Fixed Income Securities: Valuation, Risk and Risk Management (An Indian Adaptation)
ISBN: 9789357463546
632 pages
For more information write to us at: acadmktg@wiley.com
Description
Fixed Income Securities: Valuation, Risk, and Risk Management, 1st Edition provides a thorough discussion of the world of fixed income securities, the forces affecting their prices, their risks, and the
appropriate risk management practices. This book, however, provides a methodology, and not a "shopping list" of all the possible interest rate securities that have ever been invented. It instead provides examples and methodologies that can be applied quite universally once the basic concepts have been understood.
Preface to the Adapted Edition
Preface
Acknowledgments
Part I Fixed Income Markets
1 An Introduction to Fixed Income Markets
1.1 Introduction
1.2 The Government Debt Markets
1.3 The Money Market
1.4 The Repo Market
1.5 The Mortgage-Backed Securities Market and Asset-Backed Securities Market
1.6 The Derivatives Market
1.7 Roadmap of Future Chapters
1.8 Summary
2 Basics of Fixed Income Securities
2.1 Discount Factors
2.2 Interest Rates
2.3 The Term Structure of Interest Rates
2.4 Coupon Bonds
2.5 Floating Rate Bonds
2.6 Summary
2.7 Exercises
2.8 Case Study: Orange County Inverse Floaters
2.9 Appendix: Extracting the Discount Factors Z (0, T)
3 Basics of Interest Rate Risk Management
3.1 The Variation in Interest Rates
3.2 Duration
3.3 Interest Rate Risk Management
3.4 Asset-Liability Management
3.5 Summary
3.6 Exercises
3.7 Case Study: The 1994 Bankruptcy of Orange County
3.8 Case Analysis: The Ex-Ante Risk in Orange County’s Portfolio
3.9 Appendix: Expected Shortfall under the Normal Distribution
4. Basic Refinements in Interest Rate Risk Management
4.1 Convexity
4.2 Slope and Curvature
4.3 Summary
4.4 Exercises
4.5 Case Study: Factor Structure in Orange County’s Portfolio
4.6 Appendix: Principal Component Analysis
5 Interest Rate Derivatives: Forwards and Swaps
5.1 Forward Rates and Forward Discount Factors
5.2 Forward Rate Agreements
5.3 Forward Contracts
5.4 Interest Rate Swaps
5.5 Interest Rate Risk Management using Derivative Securities
5.6 Summary
5.7 Exercises
5.8 Case Study: PiVe Capital Swap Spread Trades
6 Interest Rate Derivatives: Futures and Options
6.1 Interest Rate Futures
6.2 Options
6.3 Summary
6.4 Exercises
6.5 Appendix: Liquidity and the LIBOR Curve
6.6 Appendix: Transitioning from LIBOR to SOFR
7. Inflation, Monetary Policy, and the Federal Funds Rate
7.1 Central Banks
7.2 The RBI and Monetary Policy
7.3 Understanding the Term Structure of Interest Rates
7.4 Coping with Inflation Risk: Treasury Inflation-Protected Securities
7.5 Summary
7.6 Exercises
7.7 Case Study: Monetary Policy during the Subprime Crisis of 2007 – 2008
7.8 Appendix: Derivation of Expected Return Relation
8 Basics of Residential Mortgage-Backed Securities
8.1 Securitization
8.2 Mortgages and the Prepayment Option
8.3 Mortgage-Backed Securities
8.4 Collateralized Mortgage Obligations
8.5 Summary
8.6 Exercises
8.7 Case Study: PiVe Investment Group and the Hedging of Pass-
8.8 Appendix: Effective Convexity
Part II Term Structure Models: Trees
9 One Step Binomial Trees
9.1 A one-step interest rate binomial tree
9.2 No Arbitrage on a Binomial Tree
9.3 Derivative Pricing as Present Discounted Values of Future Cash
9.4 Risk Neutral Pricing
9.5 Summary
9.6 Exercises
10 Multi-Step Binomial Trees
10.1 A Two-Step Binomial Tree
10.2 Risk Neutral Pricing
10.3 Matching the Term Structure
10.4 Multi-step Trees
10.5 Pricing and Risk Assessment: The Spot Rate Duration
10.6 Summary
10.7 Exercises
11 Risk Neutral Trees and Derivative Pricing
11.1 Risk Neutral Trees
11.2 Using Risk Neutral Trees
11.3 Implied Volatilities and the Black, Derman, and Toy Model
11.4 Risk Neutral Trees for Futures Prices
11.5 Implied Trees: Final Remarks
11.6 Summary
11.7 Exercises
12 American Options
12.1 Callable Bonds
12.2 American Swaptions
12.3 Mortgages and Residential Mortgage-Backed Securities
12.4 Summary
12.5 Exercises
13 Monte Carlo Simulations on Trees
13.1 Monte Carlo Simulations on a One-step Binomial Tree
13.2 Monte Carlo Simulations on a Two-Step Binomial Tree
13.3 Monte Carlo Simulations on Multi-Step Binomial Trees
13.4 Pricing Path Dependent Options
13.5 Spot Rate Duration by Monte Carlo Simulations
13.6 Pricing Residential Mortgage-Backed Securities
13.7 Summary
13.8 Exercises
Part III Term Structure Models: Continuous Time
14 Interest Rate Models in Continuous Time
14.1 Brownian Motions
14.2 Differential Equations
14.3 Continuous Time Stochastic Processes
14.4 Ito’s Lemma
14.5 Illustrative Examples
14.6 Summary
14.7 Exercises
14.8 Appendix: Rules of Stochastic Calculus
15 No Arbitrage and The Pricing of Interest Rate Securities
15.1 Bond Pricing with Deterministic Interest Rate
15.2 Interest Rate Security Pricing in the Vasicek Model
15.3 Derivative Security Pricing
15.4 No Arbitrage Pricing in a General Interest Rate Model
15.5 Summary
15.6 Exercises
15.7 Appendix: Derivations
16 Dynamic Hedging and Relative Value Trades
16.1 The Replicating Portfolio
16.2 Rebalancing
16.3 Application 1: Relative Value Trades on the Yield Curve
16.4 Application 2: Hedging Derivative Exposure
16.5 The Theta - Gamma Relation
16.6 Summary
16.7 Exercises
16.8 Case Study: Relative Value Trades on the Yield Curve
16.9 Appendix: Derivation of Delta for Call Options
17 Risk Neutral Pricing and Monte Carlo Simulations
17.1 Risk Neutral Pricing
17.2 Feynman-Kac Theorem
17.3 Application of Risk Neutral Pricing: Monte Carlo Simulations
17.4 Example: Pricing a Range Floater
17.5 Hedging with Monte Carlo Simulations
17.6 Convexity by Monte Carlo Simulations
17.7 Summary
17.8 Exercises
17.9 Case Study: Procter & Gamble / Bankers Trust Leveraged Swap
18 The Risk and Return of Interest Rate Securities
18.1 Expected Return and the Market Price Risk
18.2 Risk Analysis: Risk Natural Monte Carlo Simulations
18.3 A Macroeconomic Model of the Term Structure
18.4 Case Analysis: The Risk in the P&G Leveraged Swap
18.5 Summary
18.6 Exercises
18.7 Appendix: Proof of Pricing Formula in Macroeconomic Model
19 No Arbitrage Models and Standard Derivatives
19.1 No Arbitrage Models
19.2 The Ho-Lee Model Revisited
19.3 The Hull-White Model
19.4 Standard Derivatives under the “Normal” Model
19.5 The “Lognormal” Model
19.6 Generalized Affine Term Structure Models
19.7 Summary
19.8 Exercises
19.9 Appendix: Proofs
20 The Market Model for Standard Derivatives and Options’ Volatility Dynamics
20.1 The Black Formula for Caps and Floors Pricing
20.2 The Black Formula for Swaption Pricing
20.3 Summary
20.4 Exercises
21 Forward Risk Neutral Pricing and The Libor Market Model
21.1 One Difficulty with Risk Neutral Pricing
21.2 Change of Numeraire and the Forward Risk Neutral Dynamics
21.3 The Option Pricing Formula in “Normal” Models
21.4 The LIBOR Market Model
21.5 Forward Risk Neutral Pricing and the Black Formula for Swaptions
21.6 The Heath, Jarrow, and Morton Framework
21.7 Unnatural Lag and Convexity Adjustment
21.8 Summary
21.9 Exercises
21.10 Appendix: Derivations
22 Multifactor Models
22.1 Multifactor Ito’s Lemma with Independent Factors
22.2 No Arbitrage with Independent Factors
22.3 Correlated Factors
22.4 The Feynman-Kac Theorem
22.5 Forward Risk Neutral Pricing
22.6 The Multifactor LIBOR Market Model
22.7 Affine and Quadratic Term Structure Models
22.8 Summary
22.9 Exercises
22.10 Appendix
References
Index