PART Three Derivative Instruments

In the third part of the book, we consider the primary derivative instruments. Derivatives are not securities, and it is incorrect to refer to them as such. Hence, we have fixed-income securities in the cash markets and fixed-income derivatives (or interest-rate derivatives) in the synthetic markets. We look here at their application in the bond markets.

We concentrate on interest-rate swaps and how they are used by bond-market participants for hedging purposes, options, and credit derivatives. There is also a chapter on the theory of forward and futures pricing.

Readers who wish to learn more about derivative instruments have a large selection of titles to choose from. We recommend Blake (2000) as an introductory-level text. This book does a good job of placing all capital-market instruments within an integrated context, including the analysis and use of options. Marshal and Bansal (1992) and Levy (1999) are also very good introductory texts that cover a wide range of instruments, including options. Another excellent title is Jarrow and Turnbull (2000), while the author’s personal favourite on options and other derivatives is Kolb (2007); this book is well worth purchasing. For an intermediate- to advanced-level treatment, the standard text is Hull (2011.). Rubinstein (1999) is at the same level, and is very accessible and readable; it is highly recommended. An excellent advanced text on derivatives is Briys et al. (1998), which presents the ...

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