Richard Flavell

Swaps and Other Derivatives

• Gebundenes Buch

Produktbeschreibung

"Richard Flavell has a strong theoretical perspective on swaps with considerable practical experience in the actual trading of these instruments. This rare combination makes this welcome updated second edition a useful reference work for market practitioners."
--Satyajit Das, author of Swaps and Financial Derivatives Library and Traders and Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

Fully revised and updated from the first edition, Swaps and Other Derivatives, Second Edition, provides a practical explanation of the pricing and evaluation of swaps and interest rate derivatives.

Based on the author's extensive experience in derivatives and risk management, working as a financial engineer, consultant and trainer for a wide range of institutions across the world this book discusses in detail how many of the wide range of swaps and other derivatives, such as yield curve, index amortisers, inflation-linked, cross-market, volatility, diff and quanto diffs, are priced and hedged. It also describes the modelling of interest rate curves, and the derivation of implied discount factors from both interest rate swap curves, and cross-currency adjusted curves.

There are detailed sections on the risk management of swap and option portfolios using both traditional approaches and also Value-at-Risk. Techniques are provided for the construction of dynamic and robust hedges, using ideas drawn from mathematical programming.

This second edition has expanded sections on the credit derivatives market - its mechanics, how credit default swaps may be priced and hedged, and how default probabilities may be derived from a market strip. It also prices complex swaps with embedded options, such as range accruals, Bermudan swaptions and target accrual redemption notes, by constructing detailed numerical models such as interest rate trees and Libor-based simulation. There is also increased discussion around the modelling of volatility smiles and surfaces.

The book is accompanied by a CD-ROM where all the models are replicated, enabling readers to implement the models in practice with the minimum of effort.

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Produktdetails

• Wiley Finance Series
• Verlag: Wiley & Sons
• Artikelnr. des Verlages: 14572191000
• 2. Aufl.
• Seitenzahl: 400
• Erscheinungstermin: 8. Februar 2010
• Englisch
• Abmessung: 253mm x 199mm x 30mm
• Gewicht: 935g
• ISBN-13: 9780470721919
• ISBN-10: 047072191X
• Artikelnr.: 26875331

Autorenporträt

Richard Flavell has spent over twenty years working as a financial engineer, consultant and trainer, specialising in complex derivatives and risk management. He spent seven years as Director of Financial Engineering at Lombard Risk, where he was responsible for the mathematical development and implementation of models in its varied pricing and risk systems. He is currently Chairman of Lucidate, a company which specialises in the provision of consultancy and training to financial institutions.

Inhaltsangabe

Preface ix
List of Worksheets (see the accompanying CD) xv
List of Abbreviations xxv
1 Swaps and Other Derivatives 1
1.1 Introduction 1
1.2 Applications of swaps 3
1.3 An overview of the swap market 6
1.4 The evolution of the swap market 8
1.5 Conclusion 10
2 Short-term Interest Rate Swaps 13
Objective 13
2.1 Discounting, the time value of money and other matters 13
2.2 Forward rate agreements (FRAs) and interest rate futures 19
2.3 Short-term swaps 24
2.4 Convexity bias in futures 29
2.5 Forward valuing a swap 31
3 Generic Interest Rate Swaps 33
Objective 33
3.1 Generic interest rate swaps 33
3.2 Pricing through comparative advantage 37
3.3 The relative pricing of generic IRSs 40
3.4 The relationship between the bond and swap markets 43
3.5 Implying a discount function 50
3.6 Building a blended curve 56
4 The Pricing and Valuation of Non-generic Swaps 59
Objective 59
4.1 The pricing of simple non-generic swaps: forward starts 59
4.2 Rollercoasters 64
4.3 Pricing of simple non-generic swaps: a more complex example 66
4.4 Forward valuing as an alternative to discounting-revisited 68
4.5 Swap valuation 69
5 Asset Packaging 73
Objective 73
5.1 Creation and pricing of a par asset swap 74
5.2 Creation and pricing of a par maturity asset swap 77
5.3 Discounting, embedded loans and forward valuing 78
5.4 Further extensions to asset packaging 78
6 Credit Derivatives 79
Background and objective 79
6.1 Total return swaps 80
6.2 Credit default swaps 82
6.3 Pricing and hedging of generic CDSs 88
6.4 Modelling a CDS 92
6.5 Pricing and valuing non-generic CDSs 96
6.6 Basket and portfolio CDSs 97
6.7 Credit exposure under swaps 99
6.8 Appendix: An outline of the credit modelling of portfolios 102
7 More Complex Swaps 107
Objective 107
7.1 Simple mismatch swaps 107
7.2 Average rate swaps 108
7.3 Compound swaps 109
7.4 Yield curve swaps 110
7.5 Convexity effects of swaps 112
7.6 Appendix: Measuring the convexity effect 115
7.6.1 Two approaches to measuring the convexity effect 115
7.6.2 A general mismatch swap 120
7.6.3 Yield curve swaps 123
8 Cross-market and Other Market Swaps 127
Objective 127
8.1 Overnight indexed swaps 127
8.2 Cross-market basis swaps 130
8.3 Equity and commodity swaps 135
8.3.1Commodity swaps 138
8.4 Longevity swaps 140
8.5 Inflation swaps 141
8.6 Volatility swaps 151
9 Cross-currency Swaps 159
Objective 159
9.1 Floating-floating cross-currency swaps 159
9.2 Pricing and hedging of CCBSs 161
9.3 CCBSs and discounting 166
9.4 Fixed-floating cross-currency swaps 169
9.5 Floating-floating swaps continued 171
9.6 Fixed-fixed cross-currency swaps 174
9.7 Cross-currency swap valuation 177
9.8 Dual-currency swaps 179
9.9 Cross-currency equity swaps 182
9.10 Conclusion 183
9.11 Appendix: Quanto adjustments 183
10 OTC Options 187
Objective 187
10.1 Introduction 187
10.2 The Black option-pricing model 188
10.3 Interest rate volatility 190
10.4 Par and forward volatilities 199
10.5 Caps, floors and collars 201
10.6 Digital options 210
10.7 Embedded structures 211
10.8 Swaptions 214
10.9 Structures with embedded swaptions 220
10.10 Options on credit default swaps 223
10.11 FX options 223
10.12 Hedging FX options 227
10.13 Appendix: The SABR model for stochastic volatility 231
11 Swapping Structured Products 235
Objective 235
11.1 Introduction 235
11.2 Examples of some structured securities 236
11.3 Numerical interest rate models 239
11.4 Simulation models 249
11.5 Appendix: Extensions to numerical trees 262
11.5.1 Incorporating a volatility smile 262
11.5.2 Hull-White numerical trees 263
11.5.3 Extensions to BDT and HW models 270
12 Traditional Market Risk Management 273
Objective 273
12.1 Introduction 273
12.2 Interest rate risk management 276
12.3 Gridpoint risk management-market rates 277
12.4 Equivalent portfolios 278
12.5 Gridpoint risk management-forward rates 280
12.6 Gridpoint risk management-zero-coupon rates 282
12.7 Yield curve risk management 284
12.8 Bond and swap futures 289
12.9 Theta risk 290
12.10 Risk management of IR option portfolios 291
12.11 Hedging of inflation swaps 303
12.12 Appendix: Analysis of swap curves 305
13 Value-at-Risk 309
Objective 309
13.1 Introduction 309
13.2 A very simple example 310
13.3 A very simple example extended 317
13.4 Multi-factor delta VaR 321
13.5 Choice of risk factors and cashflow mapping 324
13.6 Estimation of volatility and correlations 328
13.7 A running example 329
13.8 Simulation methods 330
13.9 Shortcomings and extensions to simulation methods 333
13.10 Delta-gamma and other methods 340
13.11 Spread VaR 344
13.12 Equity VaR 346
13.13 Shock testing of VaR 347
13.14 Stress testing of VaR 350
13.15 Appendix: Extreme value theory 351
13.15.1 Peaks over threshold: negative exponential 351
13.15.2 Peaks over threshold: Generalised Pareto 352
13.15.3 Block maxima 353
Index 355