Capital Market Instruments: Analysis and Valuation
Product Author Bios
Moorad Choudhry is a vice-president in structured finance services with JPMorgan in London. He started his City career in 1989 at the London Stock Exchange, before joining the sterling eurobond desk at Hoare Govett Securities Limited. He was later employed as a gilt-edged market-maker and treasury trader at ABN Amro Hoare Govett Sterling Bonds Limited. From there he moved to Hambros Bank Limited, where he set up and ran the Treasury division's sterling proprietary trading desk. He also worked as a strategy and risk management consultant to some of the world's leading investment banks, before joining JPMorgan in 2000. Moorad has an MA in econometrics from Reading University and an MBA from Henley Management College. He has lectured at London Guildhall University, and is a Senior Fellow at the Centre for Mathematical Trading and Finance, City University Business School.
Didier Joannas is a regional director with SunGard Trading and Risk Systems in Hong Kong. He was previously employed as a quantitative analyst and arbitrage trader on the gilt-edged market-making desk at ABN Amro Hoare Govett Sterling Bonds Limited and ABN Amro Securities (UK) Limited. He obtained his doctorate in applied mathematics and aerodynamics at the University of St Etienne in France before joining Avions Marcel Dassault, the company behind such projects as the Ariane space rocket and the Rafale supersonic jet fighter. He then worked for Viel & Cie bond option brokers in Paris before joining ABN Amro Hoare Govett Sterling Bonds Limited in London in 1994.
Richard Pereira is a member of the credit derivatives and securitization team at Dresdner Kleinwort Wasserstein in London. He obtained a first-class degree in mathematics from Imperial College, University of London, before training as a Chartered Accountant. He then worked as a management consultant specializing in market and credit risk, and has been involved in advisory work at a number of investment banks. Richard joined Dresdner Kleinwort Wasserstein in 2001.
Rod Pienaar works as a business analyst with Deutsche Bank in London, as part of a project group providing systems analysis to the corporate and investment banking division. Rod obtained his undergraduate degree in business and commerce at the University of Witwatersrand in Johannesburg before training as a Chartered Accountant. He then moved to London where he worked as a management consultant specializing in market risk analysis, before joining Deutsche Bank in 2000.
Over the last 30 years, the capital markets industry has undergone an unprecedented transformation, from an industry of capital restrictions and limited hedging instruments to one that is now as wildly diverse as it is dynamic. The increasing complexity of the markets has left many individuals struggling to keep up with the rate of change and ever-growing options available to them.
Capital Market Instruments enables you to keep on track with the latest developments. It contains valuable insights into practical techniques and applications used today, as well as shedding light on what can be expected in the future. It also highlights the scope and significance of these techniques in the marketplace.
As a concise introduction to some of the important issues in the capital markets, it places emphasis on fixed income instruments and related products, as well as covering fundamental concepts in equity market analysis, foreign exchange and money markets, and other derivative instruments.
Capital Market Instruments will prove an invaluable guide for practitioners and students alike, enabling readers to understand the latest instruments and models and apply methods that will keep them abreast with the latest market practices.
Capital Market Instruments is a concise yet detailed guide to the mathematics of the debt and equity capital markets, and one that will prove essential reading for current and potential market practitioners. It emphasizes the practical applications of analytical and valuation techniques that are fundamental to an understanding of both the bond and equity markets. A wide range of topics is covered, from yield curve modelling and index-linked bonds to corporate ratio analysis.
Capital Market Instruments provides clear understanding of key financial concepts, mathematical techniques and market analysis, illustrated with worked examples and case studies of real-world events at a number of investment banks.
The book also includes the RATE specialist computer application designed to introduce readers to yield curve construction, vanilla interest rate swaps, and caps. The CD-ROM includes the C++ source code.
Moorad Choudhry is also the author of Bond Market Securities.
"The authors have applied their practical knowledge to produce a text that is concise yet thorough. It will be extremely valuable both as a beginner's guide and as a work of reference for those more experienced in the world of capital markets."
Ian B. Abrams,
Mizubo International plc
"Moorad Choudhry and his co-authors have produced a book that provides excellent and comprehensive coverage of a wide range of traditional and modern derivative securities. Given its content and user-friendly style, it is sure to become required reading for many courses in finance."
Brian A. Eales,
Department of Economics,
London Guildhall University
"The complexity of the markets made simple is a goal this book achieves with enthusiasm - an excellent guide suitable for practitioners at all levels."
VP, Head of Sales,
EMEA Structured Finance Services,
"This is a well-crafted book and a timely addition to the capital markets literature. It deserves a wide readership."
Global Credit Strategy,
This book is an introduction to some of the important issues in the capital markets today, with an emphasis on fixed-income instruments such as index-linked bonds, asset-backed securities, mortgage-backed securities, and related products such as credit derivatives. However, fundamental concepts in equity market analysis, foreign exchange and money markets, and certain other derivative instruments are also covered so as to complete the volume. The focus is on analysis and valuation techniques, presented for the purposes of practical application. Hence institutional and market-specific data is largely omitted for reasons of space and clarity, as this is abundant in existing literature.
Students and practitioners alike should be able to understand and apply the methods discussed here. The book has a practical approach to the main issues, with worked examples presented in the chapters. Some of the material in the book has previously been used by the authors as a reference and guide on consulting projects at a number of investment and commercial banks, including Citibank, CSFB, Standard Chartered, NatWest GFM (now RBS Financial Markets), Halifax plc and Co-operative Bank plc. The authors hope that readers find the book thought-provoking and that it enables them to become familiar with practical concepts of importance in the capital markets.
The book is aimed at those with just a basic understanding of the capital markets; however, it also investigates the instruments to sufficient depth to be of use to the more experienced practitioner. It is primarily aimed at front office, middle office and back office staff working in banks and other financial institutions and who are involved to some extent in the capital markets. Undergraduate and postgraduate students of finance and economics should also find the book useful. Other readers, including corporate and local authority treasurers, risk managers, capital market lawyers, auditors, financial journalists and professional students, may find the broad coverage to be of value. In particular, graduate trainees beginning their careers in financial services and investment banking should find the topic coverage ideal, as the authors have aimed to present the key concepts in both debt and equity capital markets.Structure of the book
This book is organized into six parts. Part I sets the scene with a discussion on the financial markets, the time value of money and the determinants of the discount rate. Part II examines fixed-income instruments, and the analysis and valuation of bonds. This covers in overview fashion the main interest rate models, before looking in detail at some important areas of the markets, including:
- fitting the yield curve, and an introduction to spline techniques
- the B-spline method of extracting the discount function
- the option-adjusted spread
- bond pricing in continuous time
- inflation-indexed bonds
Part III is an introduction to structured financial products, with a look at mortgage-backed bonds and collateralized debt obligations (CDOs).
In Part IV we introduce the main analytical techniques used for derivative instruments. This includes futures and swaps, as well as an introduction to options and the Black-Scholes model, still widely used today nearly 30 years after its introduction.
Part V considers the basic concepts in equity analysis, while the final part of the book describes the accompanying CD-ROM and RATE application software.Study materials
Where possible, the main concepts and techniques have been illustrated with worked examples and case studies. The case studies are examples of actual real-world events at a number of investment banks.Some of the content of this book was originally written as course notes, and used to form part of capital market courses taught at a number of professional bodies and teaching institutions, including the Securities Institute, International Faculty of Finance, London Guildhall University, City University Business School and FinTuition Limited. From these courses, a number of Microsoft Powerpoint slides have been made available for use as teaching aids, and these may be downloaded from Moorad Choudhry's website at www.YieldCurve.com. This site contains sample lecture notes and also lists details of training courses that are available on capital market topics, run by Moorad Choudhry and his associates.RATE computer software
Included with this book is a specialist computer application, RATE software, which is designed to introduce readers to yield curve modelling. It also contains calculators for vanilla interest rate swaps and caps. This application was developed in C++ specially for this book. The full source code is also included on the CD-ROM, which may be of use to budding programmers.
Table of Contents
PART ONE: INTRODUCTIONIntroduction to financial market instrumentsMarket-determined interest rates, and the time value of money PART TWO: DEBT CAPITAL MARKET CASH INSTRUMENTSMoney market instruments and foreign exchangeFixed income securitiesInterest rate riskOption-adjusted spread analysisInterest rate modellingFitting the yield curveSpline methodology and fitting the yield curveInflation-indexed bonds PART THREE: STRUCTURED FINANCIAL PRODUCTSMortgage-backed securities 1Mortgage-backed securities 2Collateralized debt obligations PART FOUR: DERIVATIVE INSTRUMENTSShort-term interest rate derivativesSwapsOptions 1Options 2Options 3Credit Derivatives PART FIVE: EQUITY INSTRUMENT ANALYSISIntroduction to equity instrument analysisIntroduction to financial ratio analysis PART SIX: RATE APPLICATIONS SOFTWARERATE computer software
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