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Sunil K. Parameswaran. Fundamentals of Financial Instruments
Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Fundamentals of Financial Instruments. An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives
Preface
Preface to the First Edition
Acknowledgments
About the Author
CHAPTER 1 An Introduction to Financial Institutions, Instruments, and Markets. THE ROLE OF AN ECONOMIC SYSTEM
A COMMAND ECONOMY
A MARKET ECONOMY
CLASSIFICATION OF ECONOMIC UNITS
AN ECONOMY'S RELATIONSHIP WITH THE EXTERNAL WORLD
THE BALANCE OF TRADE
THE CURRENT ACCOUNT BALANCE
FINANCIAL ASSETS
MONEY
MONEY AS A UNIT OF ACCOUNT OR A STANDARD OF VALUE
MONEY AS A MEDIUM OF EXCHANGE
MONEY AS A STORE OF VALUE
MONEY IS PERFECTLY LIQUID
EQUITY SHARES
DEBT SECURITIES
PREFERRED SHARES
FOREIGN EXCHANGE
DERIVATIVES
FORWARD AND FUTURES CONTRACTS
EXAMPLE 1.1
OPTIONS CONTRACTS
EXAMPLE 1.2
SWAPS
MORTGAGES AND MORTGAGE-BACKED SECURITIES
HYBRID SECURITIES
PRIMARY MARKETS AND SECONDARY MARKETS
EXCHANGES AND OVER-THE-COUNTER (OTC) MARKETS
BROKERS AND DEALERS
THE NEED FOR BROKERS AND DEALERS
TRADING POSITIONS
THE BUY-SIDE AND THE SELL-SIDE
INVESTMENT BANKERS
DIRECT AND INDIRECT MARKETS
MUTUAL FUNDS
EXAMPLE 1.3
EXAMPLE 1.4
MONEY AND CAPITAL MARKETS
THE EUROCURRENCY MARKET
THE INTERNATIONAL BOND MARKET
GLOBALIZATION OF EQUITY MARKETS
DUAL LISTING
EXAMPLE 1.5
FUNGIBILITY
ARBITRAGE
ARBITRAGE WITH ADRs
GDRs
RISK
AFTER THE TRADE – CLEARING AND SETTLEMENT
DEMATERIALIZATION AND THE ROLE OF A DEPOSITORY
CUSTODIAL SERVICES
GLOBALIZATION – THE NEW MANTRA
EXAMPLE 1.6 (An Illustration from India)
NOTES
CHAPTER 2 Mathematics of Finance. INTEREST RATES
THE REAL RATE OF INTEREST
EXAMPLE 2.1
THE FISHER EQUATION
SIMPLE INTEREST & COMPOUND INTEREST
Variables and Corresponding Symbols
Simple Interest
EXAMPLE 2.2
EXAMPLE 2.3
Compound Interest
EXAMPLE 2.4
EXAMPLE 2.5
EXAMPLE 2.6
PROPERTIES
EXAMPLE 2.7
Effective Versus Nominal Rates of Interest
EXAMPLE 2.8
A SYMBOLIC DERIVATION
PRINCIPLE OF EQUIVALENCY
CONTINUOUS COMPOUNDING
EXAMPLE 2.9
EXAMPLE 2.10
FUTURE VALUE
EXAMPLE 2.11
EXAMPLE 2.12
PRESENT VALUE
The Mechanics of Present Value Calculation
EXAMPLE 2.13
HANDLING A SERIES OF CASH FLOWS
EXAMPLE 2.14
THE INTERNAL RATE OF RETURN
EXAMPLE 2.15
EVALUATING AN INVESTMENT
The Future Value Approach
The Present Value Approach
The Rate of Return Approach
ANNUITIES: AN INTRODUCTION
Present Value
EXAMPLE 2.16
Future Value
EXAMPLE 2.17
ANNUITY DUE
Present Value
EXAMPLE 2.18
Future Value
EXAMPLE 2.19
PERPETUITIES
EXAMPLE 2.20
THE AMORTIZATION METHOD
EXAMPLE 2.21
AMORTIZATION WITH A BALLOON PAYMENT
THE EQUAL PRINCIPAL REPAYMENT APPROACH
TYPES OF INTEREST COMPUTATION
The Simple Interest Approach
EXAMPLE 2.22
The Add-on Rate Approach
The Discount Technique
LOANS WITH A COMPENSATING BALANCE
TIME VALUE OF MONEY–RELATED FUNCTIONS IN EXCEL
EXAMPLE 2.23
The Future Value (FV) Function in Excel
EXAMPLE 2.24
The Present Value Function in Excel
EXAMPLE 2.25
COMPUTING THE PRESENT AND FUTURE VALUES OF ANNUITIES AND ANNUITIES DUE IN EXCEL. EXAMPLE 2.26
AMORTIZATION SCHEDULES AND EXCEL
NOTE
CHAPTER 3 Equity Shares, Preferred Shares, and Stock Market Indices. INTRODUCTION
PAR VALUE VERSUS BOOK VALUE
ACCOUNTING FOR A STOCK ISSUE
VOTING RIGHTS
Statutory Versus Cumulative Voting
Proxies
DIVIDENDS
Dividend Yield
Dividend Reinvestment Plans
Stock Dividends
TREASURY STOCK
ACCOUNTING FOR TREASURY STOCK
SPLITS AND REVERSE SPLITS
EXAMPLE 3.1
Costs Associated with Splits and Stock Dividends
PREEMPTIVE RIGHTS
INTERPRETING STATED RATIOS
HANDLING FRACTIONS
PHYSICAL CERTIFICATES VERSUS BOOK ENTRY
TRACKING STOCK
REPORT CARDS
TYPES OF STOCKS
Interest-sensitive Stocks
RISK AND RETURN AND THE CONCEPT OF DIVERSIFICATION
PREFERRED SHARES
Callable Preferred Stock
Convertible Preferred Shares
EXAMPLE 3.2
Cumulative Preferred Shares
EXAMPLE 3.3
Adjustable-Rate Preferred Shares
Participating Preferred Shares
DIVIDEND DISCOUNT MODELS
A GENERAL VALUATION MODEL
THE CONSTANT GROWTH MODEL
EXAMPLE 3.4
THE TWO-STAGE MODEL
EXAMPLE 3.5
THE THREE-STAGE MODEL
EXAMPLE 3.6
THE H MODEL
EXAMPLE 3.7
STOCK MARKET INDICES
PRICE-WEIGHTED INDICES
EXAMPLE 3.8
Changing the Divisor
THE IMPORTANCE OF PRICE
VALUE-WEIGHTED INDICES
EXAMPLE 3.9
Changing the Divisor
EXAMPLE 3.10
CHANGING THE BASE PERIOD CAPITALIZATION
EQUALLY WEIGHTED INDICES
TRACKING PORTFOLIOS
Rebalancing a Tracking Portfolio
Equally Weighted Portfolios
Price-weighted Portfolios
Rights Issues
Value-weighted Portfolios
HANDLING A RIGHTS ISSUE
THE FREE-FLOATING METHODOLOGY
WELL-KNOWN GLOBAL INDICES
MARGIN TRADING AND SHORT-SELLING
TERMINOLOGY
EXAMPLE 3.11
EXAMPLE 3.12 (Magnifying Returns)
CASE A: THE MARKET RISES
CASE B: THE MARKET DECLINES
CASE A: THE MARKET RISES
CASE B: THE MARKET DECLINES
INTEREST AND COMMISSIONS
CASE A: THE MARKET RISES
CASE B: THE MARKET DECLINES
MAINTENANCE MARGIN
SHORT-SELLING
EXAMPLE 3.13
MAINTENANCE OF A SHORT POSITION
SHORTING AGAINST THE BOX
EXAMPLE 3.14
THE RISK FACTOR
THE ECONOMIC ROLE OF SHORT SALES
THE UPTICK RULE
NOTES
CHAPTER 4 Bonds. INTRODUCTION
TERMS USED IN THE BOND MARKET. Face Value
Term to Maturity
Coupon
Yield to Maturity
VALUATION OF A BOND
EXAMPLE 4.1
PAR, PREMIUM, AND DISCOUNT BONDS
EVOLUTION OF THE PRICE
EXAMPLE 4.2
ZERO-COUPON BONDS
EXAMPLE 4.3
VALUING A BOND IN BETWEEN COUPON DATES
DAY-COUNT CONVENTIONS
ACTUAL-ACTUAL
EXAMPLE 4.4
THE TREASURY'S APPROACH
CORPORATE BONDS
ACCRUED INTEREST
NEGATIVE ACCRUED INTEREST
YIELDS
THE CURRENT YIELD
EXAMPLE 4.5
SIMPLE YIELD TO MATURITY
EXAMPLE 4.6
YIELD TO MATURITY
APPROXIMATE YIELD TO MATURITY
EXAMPLE 4.7
ZERO-COUPON BONDS AND THE YTM
ANALYZING THE YTM
THE REALIZED COMPOUND YIELD
EXAMPLE 4.8
REINVESTMENT AND ZERO-COUPON BONDS
THE HOLDING PERIOD YIELD
TAXABLE EQUIVALENT YIELD
CREDIT RISK
BOND INSURANCE
EQUIVALENCE WITH ZERO-COUPON BONDS
SPOT RATES
THE COUPON EFFECT
BOOTSTRAPPING
FORWARD RATES
THE YIELD CURVE AND THE TERM STRUCTURE
SHAPES OF THE TERM STRUCTURE
THEORIES OF THE TERM STRUCTURE
The Pure or Unbiased Expectations Hypothesis
THE LIQUIDITY PREMIUM HYPOTHESIS
THE MONEY SUBSTITUTE HYPOTHESIS
THE MARKET SEGMENTATION HYPOTHESIS
THE PREFERRED HABITAT THEORY
THE SHORT RATE
EXAMPLE 4.9
FLOATING RATE BONDS
SIMPLE MARGIN
EXAMPLE 4.10
BONDS WITH EMBEDDED OPTIONS
CALLABLE BONDS
YIELD TO CALL
EXAMPLE 4.11
PUTABLE BONDS
CONVERTIBLE BONDS
EXAMPLE 4.12
USING SHORT RATES TO VALUE BONDS
PRICE VOLATILITY
EXAMPLE 4.13
A CONCISE FORMULA
DURATION AND PRICE VOLATILITY
PROPERTIES OF DURATION
DOLLAR DURATION
CONVEXITY
A CONCISE FORMULA
DOLLAR CONVEXITY
PROPERTIES OF CONVEXITY
IMMUNIZATION
Analysis
TREASURY AUCTIONS
EXAMPLE 4.14 (Issue of a 5-year T-note)
EXAMPLE 4.15. Reopening of a 30-year T-bond
WHEN ISSUED TRADING
PRICE QUOTES
STRIPS
EXAMPLE 4.16
INFLATION INDEXED BONDS
EXAMPLE 4.17
COMPUTING PRICE GIVEN YIELD AND VICE VERSA IN EXCEL
EXAMPLE 4.18
EXAMPLE 4.19
COMPUTING DURATION IN EXCEL
NOTES
CHAPTER 5 Money Markets. INTRODUCTION
MARKET SUPERVISION
THE FEDERAL RESERVE SYSTEM
KEY DATES IN THE CASE OF CASH MARKET INSTRUMENTS
THE MODIFIED FOLLOWING BUSINESS DAY CONVENTION
THE END/END RULE
THE INTERBANK MARKET
TYPES OF LOANS
LIBOR
LIBID
SONIA
TRANSITIONING FROM LIBOR
INTEREST COMPUTATION METHODS
EXAMPLE 5.1
EXAMPLE 5.2
EXAMPLE 5.3
EXAMPLE 5.4
TERM MONEY MARKET DEPOSITS
MONEY MARKET FORWARD RATES
EXAMPLE 5.5
FEDERAL FUNDS
FEDERAL FUNDS VERSUS CLEARINGHOUSE FUNDS
CORRESPONDENT BANKS: NOSTRO AND VOSTRO ACCOUNTS
TREASURY BILLS
REOPENINGS
YIELDS ON DISCOUNT SECURITIES
NOTATION
DISCOUNT RATES AND T-BILL PRICES
EXAMPLE 5.6
EXAMPLE 5.7
THE BOND EQUIVALENT YIELD (BEY)
CASE A: TM< 182 DAYS
EXAMPLE 5.8
THE MONEY MARKET YIELD
EXAMPLE 5.9
CASE B: TM > 182 DAYS
EXAMPLE 5.10
HOLDING PERIOD RETURN
EXAMPLE 5.11
VALUE OF AN 01
CONCEPT OF CARRY
CONCEPT OF A TAIL
EXAMPLE 5.12
T-BILL RELATED FUNCTIONS IN EXCEL
TBILLPRICE
EXAMPLE 5.13
TBILLYIELD
TBILLEQ
DISC
TREASURY AUCTIONS
TYPES OF AUCTIONS
EXAMPLE 5.14
RESULTS OF AN AUCTION
PRIMARY DEALERS AND OPEN MARKET OPERATIONS
REPURCHASE AGREEMENTS
EXAMPLE 5.15
REVERSE REPOS
GENERAL COLLATERAL VERSUS SPECIAL REPOS
MARGINS
EXAMPLE 5.16 (Initial Margins)
SALE AND BUYBACK
COLLATERAL
REPOS AND OPEN MARKET OPERATIONS
NEGOTIABLE CDs
NOTATION
EXAMPLE 5.17
EXAMPLE 5.18
EXAMPLE 5.19
COST OF A CD FOR THE ISSUING BANK
EXAMPLE 5.20
TERM CDs
EXAMPLE 5.21
CDs VERSUS MONEY MARKET TIME DEPOSITS
COMMERCIAL PAPER
LETTERS OF CREDIT AND BANK GUARANTEES
YANKEE PAPER
CREDIT RATING
MOODY'S RATING SCALE
S&P'S RATING SCALE
FITCH'S RATING SCALE
BILLS OF EXCHANGE
DOCUMENTS AGAINST PAYMENT (DAP) VERSUS DOCUMENTS AGAINST ACCEPTANCE (DAA) TRANSACTIONS
ELIGIBLE AND NONELIGIBLE BANK BILLS
BUYING AND SELLING BILLS
BANKERS' ACCEPTANCE
EXAMPLE 5.22
EXAMPLE 5.23
ACCEPTANCE CREDITS
EUROCURRENCY DEPOSITS
APPENDIX
NOTES
CHAPTER 6 Forward and Futures Contracts. INTRODUCTION
MARKING TO MARKET FOR A TRADER IN PRACTICE
EXAMPLE 6.1
DELIVERY OPTIONS
PROFIT DIAGRAMS
VALUE AT RISK
EXAMPLE 6.2
THE EXPECTED SHORTFALL
EXAMPLE 6.3
SPOT-FUTURES EQUIVALENCE
PRODUCTS AND EXCHANGES
CASH-AND-CARRY ARBITRAGE
REVERSE CASH-AND-CARRY ARBITRAGE
REPO AND REVERSE REPO RATES
SYNTHETIC SECURITIES
VALUATION
EXAMPLE 6.4
THE CASE OF ASSETS MAKING PAYOUTS
EXAMPLE 6.5
EXAMPLE 6.6
PHYSICAL ASSETS
EXAMPLE 6.7
NET CARRY
BACKWARDATION AND CONTANGO
THE CASE OF MULTIPLE DELIVERABLE GRADES
RISK ARBITRAGE
THE CASE OF MULTIPLICATIVE ADJUSTMENT
THE CASE OF ADDITIVE ADJUSTMENT
EXAMPLE 6.8
EXAMPLE 6.9
TRADING VOLUME AND OPEN INTEREST
EXAMPLE 6.10
DELIVERY
CASH SETTLEMENT
HEDGING AND SPECULATION
ROLLING A HEDGE
TAILING A HEDGE
THE MINIMUM VARIANCE HEDGE RATIO
ESTIMATION OF THE HEDGE RATIO AND THE HEDGING EFFECTIVENESS
CROSS-HEDGING
SPECULATION
EXAMPLE 6.11
EXAMPLE 6.12
EXAMPLE 6.13
EXAMPLE 6.14
EXAMPLE 6.15
EXAMPLE 6.16
LEVERAGE
CONTRACT VALUE
EXAMPLE 6.17
FORWARD VERSUS FUTURES PRICES
HEDGING THE RATE OF RETURN ON A STOCK PORTFOLIO
EXAMPLE 6.18
EXAMPLE 6.19
EXAMPLE 6.20
CHANGING THE BETA
EXAMPLE 6.21
PROGRAM TRADING
EXAMPLE 6.22
STOCK PICKING
EXAMPLE 6.23
EXAMPLE 6.24
PORTFOLIO INSURANCE
EXAMPLE 6.25
IMPORTANCE OF FUTURES
NOTES
CHAPTER 7 Options Contracts. INTRODUCTION
NOTATION
EXERCISING OPTIONS
EXAMPLE 7.1
EXAMPLE 7.2
EXAMPLE 7.3
MONEYNESS
EXAMPLE 7.4
EXCHANGE-TRADED OPTIONS
EXAMPLE 7.5
OPTION CLASS AND OPTION SERIES
FLEX OPTIONS
CONTRACT ASSIGNMENT
ADJUSTING FOR CORPORATE ACTIONS
EXAMPLE 7.6
EXAMPLE 7.7
NONNEGATIVE OPTION PREMIA
INTRINSIC VALUE AND TIME VALUE
EXAMPLE 7.8
EXAMPLE 7.9
TIME VALUE OF AMERICAN OPTIONS
EXAMPLE 7.10
EXAMPLE 7.11
TIME VALUE AT EXPIRATION
EXAMPLE 7.12
EXAMPLE 7.13
PUT-CALL PARITY
EXAMPLE 7.14
EXAMPLE 7.15
IMPLICATIONS FOR THE TIME VALUE
PUT-CALL PARITY WITH DIVIDENDS
IMPLICATIONS FOR THE TIME VALUE
A VERY IMPORTANT PROPERTY FOR AMERICAN CALLS
EARLY EXERCISE OF OPTIONS: AN ANALYSIS
PROFIT PROFILES
SPECULATION WITH OPTIONS
EXAMPLE 7.16
EXAMPLE 7.17
EXAMPLE 7.18
EXAMPLE 7.19
EXAMPLE 7.20
HEDGING WITH OPTIONS
Using Call Options to Protect a Short Position
EXAMPLE 7.21
Using Put Options to Protect a Long Spot Position
EXAMPLE 7.22
VALUATION
THE BINOMIAL OPTION PRICING MODEL
EXAMPLE 7.23
THE TWO-PERIOD MODEL
EXAMPLE 7.24
VALUATION OF EUROPEAN PUT OPTIONS
EXAMPLE 7.25
VALUING AMERICAN OPTIONS
EXAMPLE 7.26
IMPLEMENTING THE BINOMIAL MODEL IN PRACTICE
EXAMPLE 7.27
THE BLACK-SCHOLES MODEL
EXAMPLE 7.28
PUT-CALL PARITY
INTERPRETATION OF THE BLACK-SCHOLES FORMULA
THE GREEKS
OPTION STRATEGIES
Bull Spreads
EXAMPLE 7.29
EXAMPLE 7.30
Bear Spreads
EXAMPLE 7.31
EXAMPLE 7.32
Butterfly Spread
The Convexity Property
EXAMPLE 7.33
A Straddle
EXAMPLE 7.34
A Strangle
EXAMPLE 7.35
FUTURES OPTIONS
EXAMPLE 7.36
EXAMPLE 7.37
PUT-CALL PARITY
THE BLACK MODEL
EXAMPLE 7.38
NOTES
CHAPTER 8 Foreign Exchange. INTRODUCTION
EXAMPLE 8.1
EXAMPLE 8.2
CURRENCY CODES
BASE AND VARIABLE CURRENCIES
DIRECT AND INDIRECT QUOTES
EUROPEAN TERMS AND AMERICAN TERMS
BID AND ASK QUOTES
APPRECIATING AND DEPRECIATING CURRENCIES
CONVERTING DIRECT QUOTES TO INDIRECT QUOTES
POINTS
RATES OF RETURN
EXAMPLE 8.3
THE IMPACT OF SPREADS ON RETURNS
EXAMPLE 8.4
ARBITRAGE IN SPOT MARKETS
ONE-POINT ARBITRAGE
TWO-POINT ARBITRAGE
TRIANGULAR ARBITRAGE
CROSS RATES
MARKET RATES AND EXCHANGE MARGINS
EXAMPLE 8.5
VALUE DATES
THE FORWARD MARKET
EXAMPLE 8.6
OUTRIGHT FORWARD RATES
SWAP POINTS
EXAMPLE 8.7
BROKEN-DATED CONTRACTS
EXAMPLE 8.8
EXAMPLE 8.9
COVERED INTEREST ARBITRAGE
A PERFECT MARKET
EXAMPLE 8.10
FOREIGN EXCHANGE SWAPS
EXAMPLE 8.11
THE COST
EXAMPLE 8.12
THE MOTIVE
EXAMPLE 8.13
INTERPRETATION OF THE SWAP POINTS
A CLARIFICATION
EXAMPLE 8.14
SHORT-DATE CONTRACTS
EXAMPLE 8.15
EXAMPLE 8.16
OPTION FORWARDS
EXAMPLE 8.17
EXAMPLE 8.18
EXAMPLE 8.19
EXAMPLE 8.20
EXAMPLE 8.21
EXAMPLE 8.22
NONDELIVERABLE FORWARDS
EXAMPLE 8.23
EXAMPLE 8.24
RANGE FORWARDS
FUTURES MARKETS
HEDGING USING CURRENCY FUTURES
A SELLING HEDGE. EXAMPLE 8.25
A BUYING HEDGE. EXAMPLE 8.26
EXCHANGE-TRADED FOREIGN CURRENCY OPTIONS
SPECULATING WITH FOREX OPTIONS
EXAMPLE 8.27
EXAMPLE 8.28
The Garman-Kohlhagen Model
EXAMPLE 8.29
Put-Call Parity
The Binomial Model
EXAMPLE 8.30
EXCHANGE RATES AND COMPETITIVENESS
NOTES
CHAPTER 9 Mortgages and Mortgage-backed Securities. INTRODUCTION
MARKET PARTICIPANTS
MORTGAGE ORIGINATION
Income for the Originator
Mortgage Servicing
Escrow Accounts
Income for the Servicer
Mortgage Insurance
Government Insurance and PMI
Secondary Sales
RISKS IN MORTGAGE LENDING
Default Risk
Liquidity Risk
Interest Rate Risk
Prepayment Risk
EXAMPLE 9.1
OTHER MORTGAGE STRUCTURES
Adjustable-Rate Mortgage (ARM)
EXAMPLE 9.2
Option to Change the Maturity
Rate Caps
Carryovers
Payment Caps
Negative Amortization
EXAMPLE 9.3
Graduated Payment Mortgage
EXAMPLE 9.4
Growing Equity Mortgages (GEM)
WAC and WAM
Calculation of WAC and WAM
Pass-Through Securities
EXAMPLE 9.5
Cash Flows for a Pass-Through
Prepayment Conventions
Single Month Mortality Rate
EXAMPLE 9.6
ANALYSIS
ANALYSIS
Average Life
Cash Flow Yield
EXAMPLE 9.7
A Note
Conditional Prepayment Rate
PSA PREPAYMENT BENCHMARK
Illustration of 100 PSA
ANALYSIS
Illustration of 200 PSA
Collateralized Mortgage Obligations
Sequential Pay CMO
Analysis – Tranche A
Analysis – Tranche B
Analysis – Tranche C
Analysis – Tranche D
EXTENSION RISK AND CONTRACTION RISK
ACCRUAL BONDS
Analysis
FLOATING RATE TRANCHES
NOTIONAL INTEREST-ONLY TRANCHE
INTEREST-ONLY AND PRINCIPAL-ONLY STRIPS
PAC BONDS
EXAMPLE 9.8
ANALYSIS
ANALYSIS
ANALYSIS
ANALYSIS
ANALYSIS
NOTES
CHAPTER 10 Swaps. INTRODUCTION
EXAMPLE 10.1
EXAMPLE 10.2
CONTRACT TERMS
MARKET TERMINOLOGY
KEY DATES
INHERENT RISK
THE SWAP RATE
EXAMPLE 10.3
ILLUSTRATIVE SWAP RATES
DETERMINING THE SWAP RATE
THE MARKET METHOD
VALUATION OF A SWAP DURING ITS LIFE
TERMINATING A SWAP
THE ROLE OF BANKS IN THE SWAP MARKET
MOTIVATION FOR THE SWAP
Speculation
Hedging
COMPARATIVE ADVANTAGE AND CREDIT ARBITRAGE
SWAP QUOTATIONS
EXAMPLE 10.4
MATCHED PAYMENTS
AMORTIZING SWAPS
EXTENDABLE AND CANCELABLE SWAPS
SWAPTIONS
CURRENCY SWAPS
EXAMPLE 10.5
CROSS-CURRENCY SWAPS
VALUATION
CURRENCY RISKS
HEDGING WITH CURRENCY SWAPS
NOTES
CHAPTER 11 Mutual Funds, ETFs, and Pension Funds. INTRODUCTION
PROS AND CONS OF INVESTING IN A FUND
SHARES AND UNITS
OPEN-END VERSUS CLOSED-END FUNDS
PREMIUM/DISCOUNT OF A CLOSED-END FUND
UNIT TRUSTS
CALCULATING THE NAV
EXAMPLE 11.1
COSTS
SALES CHARGES
EXAMPLE 11.2
EXAMPLE 11.3
EXAMPLE 11.4
EXAMPLE 11.5
PRICE QUOTES
ANNUAL OPERATING EXPENSES
SWITCHING FEES
DIVIDEND OPTIONS
EXAMPLE 11.6
TYPES OF MUTUAL FUNDS
Categorization by Nature of Investments
Categorization by Investment Objectives
Categorization by Risk Profile
MONEY MARKET FUNDS
GILT FUNDS
DEBT FUNDS
DIVERSIFIED DEBT FUNDS
FOCUSED DEBT FUNDS
HIGH YIELD DEBT FUNDS
DEBT FUNDS AND BOND DURATION
EQUITY FUNDS
AGGRESSIVE GROWTH FUNDS
GROWTH FUNDS
SPECIALTY FUNDS
SECTOR FUNDS
OFFSHORE FUNDS
SMALL CAP EQUITY FUNDS
OPTION INCOME FUNDS
FUND OF FUNDS
EQUITY INDEX FUNDS
VALUE FUNDS
EQUITY INCOME FUNDS
BALANCED FUNDS
ASSET-ALLOCATION FUNDS
COMMODITY FUNDS
REAL ESTATE FUNDS
TAX-EXEMPT FUNDS
RISK CATEGORIES
Low Level Risk Funds
Moderate Level Risks
High Level Risks
THE PROSPECTUS
STRUCTURE OF A MUTUAL FUND
SERVICES
Automatic Reinvestment Plan
Contractual Accumulation Plan
Voluntary Accumulation Plan
Check Writing
Switching Within a Family of Funds
Voluntary Withdrawal Plans
INVESTMENT TECHNIQUES
Dollar-cost Averaging
EXAMPLE 11.7
ANALYSIS
Value Averaging
EXAMPLE 11.8
ANALYSIS
The Combined Method
THE TOTAL RETURN
COMPUTATION OF RETURNS
Analysis
TAXATION ISSUES
EXAMPLE 11.9
EXAMPLE 11.10
ALTERNATIVES TO MUTUAL FUNDS
Exchange-Traded Funds (ETFs)
Potential Asset Classes
Segregated (Separately Managed) Accounts
Pension Plans
TYPES OF PLANS
Defined Benefit Plans
Defined Contribution Plans
IRAs
CASH BALANCE PLANS
NOTE
CHAPTER 12 Orders and Exchanges
EXAMPLE 12.1
EXAMPLE 12.2
EXAMPLE 12.3
IMPORTANT ACRONYMS
MARKET ORDERS AND LIMIT ORDERS
THE LIMIT PRICE
THE LIMIT ORDER BOOKS
ILLUSTRATION OF A LIMIT ORDER BOOK
EXAMPLE 12.4
LIMIT ORDERS VERSUS MARKET ORDERS
MARKETABLE LIMIT ORDERS
TRADE PRICING RULES
EXAMPLE 12.5
STOP-LOSS AND STOP-LIMIT ORDERS
TRAILING STOP-LOSS ORDERS
EXAMPLE 12.6
MARKET TO LIMIT ORDERS
EXAMPLE 12.7
EQUIVALENCE WITH OPTIONS
VALIDITY CONDITIONS
GOOD TILL CANCELED (GTC) ORDERS
GOOD TILL DAYS ORDERS
ORDERS WITH QUANTITY RESTRICTIONS
EXAMPLE 12.8
EXAMPLE 12.9
A POINT ON ORDER SPECIFICATION
OPEN-OUTCRY TRADING SYSTEMS
ELECTRONIC MARKETS VERSUS OPEN-OUTCRY MARKETS
CALL MARKETS
EXAMPLE 12.10
NOTES
CHAPTER 13 The Macroeconomics of Financial Markets
ECONOMIC GROWTH
GROSS DOMESTIC PRODUCT
Consumption
Real Estate
Capital Expenditure
Government Spending
Inventories
Foreign Trade
GDP VERSUS GNP
INFLATION ADJUSTMENT
TRANSNATIONAL COMPARISONS
THE BIG MAC INDEX
INFLATION
TYPES OF INFLATION
INTEREST RATES
THE FEDERAL BUDGET DEFICIT
MEASURES OF BUDGET DEFICITS
THE PRIMARY DEFICIT
FISCAL POLICY
BUDGET DEFICITS AND THE CAPITAL MARKET
THE ROLE OF THE CENTRAL BANK
BUDGET DEFICITS AND MONETARY POLICY
CROSS-BORDER BORROWING
CENTRAL BANKS AND FOREIGN EXCHANGE MARKETS
STERILIZED AND UNSTERILIZED INTERVENTIONS
EXCHANGE RATES
ISSUES WITH A RESERVE CURRENCY
CROSS-BORDER IMPLICATIONS OF CENTRAL BANK ACTIONS
QUANTITATIVE EASING
QUANTITATIVE EASING VERSUS OPEN-MARKET OPERATIONS
CHAPTER 14 Interest Rate Derivatives
FORWARD RATE AGREEMENTS (FRAs)
EXAMPLE 14.1
EXAMPLE 14.2
EXAMPLE 14.3
SETTLING AN FRA
DETERMINING BOUNDS FOR THE FRA RATE
EXAMPLE 14.4
EURODOLLAR FUTURES
CALCULATING PROFITS AND LOSSES ON ED FUTURES
LOCKING IN A BORROWING RATE
EXAMPLE 14.5
LOCKING IN A LENDING RATE
EXAMPLE 14.6
EXAMPLE 14.7
THE NO-ARBITRAGE PRICING EQUATION
EXAMPLE 14.8
CREATING A FIXED-RATE LOAN
EXAMPLE 14.9
30-YEAR T-BOND FUTURES CONTRACTS
CONVERSION FACTORS
EXAMPLE 14.10
EXAMPLE 14.11
EXAMPLE 14.12
INTEREST RATE OPTIONS
STATE PRICES
CALLABLE AND PUTABLE BONDS
CAPS, FLOORS, AND COLLARS
CAPTIONS AND FLOORTIONS
NOTES
Sources and References. CHAPTER 1. Sources & References
Websites
CHAPTER 2. Sources & References
CHAPTER 3. Sources & References
Websites
CHAPTER 4. Sources & References
CHAPTER 5. Sources & References
Websites
CHAPTER 6. Sources & References
CHAPTER 7. Sources & References
CHAPTER 8. Sources & References
Websites
CHAPTER 9. Sources & References
Websites
CHAPTER 10. Sources & References
CHAPTER 11. Sources & References
CHAPTER 12. Sources & References
CHAPTER 14. Sources & References
Index
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