Risk Management and Analysis, Volume 2: New Markets and Products(Wiley Series in Financial Engineering)

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

Table of Contents:
List of Contributors About the Contributors Preface Foreword Emerging Markets I, Michael J. Howell Introduction 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 Conclusion Appendix 1: Selected Data on Emerging Markets Appendix 2: Valuation Methods Endnotes References Emerging Markets II, Mark Fox and Ian King Introduction The Beginning of Emerging Markets Defining Emerging Markets The size of Emerging Markets Do Emerging Markets Constitute a Separate Asset Class? Non-Performing Loans History The Present Market Brady Bonds History Structures of Brady Plans The Brady Market Analysing Brady Bonds Evaluating Default Risk Income Guarantees Trading Strategies Exclusive to Brady Bonds Eurobonds History 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 Equities History Analysing Emerging Equity Stocks Trading and Managing Emerging Equity Market Exposure Strategic Uses for Investing in Emerging Equity Markets Benchmarks Derivatives Options Repurchase Agreements Structured Notes Credit Derivatives Relative Value Trades Equities Special Considerations in Evaluating Relative Value A Matrix Approach to Regional and Asset Allocation Past Experience Endnotes The Origins of Risk-Neutral Pricing and the Black-Scholes Formula, L.C.G. Rogers Introduction Portfolio Choices Some Notions and Notations from Probability Optimal Investment The Binomial Market and the Black-Scholes Formula Appendix: Two Other Approaches Endnotes References Equity Derivatives Andrew Street Introduction 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 Leverage 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 Capital Credit Risk Aggregation Technology 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 References 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" References Exotic Options I, Edmond Levy Introduction 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 References 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 Rebates Discontinuous Barriers Double Barrier Options Second Market Barriers Compound Options Definitions and Example Geske's Model Risk Management Extensions Even More Exotic Options References 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 Captions Non-Parametric estimation of the Volatility Structure Concluding remarks Is There a "Market Model of Interest Rates"? Appendix Endnotes References Trading Volatility, M. Desmond Fitzgerald Introduction Basics of Volatility Trading Analysing Volatility Patterns for Trading Relative Volatility Trading Summary 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 Term 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 Conclusion Credit Derivatives and Portfolio Management Other Implications Glossary Endnotes/References Index

About the Author :
Carol Alexander obtained her PhD in Algebraic Number Theory, then worked at the Gemente Universiteit in Amsterdam and at UBS Phillips and Drew in London before joining the Mathematics Faculty of the University of Sussex in 1985. She holds a BSc in Mathematics with Experimental Psychology and an MSc in Econometrics and Mathematical Economics from the London School of Economics. Since 1990 Dr Alexander has been consulting, training, speaking at conferences, writing books and articles, and developing software in the areas of risk management and investment analysis. In 1996 she became the academic director of Algorithmics Inc (part-time) and in 1998 she eventually left the academic world to join Nikko Global Holdings as Director and Head of Market Risk Modelling. However, she retains a visiting fellowship at the University of Sussex. She has developed a number of computer programs and software packages for Risk and Investment analysis based on time series techniques. One of these was the winner of the first International Non-Linear Financial Forecasting Competition in 1997. Another used the concept of cointegration to build long-term index tracking tools for fund management, and long-short strategies for portfolio hedging. A third software module is based on her original research, using orthogonal factors to produce large GARCH covariance matrices for factor models.

Review :
"In what started as a second edition of the well received Handbook of Risk Management and Analysis, Carol Alexander has taken up the challenge of the increasing complexity of today's markets by selecting additional material to cover new aspects of risk modelling and new products, hence the present two volume edition. As before, the authors are well known not only for their mastery of the subject matter but also for their expository skills. Sound theories and tried methods are explained; new markets and products are clearly described. This is essential reading for the growing community of quantitatively-minded risk managers." —Dr Jacques Pézier, September 1998