How to Understand and Use Mathematics for Derivatives

Volume 1
Erscheinungsjahr 1995
ISBN: 978-1-85564-446-5
Verlag: Euromoney

Buch, Englisch, 256 Seiten

These two companion volumes offer a comprehensive guide to the ‘new maths’, analysing and explaining the behaviour of the markets and providing a practical guide to the key mathematical models underlying trading and risk management.

Volume I - Understanding the Behaviour of Markets - brings together all foreign exchange and derivatives issues. Illustrated with numerous examples, the book examines: forex markets and patterns in forex trading; intraday patterns and high frequency data; business time, intrinsic time and micro-seasonal fluctuations; derivatives, in forex and their business opportunities; the management of derivatives risk; currency futures, options and forwards; swaps, swaptions and exotics; risk and internal control issues.

Autoren/Hrsg.

Chorafas, Dimitris

Fachgebiete

• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Anlagen & Wertpapiere
• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Internationale Finanzmärkte
• Wirtschaftswissenschaften Volkswirtschaftslehre Internationale Wirtschaft Internationale Finanzmärkte
• Mathematik | Informatik Mathematik Mathematik Interdisziplinär Finanz- und Versicherungsmathematik

Inhaltsverzeichnis

HOW TO UNDERSTAND AND USE MATHEMATICS FOR DERIVATIVES

Volume 1: Understanding the behaviour of markets

Preface 1

Chapter 1

5 Treasury operations, financial instruments and inefficient markets

Introduction

Roles played by treasury operations

Banks and the provision of effective financial services

Developing and selling flexible and appealing financial products

Markets, investors, traders, bankers and creditworthiness

Are the financial markets efficient or inefficient?

Non-traditional financial research to identify market inefficiencies

Notes and references

Chapter 2

25 The third era in currency exchange and ist aftermath

Introduction

Bretton Woods, Smithsonian Agreement and everyone on his own

Is there financial sovereignty in a global market?

The free rise and fall of currency values

What makes the foreign exchange market tick?

Exchange rates, interest rates, cash flows and risk

Overvalued currencies, devalued currencies and the weakness of the dollar

Other currencies against the dollar: a sharp change in parities

Structural outflow of US dollars by pension funds and short-term investors

Notes and references

Chapter 3

49 The forex market: risks, crossrates, spreads and dealers' competition

Introduction

Foreign exchange markets, bid/ask and currency risk

Maintaining and exploiting currency positions in realtime

Bid/ask spreads, dealers' competition and inventory costs

Money is a fertile field for inventory management

Order flow, order books and hot administrative considerations

Notes and references

Chapter 4

71 Patterns in forex trading: market-makers, arbitrageurs, investors and correspondent banks

Introduction

Market-makers, contrarians and the expanding horizon of financial products

Currency arbitrage and the short time horizon of arbitrageurs

Spread trading and other types of arbitrage

Why a profit and loss evaluation needs realistic assumptions

Business cycles, government policies and forex patters

Currency exchange, derivatives deals and corespondent banking

The role of productization in correspondent banking

Notes and references

Chapter 5

91 Intraday patterns in foreign exchange and high frequency financial data

Introduction

To be profitable, currency exchange requires intraday solutions

Speed and accuracy in the collection, manipulation and visualization of financial data

Capitalizing on the market's long memory

Intraday average returns from currency exchange and the stock market

Focusing on high frequency financial data and ist tools

Exploiting the concept of time sampling while avoiding measurement errors

Establishing the framework for the necessary cultural change

Notes and references

Chapter 6

111 Business time, intrinsic time, microseasonal fluctuations and market productivity

Introduction

The concept of business time in an intraday setting

Intrinsic time as a result of market productivity

The complex but important notion of microseasonality

A process of devolatilization and the effect of noise and entropy on time series

High frequency data, microseasonality, and volatility persistence

Transaction frequency, heteroschedasticity and volatility clustering

Directional change, market volatility and risk management

Notes and references

Chapter 7

131 Derivative products in foreign exchange and their business opportunity

Introduction

Derivatives which became institutionalized

The regulators address the subject of exposure

The over-the-counter market and the offshore

Risk and return with foreign exchange derivatives

Principal markets for currency exchange products

Trading currency derivatives and synthetics

Long positions, short positions and netting

Credit risk, market risk, duration, and technology

Notes and references

Chapter 8

153 Notional principal amounts and the management of derivatives risk

Introduction

Notional principal amounts with foreign exchange and derivatives

From notional principal to loan equivalence: the role of the demodulator

Applying the notion of original exposure in calculating risk

Benefits to be obtained through a class of instruments approach

Changes in the price function, worst-case and value at risk

The constant monitoring or risk: RAROC by Bankers Trust

RiskMetrics by JP Morgan and zero-coupon equivalence

Streamlining the reporting structure. A lesson from the Dai-Ichi Kangyo Bank

Notes and references

Chapter 9

175 Currency futures, options, forwards and the battle of the dollar

Introduction

Futures, options and the market watch

Investors and the mechanism to transfer risk

The line dividing futures and forwards

Currency futures and options

Dealing in foreign currencies: underlies, instrument choices and settlements

US dollars, Japanese yen, financial and commercial currency choices

Dollars, yen and Deutschmarks - a bouillon des cultures

Notes and references

Chapter 10

195 The many aspects of swaps and exotic derivatives

Introduction

Swaps transactions, players and AAA rating of the counterparties

The ABC of a swaps agreement

Physical commodity and other types of swaps

Reasons for executing currency swaps

Different flavours of the popular interest rate swaps and currency swaps

Forward rate agreements and the liquidity premium theory

Playing and investing through differential swaps

Derivatives of derivatives: dealing in swaptions

Exotics derivatives: are they worth the risk?

Notes and references

Chapter 11

215 The tale of two banks: Barings and Crédit Lyonnais

Introduction

Murphy's law: 'If anything can go wrong, it will!'

The Barings crisis of February 1995

The man who single-handedly brought down Barings, and his pals

Derivatives is a game of risk, and internal controls make the difference

There are different ways of looking at the Barings meltdown

Problems still unsolved after the takeover of Barings by ING

Can big companies really control their empire?

Crédit Lyonnais: the bank that thought that it ran the government

Nothing emboldens sin so much as mercy

Notes and references

Chapter 12

237 Other people's money: Orange County and emerging markets

Introduction

Background reasons for the Orange County default

The Code of Hammurabi did not foresee derivatives

Beware of free advice. It may not be all that good

Only in times of crisis investors learn what may be the truth

Municipalities wake up and try to clean themselves of funny paper

Fund versus banks; financing Third World countries

Handouts are no solution when hot money calls the tune

Bad debt in emerging markets. A warning signal?

Notes and references

Über Autor(innen)

Professor Dr. Dimitris N. Chorafas has, since 1961, advised financial institutions and industrial corporations on strategic planning, risk management, computer and communications systems, and internal controls. A graduate of the University of California, Los Angeles, the University of Paris, and the Technical University of Athens, Dr Chorafas has been a fulbright scholar.

Among the multinational corporations for which Dr Chorafas has worked as consultant to top management are General Electric, Bull, Univac, Honeywell, Digital Equipment Corp, Olivetti, Nestle, Omega, Italcementi, AEG-Telefunken, Olympia, Osram, Antar, Pechiney, the American Management Association and a range of other firms in Europe and the United States.

Dr Chorafas has served on the faculty of the Catholic University of America and as visiting professor at five other American universities, one Canadian, one Swiss and one German university. More that 6,000 banking, industry and government executives have participated in his seminars in the United States, England, Germany, other European countries, Asia and Latin America.