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Risk Management and Analysis, New Markets and Products. Volume 2. Wiley Series in Financial Engineering

  • ID: 2240059
  • Book
  • November 1998
  • 360 Pages
  • John Wiley and Sons Ltd
The author/editor has produced two stand-alone or companion volumes. Only one third of the original material remains.
New Markets and Products begins with two chapters on emerging markets. The book then goes on to cover markets and products of increasing complexity: standard equity and interest rate derivatives, exotic options, swap (and swaptions), volatility trading and finally credit derivatives.
The contributors are all acknowledged experts in their fields: Michael Howell, Mark Fox, Ian King, Chris Rogers, Andrew Street, Riccardo Rebonato, Edmond Levy, Bryan Thomas, Vincent Lacoste, Desmond Fitzgerald and Blythe Masters.
New Markets and Products will be an essential reference tool for risk managers, institutional investors, fund managers, bankers, corporate treasurers and financial consultants.
"In this volume Carol Alexander has gathered together ten articles that are concerned with important recent developments in financial markets. Two of the articles are concerned with emerging markets. They explore the reasons for their growth and the nature of the investment opportunities available. The remaining eight articles are concerned with derivatives. There are chapters on equity derivatives, interest rate derivatives, exotic options, volatility trading, and credit derivatives. The final chapter on credit derivatives is particularly timely. This market is in the process of transforming the way banks manage credit risk. I have seen no other discussion of the market as comprehensive and useful as that provided by Blythe Masters.
Market participants and students alike will find much useful and thought-provoking information in this volume."
- John Hull, August 1998
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List of Contributors

About the Contributors



Emerging Markets I, Michael J.Howell


Growing Countries not Poor Countries

Cross-Border Capital Flows

Markets in Emerging Financial Economies

The Future Size of Emerging Stock Markets

The Growing Need for Financial Development


Appendix 1: Selected Data on Emerging Markets

Appendix 2: Valuation Methods



Emerging Markets II, Mark Fox and Ian King


The Beginning of Emerging Markets

Defining Emerging Markets

The size of Emerging Markets

Do Emerging Markets Constitute a Separate Asset Class?

Non-Performing Loans


The Present Market

Brady Bonds


Structures of Brady Plans

The Brady Market

Analysing Brady Bonds

Evaluating Default Risk

Income Guarantees

Trading Strategies Exclusive to Brady Bonds



A Changing Role

The Role of Credit Curves

Using Credit Curves

Analysing Credit Curves

Trading Credit Curve Shapes

Local Markets and Emerging Market Currencies

The Role of Local Markets in the Investing Cycle

The Character of Local Emerging Debt Markets

Russia -
A Case Study

Strategic Uses for Investing in Local Markets

Trading and Managing Local Currency Exposure

Trading and Managing Local Interest Rate Exposure



Analysing Emerging Equity Stocks

Trading and Managing Emerging Equity

Market Exposure

Strategic Uses for Investing in Emerging Equity Markets




Repurchase Agreements

Structured Notes

Credit Derivatives

Relative Value Trades


Special Considerations in Evaluating Relative Value

A Matrix Approach to Regional and Asset Allocation

Past Experience


The Origins of Risk-Neutral Pricing and the Black-Scholes Formula, L.C.G. Rogers


Portfolio Choices

Some Notions and Notations from Probability

Optimal Investment

The Binomial Market and the Black-Scholes Formula

Appendix: Two Other Approaches



Equity Derivatives Andrew Street


Aims and Scope of this Chapter

Classification of Equity Derivatives

General Features of Pricing Equity Derivatives

Historical Development

Listed Equity Derivatives

Unlisted or "Over-the-Counter" Equity Derivatives

The Utility of Equity Derivatives

The Evaluation of Risk and Return

Tax Efficiency

Regulatory Efficiency


Implementation of Specific Investment Views

Efficiency and Cost Effectiveness

The Utility of Equity Derivatives for Borrowers

The Role of the Investment Bank in the Creation of Equity Derivatives



Risk Aggregation


Index Products

Exchange Traded Equity Derivatives

Over-the-Counter Traded Equity Derivatives

Hybrid Equity Derivatives

Single Stocks, Bespoke Index Products

Future Development for Equity Derivatives

Glossary of Terms


Interest Rate Option Models: A Critical Survey, Riccardo Rebonato

Introduction and Outline of the Chapter

Yield Curve Models: A Statistical Motivation

Statistical Analysis of the Evolution of Rates

A Framework for Option Pricing

The No-Arbitrage Conditions

Definition of No-arbitrage in a Complete Market

The Condition of No-arbitrage: Vasicek's Approach

The condition of No-arbitrage: The Martingale Approach

First Choice of Numeraire: The Money Market Account

Second Choice of Numeraire: A Discount Bond

The General Link Between Different Measures

The Implementation Tools

Lattice Approaches: Justification and Implementation

Monte Carlo (MC) Approaches

PDE Approaches: Finite Differences Schemes and Analytic Solutions

Analysis of Specific Models

BDT: Models Implications and Empirical Findings

Extended Vasicek (HW): Model Implications and Empirical Findings

Longstaff and Schwartz: Model Implications and Empirical Findings

The HJM Approach

Conclusions or "How to Choose the Best Model"


Exotic Options I, Edmond Levy


Asian Options

Definition and Uses

Valuation Approaches

Risk Management of Asian Options

Binary and Contingent Premium Options

Examples and Uses

Valuation and Hedging

Currency Protected Options

Cross-Market Contracts

Valuation of Cross-Market Contracts

Currency Basket Options

Appendix 1

Appendix 2

Appendix 3


Exotic Options II, Bryan Thomas

Barrier Options

Definitions and Examples of single barrier options

An Analytical Model of Single Barrier options

Alternative Modelling Methods

Risk Management of Single Barrier options

Barrier Options Combinations


Discontinuous Barriers

Double Barrier Options

Second Market Barriers

Compound Options

Definitions and Example

Geske's Model

Risk Management


Even More Exotic Options


Captions and Swaptions Vincent Lacoste

Change of Numeraire: A General Valuation Method for Swaptions

Introductory Comments

Technical Properties

Application to Swaptions

Hedging a Swaption

Hedging Swptions Against Yield Curve Scenarios

The Hedging Space

Estimated Methods

Empirical Results

Concluding remarks on Historical Data

Marking to Market the Term structure of Volatility


Non-Parametric estimation of the Volatility Structure

Concluding remarks

Is There a "Market Model of Interest Rates"?




Trading Volatility, M. Desmond Fitzgerald


Basics of Volatility Trading

Analysing Volatility Patterns for Trading

Relative Volatility Trading


Credit Derivatives, Blythe Masters

Background and Overview: The Case for Credit Derivatives

What are Credit Derivatives?

What is the Significance of Credit Derivatives?

Basic Credit Derivative Structures and Applications

Credit (Default) Swaps

Total (Rate of) Swaps

Credit Options

Downgrade Options

Dynamic Credit Swaps

Other Credit Derivatives

A Portfolio Approach to Credit Risk Management

Why Credit Has Become a Risk-Management Challenge

The Need for a Portfolio Approach to Credit Risk

The Challenges of Estimating Portfolio Credit Risk

Assessing Credit Risk on a Portfolio Basis: Methodology

Practical Applications of Portfolio Methodology Using Credit Derivatives

Regulatory Treatment of Credit Derivatives

Balance Sheet Management: Synthetic Securitization

Investment Considerations

Filling Gaps in the Credit Spectrum

Transcending Asset Class Barriers

Recovery Rate


Common Pricing Considerations

Predictive or Theoretical Pricing Models of Credit Swaps

Mark to Market and Valuation Methodologies for Credit Swaps

Risk Equivalence of Total Return Swaps and Credit Swaps for Valuation Purposes

Relative Value Analysis of Credit Swaps

Counterparty Considerations


Credit Derivatives and Portfolio Management

Other Implications

Glossary Endnotes/References

Note: Product cover images may vary from those shown
Carol Alexander
Note: Product cover images may vary from those shown