuring and Managing Market Risk Learning Outcomes 1. Introduction 1.1. Understanding Value at Risk 2. Estimating VaR 3. The Parametric Method of VaR Estimation 4. The Historical Simulation Method of VaR Estimation 5. The Monte Carlo Simulation Method of VaR Estimation 6. Advantages and Limitations of VaR and Extensions of VaR 6.1. Advantages of VaR 6.2. Limitations of VaR 6.3. Extensions of VaR 7. Other Key Risk Measures – Sensitivity Risk Measures; Sensitivity Risk Measures 7.1. Sensitivity Risk Measures 8. Scenario Risk Measures 8.1. Historical Scenarios 8.2. Hypothetical Scenarios 9. Sensitivity and Scenario Risk Measures and VaR 9.1. Advantages and Limitations of Sensitivity Risk Measures and Scenario Risk Measures 10. Using Constraints in Market Risk Management 10.1. Risk Budgeting 10.2. Position Limits 10.3. Scenario Limits 10.4. Stop-Loss Limits 10.5. Risk Measures and Capital Allocation 11. Applications of Risk Measures 11.1. Market Participants and the Different Risk Measures They Use 12. Pension Funds and Insurers 12.1. Insurers Summary Reference Problems CHAPTER 12 Risk Management for Individuals Learning Outcomes 1. Introduction 2. Human Capital, Financial Capital, and Economic Net Worth 2.1. Human Capital 2.2. Financial Capital 2.3. Economic Net Worth 3. A Framework for Individual Risk Management 3.1. The Risk Management Strategy for Individuals 3.2. Financial Stages of Life 4. The Individual Balance Sheet 4.1. Traditional Balance Sheet 4.2. Economic (Holistic) Balance Sheet 4.3. Changes in Economic Net Worth 5. Individual Risk Exposures 5.1. Earnings Risk 5.2. Premature Death Risk 5.3. Longevity Risk 5.4. Property Risk 5.5. Liability Risk 5.6. Health Risk 6. Life Insurance: Uses, Types, and Elements 6.1. Life Insurance 7. Life Insurance: Pricing, Policy Cost Comparison, and Determining Amount Needed 7.1. Mortality Expectations 7.2. Calculation of the Net Premium and Gross Premium 7.3. Cash Values and Policy Reserves 7.4. Consumer Comparisons of Life Insurance Costs 7.5. How Much Life Insurance Does One Need? 8. Other Types of Insurance 8.1. Property Insurance 8.2. Health/Medical Insurance 8.3. Liability Insurance 8.4. Other Types of Insurance 9. Annuities: Types, Structure, and Classification 9.1. Parties to an Annuity Contract 9.2. Classification of Annuities 10. Annuities: Advantages and Disadvantages of Fixed and Variable Annuities 10.1. Volatility of Benefit Amount 10.2. Flexibility 10.3. Future Market Expectations 10.4. Fees 10.5. Inflation Concerns 10.6. Payout Methods 10.7. Annuity Benefit Taxation 10.8. Appropriateness of Annuities 11. Risk Management Implementation: Determining the Optimal Strategy and Case Analysis 11.1. Determining the Optimal Risk Management Strategy 11.2. Analyzing an Insurance Program 12. The Effect of Human Capital on Asset Allocation and Risk Reduction 12.1. Asset Allocation and Risk Reduction Summary References Problems CHAPTER 13 Case Study in Risk Management: Private Wealth Learning Outcomes 1. Introduction and Case Background 1.1. Background of Eurolandia 1.2. The Schmitt Family in Their Early Career Stage 2. Identification and Analysis of Risk Exposures: Early Career Stage 2.1. Specify the Schmitts’ Financial Objectives 2.2. Identification of Risk Exposures 2.3. Analysis of Identified Risk 3. Risk Management Recommendations: Early Career Stage 3.1. Recommendations for Managing Risks 3.2. Monitoring Outcomes and Risk Exposures 4. Risk Management Considerations Associated with Home Purchase 4.1. Review of Risk Management Arrangements Following the House Purchase 5. Identification and Analysis of Risk Exposures: Career Development Stage 5.1. Case Facts: The Schmitts Are 45 5.2. Financial Objectives in the Career Development Stage 5.3. Identification and Evaluation of Risks in the Career Development Stage 6. Risk Management Recommendations: Career Development Stage 6.1. Disability Insurance 6.2. Life Insurance 6.3. Investment Risk Recommendations 6.4. Retirement Planning Recommendation 6.5. Additional Suggestions 7. Identification and Analysis of Risk Exposures: Peak Accumulation Stage 7.1. Review of Objectives, Risks, and Methods of Addressing Them 8. Assessment of and Recommendations concerning Risk to Retirement Lifestyle and Bequest Goals: Peak Accumulation Stage 8.1. Analysis of Investment Portfolio 8.2. Analysis of Asset Allocation 8.3. Recommendations for Risk Management at Peak Accumulation Stage 9. Identification and Analysis of Retirement Objectives, Assets, and Drawdown Plan: Retirement Stage 9.1. Key Issues and Objectives 9.2. Analysis of Retirement Assets and Drawdown Plan 10. Income and Investment Portfolio Recommendations: Retirement Stage 10.1. Investment Portfolio Analysis and Recommendations 10.2. The Advisor’s Recommendations for Investment Portfolio in Retirement Summary Problems CHAPTER 14 Integrated Cases in Risk Management: Institutional Learning Outcomes 1. Introduction 2. Financial Risks Faced by Institutional Investors 2.1. Long-Term Perspective 2.2. Dimensions of Financial Risk Management 2.3. Risk Considerations for Long-Term Investors 2.4. Risks Associated with Illiquid Asset Classes 2.5. Managing Liquidity Risk 2.6. Enterprise Risk Management for Institutional Investors 3. Environmental and Social Risks Faced by Institutional Investors 3.1. Universal Ownership, Externalities, and Responsible Investing 3.2. Material Environmental Issues for an Institutional Investor 3.3. Material Social Issues for an Institutional Investor References Glossary About the Editors and Authors Index End User License Agreement
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