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Financial Derivatives : The Currency and Rates Factor

Book Description

To be financially literate in today's market, students and professionals in the field of finance must have a solid understanding of the concepts, instruments and application of financial derivatives. This text offers a broad based introduction to financial derivatives and covers both the technical aspects of these instruments and information about the markets in which they are traded. The text balances rigor and accessibility through a clear writing style, a graduated mathematical treatment, and an integration of numerous examples and worked out activities to illustrate the application of techniques and facilitate self-assessment.

Table of Contents

  1. Cover
  2. Title Page
  3. Foreword
  4. Preface
  5. Acknowledgements
  6. About the Authors
  7. Derivatives—Through the Window
  8. 1. Universe of Derivatives: Facts
    1. Learning Objectives
    2. Introduction
    3. Global Foreign Exchange Market Turnover
    4. Growth of Global Foreign Exchange Turnover
    5. Concentration in the Banking Industry
    6. Turnover by Instrument
    7. Turnover by Maturity
    8. Turnover by Currency
    9. Turnover by Currency Pair
    10. Turnover by Execution Method
    11. Geographical Distribution of Turnover
    12. Amount of Foreign Exchange Contracts Outstanding as on End-June 2010
    13. Growth of Global Foreign Exchange Positions
    14. Positions by Counterparty
    15. Positions Value by Instrument
    16. Positions by Maturity
    17. Positions by Currency
    18. Derivatives Outstanding
    19. Amount Outstanding of Over-the-Counter (OTC) Derivatives
    20. Amount Outstanding of Exchange Traded Derivatives
    21. Size of OTC Derivative Markets in India
    22. Outstanding Derivatives of Banks in India
    23. Test Your Understanding
  9. 2. Derivatives Introduced: Indian Perspective
    1. Learning Objectives
    2. Derivatives: Legal Definition
    3. Major Types of Derivatives
    4. Participants in the Derivatives Market
    5. History and Legalization of Derivatives in India
    6. Additions and Amendments to Securities Contract (Regulation) Act, 1956 to Legalize the Derivative as Exchange Traded Contract 18
    7. Amendments and Additions to Reserve Bank of India Act, 1934 to Legalize OTC Derivatives
    8. Introduction of Currency Futures and Options on Exchanges in India
    9. Test Your Understanding
  10. 3. OTC FX Concepts
    1. Learning Objectives
    2. Concept of Base Currency and Home Currency
    3. Direct and Indirect Quotes
    4. Currency Regimes
    5. Fully Convertible
    6. Partially Convertible
    7. Pegged
    8. Concept of Hedging in Over-the-Counter Markets
    9. Introduction to Forex Rates Determination
    10. Cash Rate
    11. Tom Rate
    12. Spot Rate
    13. Forward Rate
    14. Important Related Notes
    15. Interest Rate Parity Theory
    16. Calculation of Rates
    17. How Do Banks Calculate Value Cash/Value Today Foreign Exchange Rate?
    18. Miscellaneous Illustrations
    19. Important Concept: Cross Currency
    20. Test Your Understanding
  11. 4. ETC FX Concepts
    1. Learning Objectives
    2. Introduction
    3. Currency Futures: Introduction
    4. Market Participants in Currency Futures Segment
    5. Hedgers
    6. Investors
    7. Arbitrageurs
    8. Currency Futures: Technical Aspects
    9. Concept of Margin in ETC Markets
    10. Initial Margin
    11. Mark-to-Market Margin
    12. Maintenance Margin
    13. Advantages of Currency Futures Market
    14. Transparency
    15. Accessibility
    16. Cost
    17. Efficient Price Discovery
    18. Credit Risk
    19. Standardized Contracts
    20. NSE and Thomson Reuters Screenshots
    21. Summary Statement and Ledger Formats
    22. Difference Between ETC and OTC
    23. Stock Futures in Brief
    24. Miscellaneous Illustrations
    25. Test Your Understanding
  12. 5. FX Options: Concepts
    1. Learning Objectives
    2. Introduction
    3. What Is an Option?
    4. Option Definitions (From Currency Perspective)
    5. Basics of Option
    6. Option Payoff
    7. Payoff Diagrams
    8. Buy Put
    9. Sell Call
    10. Buy Call
    11. Sell Put
    12. Miscellaneous Illustrations
    13. Test Your Understanding
  13. 6. FX Options: Valued
    1. Learning Objectives
    2. Introduction
    3. Currency Option Market Mechanics in Real World
    4. Market Participants
    5. Introduction to Black and Scholes
    6. Option Premium Components
    7. Option Pricing and Greeks
    8. Binomial Model
    9. Risk Neutralization Model
    10. Black–Scholes Pricing Formulas
    11. Black–Scholes Pricing: Currency Options
    12. Assumptions of the Black–Scholes Model
    13. Factors Affecting Option Prices
    14. Underlying Price and Strike Price
    15. Time to Expiration
    16. Volatility
    17. Risk-free Interest Rate
    18. Option Greeks: Measurement of Risk in Option Pricing for Vanilla Options
    19. Graph of the Black–Scholes Model
    20. Volatility
    21. Historical/Realized Volatility Calculation
    22. Estimating Volatility from Historical Data
    23. Implied Volatility
    24. Implied Volatility Exhibits
    25. Application of Option Greeks, Risk Reversal and Fly in Real Market Scenario
    26. Delta
    27. Gamma
    28. Theta
    29. Vega
    30. Rho
    31. Risk Reversal
    32. Fly
    33. Miscellaneous Illustrations
    34. Test Your Understanding
  14. 7. FX Options: Structured Solutions
    1. Learning Objectives
    2. Vanilla Option
    3. Vanilla Option (European)
    4. Vanilla Spread (European)
    5. Range Forward/Risk Reversal
    6. Seagull
    7. Participatory Forward
    8. Ratio Forward
    9. Fader
    10. Accumulator Ratio Forward
    11. Target Redemption Notes (TARN)
    12. Barrier Option
    13. Vanilla Option with Knock-In (KI) (American)
    14. Vanilla Option with Double Knock-In (DKI) (American)
    15. Vanilla Option with Knock-Out (KO) (American)
    16. Vanilla Option with Double Knock-Out (DKO) (American)
    17. Vanilla Option with Knock-In and Knock-Out (KIKO) (American)
    18. Digitals
    19. Vanilla Digital (European)
    20. One Touch (OT) (American)
    21. Double One Touch (DOT) (American)
    22. Double Must Touch (DMT) (American)
    23. No Touch (NT) (American)
    24. Double No Touch (DNT) (American)
    25. Daily Range Accrual (RAC)
    26. Miscellaneous Illustrations
    27. Range Forward Strategy
    28. Range Extra Strategy
    29. Straddle Strategy
    30. Strangle Strategy
    31. Butterfly Strategy
    32. Bull Spread/Call Spread Strategy
    33. Bear Spread/Put Spread Strategy
    34. Test Your Understanding
  15. 8. Interest Rate Products: Vanilla to Exotic
    1. Learning Objectives
    2. Interest Rate Swaps
    3. Forward Rate Agreement
    4. Arrear Swap
    5. Full Currency Swap
    6. Coupon Only Swap
    7. Interest Rate Options
    8. Interest Rate Cap
    9. Collar
    10. Seagull
    11. European Knock-Out Cap
    12. Knock-Ins and Knock-Outs
    13. Range Accruals
    14. Variations
    15. Floating to Fixed Range Accrual
    16. Fixed to Fixed Range Accrual
    17. Yield Curve Structures
    18. Constant Maturity Swap
    19. Curve Steepeners
    20. Curve Flatteners
    21. Key Concepts of Rates Market
    22. Miscellaneous Illustrations
    23. Test Your Understanding
  16. 9. Money Market: The FX Impact
    1. Learning Objectives
    2. Introduction
    3. Interlinkage Between Money Market and Currency Market
    4. Money Market Instruments
    5. Overnight Call Money
    6. Call Money Market
    7. Repo/Reverse Repo Rate
    8. Inter Corporate Deposits (ICD)
    9. Commercial Paper
    10. Certificate of Deposit
    11. T-bills
    12. Most Common Interest Rate Benchmarks and Curves (Indian and Global)
    13. MIBOR
    14. Indian Benchmark Rate
    15. Mumbai Interbank Forward Offered Rate
    16. Forward Rate Agreement
    17. Mumbai Interbank Bid Rate
    18. Overnight Indexed Swap
    19. London Interbank Offer Rate and Interest Rate Swap
    20. Global Money Market Risk Indicators and Their Impact on Exchange Rate
    21. TED Spread
    22. LIBOR-OIS Spread
    23. Basis Swap
    24. Test Your Understanding
  17. 10. Indianomics
    1. Learning Objectives
    2. Types of Policies
    3. Monetary Policy
    4. Fiscal Policy
    5. Indian Data Releases
    6. Industrial Production Growth Rate
    7. Consumer Price Index
    8. Wholesale Price Index
    9. Balance of Trade (BOT)
    10. Trade Surplus
    11. Trade Deficit
    12. Repo and Reverse Repo Rate
    13. Foreign Investments
    14. Kinds of Foreign Investments
    15. Foreign Institutional Investment
    16. Test Your Understanding
  18. 11. Fundamental Analysis and Data Releases
    1. Learning Objectives
    2. Employment Data
    3. Jobless Claims
    4. Unemployment Rate
    5. Non-farm Payroll
    6. Help Wanted Index
    7. Employee Cost Index (ECI)
    8. Inflation Data
    9. Consumer Price Index
    10. Producer Price Index (PPI)
    11. Personal Consumption Expenditure (PCE) Deflator
    12. Import and Export Prices
    13. Activity-related Variables
    14. Gross Domestic Product
    15. Industrial Production
    16. Institute of Supply Management Manufacturing Index
    17. Institute of Supply Management Non-manufacturing Index
    18. Philadelphia Fed Survey
    19. NAPM: Chicago Index (Chicago PMI)
    20. New York Empire State Index
    21. Personal Income and Expenditure Outlays
    22. Retail Sales
    23. ICSC—UBS Store Sales
    24. Leading Indicators
    25. Existing Home Sales Report
    26. Housing Starts
    27. New Home Sales
    28. Factory Orders
    29. Durable Goods Orders
    30. Construction Spending
    31. Wholesale Trade
    32. Business Inventories
    33. Consumer Sentiment: Michigan Survey
    34. Leading Indicators Composite Index
    35. Motor Vehicle Sales
    36. MBA Purchase Applications
    37. External Sector
    38. International Trade Balance
    39. Current Account Balance
    40. Treasury International Capital Data
    41. Other Data Releases
    42. US Treasury Budget
    43. Money Supply
    44. Beige Book
    45. Productivity and Costs
    46. Consumer Confidence Index
    47. Consumer Credit Report
    48. Mutual Fund Flows
    49. Some International Indicators
    50. Tankan Survey: Bank of Japan
    51. IFO Survey
    52. ZEW Survey
    53. Purchasing Managers Index
    54. Retail Price Index: UK
    55. Royal Institute of Chartered Surveyors Residential Housing Survey
    56. Test Your Understanding
  19. 12. Technical Analysis
    1. Learning Objectives
    2. Introduction and Importance of Technical Analysis
    3. Kinds of Charts
    4. Fundamental Analysis Versus Technical Analysis
    5. Technical Analysis Concepts
    6. Support and Resistance
    7. Trends
    8. Introduction to Candlestick
    9. Types of Candles
    10. Reading Chart Patterns
    11. Reversal Patterns
    12. Continuation Pattern
    13. Technical Indicator
    14. Leading Indicators
    15. Lagging Indicators
    16. Steps in Technical Analysis
    17. Test Your Understanding
  20. 13. ISDA Agreement: Documenting Derivatives
    1. Learning Objectives
    2. Introduction
    3. ISDA Master Agreement
    4. History
    5. Architecture of the Agreement
    6. Single Agreement
    7. Events of Default and Termination Events
    8. Close Out Netting
    9. Taxation
    10. Multi-branch Issues
    11. Related Documents
    12. Schedule
    13. Credit Support Annex
    14. Confirmations
    15. Definitions
    16. Legal Issues
    17. Netting
    18. Set-off
    19. Authority and Capacity
    20. Reliance and Suitability
    21. Termination
    22. Advantages of the Agreement
    23. Test Your Understanding
  21. Appendix 1: Case Studies
  22. Appendix 2: Term Sheets
  23. Appendix 3: Derivative Disclosures in Annual Reports
  24. Appendix 4: Master Circular on Risk Management and Inter-Bank Dealings (Issued on 02 July 2007)
  25. Appendix 5: Master Circular on Risk Management and Inter-Bank Dealings (Issued on 01 July 2011)
  26. Appendix 6: Circular Issued with Relation to Suitability and Appropriateness of Derivative Transactions
  27. Index
  28. Copyright