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<p>Acknowledgements xv</p> <p><b>1 Introduction: The Market Context 1</b></p> <p>1.1 Capital and the Capital Markets 1</p> <p>1.2 The Euromarkets (International Capital Markets) 4</p> <p>1.3 Modern Investment Banking 5</p> <p>1.4 The Clients of Investment Banks 8</p> <p>1.5 About this Book 11</p> <p><b>2 The Money Markets 15</b></p> <p>2.1 Chapter Overview 15</p> <p>2.2 Domestic Money Markets 15</p> <p>2.3 US Domestic Markets 16</p> <p>2.4 The European Central Bank (ECB) 18</p> <p>2.5 Sterling Money Markets 19</p> <p>2.6 The Bank of Japan 20</p> <p>2.7 Systemic Risks and Moral Hazards 20</p> <p>2.8 Treasury Bills 21</p> <p>2.9 Discounting Treasury Bills 21</p> <p>2.10 US Commercial Paper 24</p> <p>2.11 Credit Risk on USCP 25</p> <p>2.12 Bankers’ Acceptances 26</p> <p>2.13 The Eurocurrency Markets 26</p> <p>2.14 Eurocurrency Loans and Deposits 27</p> <p>2.15 Eurocurrency Interest and Day-Count 29</p> <p>2.16 Eurocurrency Certificates of Deposit 30</p> <p>2.17 CD Yield-to-Maturity 31</p> <p>2.18 Euro-Commercial Paper 31</p> <p>2.19 Repos and Reverses 32</p> <p>2.20 Repo: Case Study 33</p> <p>2.21 Other Features of Repos 33</p> <p>2.22 Chapter Summary 34</p> <p><b>3 The Foreign Exchange Market 37</b></p> <p>3.1 Chapter Overview 37</p> <p>3.2 Market Structure 37</p> <p>3.3 FX Dealers and Brokers 38</p> <p>3.4 Spot Foreign Exchange Deals 39</p> <p>3.5 Sterling and Euro Quotations 40</p> <p>3.6 Factors Affecting Spot FX Rates 41</p> <p>3.7 Spot FX Trading 44</p> <p>3.8 Spot Position Keeping 45</p> <p>3.9 FX Risk Control 47</p> <p>3.10 Cross-Currency Rates 49</p> <p>3.11 Outright Forward FX Rates 50</p> <p>3.12 Outright Forward FX Hedge: Case Study 51</p> <p>3.13 Forward FX Formula 52</p> <p>3.14 FX or Forward Swaps 53</p> <p>3.15 FX Swap Two-Way Quotations 55</p> <p>3.16 Chapter Summary 56</p> <p><b>4 Major Government Bond Markets 59</b></p> <p>4.1 Chapter Overview 59</p> <p>4.2 Introduction to Government Bonds 59</p> <p>4.3 Sovereign Risk 60</p> <p>4.4 US Government Notes and Bonds 62</p> <p>4.5 US Treasury Quotations 64</p> <p>4.6 US Treasury Strips 66</p> <p>4.7 Bond Pricing 67</p> <p>4.8 Pricing Coupon Bonds: Examples 68</p> <p>4.9 Detailed Bond Valuation: US Treasury 69</p> <p>4.10 Bond Yield 71</p> <p>4.11 Reinvestment Assumptions 72</p> <p>4.12 Annual and Semi-Annual Bond Yields 73</p> <p>4.13 UK Government Bonds 74</p> <p>4.14 Japanese Government Bonds (JGBs) 77</p> <p>4.15 Eurozone Government Bonds 77</p> <p>4.16 Chapter Summary 78</p> <p><b>5 Bond Price Sensitivity 81</b></p> <p>5.1 Chapter Overview 81</p> <p>5.2 Bond Market Laws 81</p> <p>5.3 Other Factors Affecting Price Sensitivity 83</p> <p>5.4 Macaulay’s Duration 83</p> <p>5.5 Calculating Macaulay’s Duration 84</p> <p>5.6 Duration of a Zero 85</p> <p>5.7 Modified Duration 86</p> <p>5.8 Price Value of a Basis Point 87</p> <p>5.9 Convexity 88</p> <p>5.10 Measuring Convexity 88</p> <p>5.11 Convexity Behaviour 90</p> <p>5.12 Portfolio Duration 91</p> <p>5.13 Dedication 92</p> <p>5.14 Immunization 94</p> <p>5.15 Duration-Based Hedges 96</p> <p>5.16 Convexity Effects on Duration Hedges 97</p> <p>5.17 Chapter Summary 98</p> <p><b>6 The Yield Curve 99</b></p> <p>6.1 Chapter Overview 99</p> <p>6.2 Real and Nominal Interest Rates 99</p> <p>6.3 Compounding Periods 100</p> <p>6.4 The Yield Curve Defined 101</p> <p>6.5 Theories of Yield Curves 102</p> <p>6.6 Zero Coupon or Spot Rates 104</p> <p>6.7 Bootstrapping 106</p> <p>6.8 Spot Rates and the Par Curve 108</p> <p>6.9 Pricing Models Using Spot Rates 108</p> <p>6.10 Forward Rates 109</p> <p>6.11 Discount Factors 110</p> <p>6.12 Chapter Summary 112</p> <p><b>7 Credit Spreads and Securitization 113</b></p> <p>7.1 Chapter Overview 113</p> <p>7.2 Basics of Credit Spreads 113</p> <p>7.3 The Role of the Ratings Agencies 115</p> <p>7.4 Credit Spreads and Default Probabilities 117</p> <p>7.5 Credit Default Swaps 118</p> <p>7.6 Index Credit Default Swaps 121</p> <p>7.7 Basket Default Swaps 122</p> <p>7.8 Credit-Linked Notes 123</p> <p>7.9 Securitization and CDOs 124</p> <p>7.10 Rationale for Securitization 126</p> <p>7.11 Synthetic CDOs 126</p> <p>7.12 Chapter Summary 128</p> <p><b>8 Equity Markets and Equity Investment 129</b></p> <p>8.1 Chapter Overview 129</p> <p>8.2 Comparing Corporate Debt and Equity 129</p> <p>8.3 Additional Features of Common Stock 130</p> <p>8.4 Hybrid Securities 131</p> <p>8.5 Equity Investment Styles 132</p> <p>8.6 Efficient Markets 133</p> <p>8.7 Modern Portfolio Theory (MPT) 135</p> <p>8.8 Primary Markets for Common Stock 138</p> <p>8.9 Subsequent Common Stock Issues 140</p> <p>8.10 Secondary Markets: Major Stock Markets 142</p> <p>8.11 Depository Receipts 145</p> <p>8.12 Stock Lending 146</p> <p>8.13 Portfolio (Basket) Trading 148</p> <p>8.14 Chapter Summary 148</p> <p><b>9 Equity Fundamental Analysis 151</b></p> <p>9.1 Chapter Overview 151</p> <p>9.2 Principles of Common Stock Valuation 151</p> <p>9.3 The Balance Sheet Equation 152</p> <p>9.4 The Income Statement 154</p> <p>9.5 Earnings Per Share (EPS) 156</p> <p>9.6 Dividend Per Share (DPS) 157</p> <p>9.7 Ratio Analysis 158</p> <p>9.8 Liquidity Ratios 159</p> <p>9.9 Profitability Ratios 159</p> <p>9.10 Leverage Ratios 161</p> <p>9.11 Investor Ratios and Valuation 162</p> <p>9.12 Applying Valuation Multiples 163</p> <p>9.13 Firm or Enterprise Value Multiples 165</p> <p>9.14 Chapter Summary 166</p> <p><b>10 Cash Flow Models in Equity Valuation 169</b></p> <p>10.1 Chapter Overview 169</p> <p>10.2 The Basic Dividend Discount Model 169</p> <p>10.3 Constant Dividend Growth Models 170</p> <p>10.4 The Implied Return on a Share 172</p> <p>10.5 Dividend Yield and Dividend Growth 172</p> <p>10.6 Price/Earnings Ratio 173</p> <p>10.7 Stage Dividend Discount Models 175</p> <p>10.8 Two-Stage Model: Example 175</p> <p>10.9 The Capital Asset Pricing Model (CAPM) 176</p> <p>10.10 Beta 177</p> <p>10.11 Estimating the Market Risk Premium 178</p> <p>10.12 The Equity Risk Premium Controversy 178</p> <p>10.13 CAPM and Portfolio Theory 180</p> <p>10.14 Free Cash Flow Valuation 183</p> <p>10.15 Forecasting Free Cash Flows 184</p> <p>10.16 Weighted Average Cost of Capital (WACC) 185</p> <p>10.17 Residual Value 186</p> <p>10.18 WACC and Leverage 187</p> <p>10.19 Assets Beta Method 189</p> <p>10.20 Company Value and Leverage 190</p> <p>10.21 Chapter Summary 191</p> <p><b>11 Interest Rate Forwards and Futures 193</b></p> <p>11.1 Chapter Overview 193</p> <p>11.2 Forward Rate Agreements (FRAs) 193</p> <p>11.3 FRA Application: Case Study 194</p> <p>11.4 Borrowing Costs with an FRA Hedge 196</p> <p>11.5 FRA Market Quotations 197</p> <p>11.6 The Forward Interest Rate 199</p> <p>11.7 Financial Futures 201</p> <p>11.8 CME Eurodollar Futures 203</p> <p>11.9 Eurodollar Futures Quotations 203</p> <p>11.10 Futures Margining 204</p> <p>11.11 Margining Example: EURIBOR Futures on Eurex 205</p> <p>11.12 Hedging with Interest Rate Futures: Case Study 208</p> <p>11.13 Futures Strips 209</p> <p>11.14 Chapter Summary 211</p> <p>Appendix: Statistics on Derivative Markets 211</p> <p><b>12 Bond Futures 213</b></p> <p>12.1 Chapter Overview 213</p> <p>12.2 Definitions 213</p> <p>12.3 The CBOT 30-Year US Treasury Bonds Futures 213</p> <p>12.4 Invoice Amount and Conversion Factors 214</p> <p>12.5 Long Gilt and Euro-Bund Futures 216</p> <p>12.6 Forward Bond Price 217</p> <p>12.7 Carry Cost 218</p> <p>12.8 The Implied Repo Rate 218</p> <p>12.9 The Cheapest to Deliver (CTD) Bond 219</p> <p>12.10 CTD Behaviour 221</p> <p>12.11 Hedging with Bond Futures 222</p> <p>12.12 Basis Risk 223</p> <p>12.13 Hedging Non-CTD Bonds 224</p> <p>12.14 Using Futures in Portfolio Management 225</p> <p>12.15 Chapter Summary 226</p> <p><b>13 Interest Rate Swaps 227</b></p> <p>13.1 Chapter Overview 227</p> <p>13.2 Swap Definitions 227</p> <p>13.3 The Basic Interest Rate Swap Illustrated 228</p> <p>13.4 Typical Swap Applications 230</p> <p>13.5 Interest Rate Swap: Detailed Case Study 231</p> <p>13.6 Interest Rate Swap Terms 233</p> <p>13.7 Comparative Advantage 234</p> <p>13.8 Swap Quotations and Spreads 236</p> <p>13.9 Determinants of Swap Spreads 237</p> <p>13.10 Hedging Swaps with Treasuries 238</p> <p>13.11 Cross-Currency Swaps: Case Study 239</p> <p>13.12 Cross-Currency Swap Revaluation 241</p> <p>13.13 Chapter Summary 242</p> <p>Appendix: Swap Variants 242</p> <p><b>14 Interest Rate Swap Valuation 245</b></p> <p>14.1 Chapter Overview 245</p> <p>14.2 Valuing a Swap at Inception 245</p> <p>14.3 Valuing the Swap Components 246</p> <p>14.4 Swap Revaluation 247</p> <p>14.5 Revaluation Between Payment Dates 248</p> <p>14.6 The Forward Rate Method 249</p> <p>14.7 Forward Rate Method on a Spreadsheet 251</p> <p>14.8 Swap Rates and LIBOR Rates 251</p> <p>14.9 Pricing a Swap from Futures 252</p> <p>14.10 Hedging Interest Rate Risk on Swaps 256</p> <p>14.11 Chapter Summary 257</p> <p><b>15 Equity Index Futures and Swaps 259</b></p> <p>15.1 Chapter Overview 259</p> <p>15.2 Index Futures 259</p> <p>15.3 Margining Procedures 260</p> <p>15.4 Final Settlement and Spread Trades 262</p> <p>15.5 Hedging with Index Futures: Case Study 263</p> <p>15.6 Hedge Efficiency 264</p> <p>15.7 Other Uses of Index Futures 265</p> <p>15.8 Pricing an Equity Forward Contract 266</p> <p>15.9 Index Futures Fair Value 267</p> <p>15.10 The Basis 268</p> <p>15.11 Index Arbitrage Trade 269</p> <p>15.12 Running an Arbitrage Desk 270</p> <p>15.13 Features of Index Futures 271</p> <p>15.14 Equity Swaps 272</p> <p>15.15 Managing the Risks on Equity Swaps 273</p> <p>15.16 Structuring Equity Swaps 274</p> <p>15.17 Benefits and Applications of Equity Swaps 275</p> <p>15.18 Chapter Summary 276</p> <p><b>16 Fundamentals of Options 277</b></p> <p>16.1 Chapter Overview 277</p> <p>16.2 Definitions 277</p> <p>16.3 Basic Option Trading Strategies 278</p> <p>16.4 Long Call: Expiry Payoff Profile 279</p> <p>16.5 Short Call: Expiry Payoff Profile 281</p> <p>16.6 Long Put: Expiry Payoff Profile 282</p> <p>16.7 Short Put: Expiry Payoff Profile 284</p> <p>16.8 Summary: Intrinsic and Time Value 284</p> <p>16.9 CBOE Stock Options 285</p> <p>16.10 CME S&P 500 Index Options 286</p> <p>16.11 Stock Options on LIFFE 287</p> <p>16.12 FT-SE 100 Index Options 288</p> <p>16.13 Chapter Summary 289</p> <p>Appendix: Exotic Options 289</p> <p><b>17 Option Valuation Models 293</b></p> <p>17.1 Chapter Overview 293</p> <p>17.2 Fundamental Principles: European Options 293</p> <p>17.3 Synthetic Forwards and Futures 295</p> <p>17.4 American Options and Early Exercise 296</p> <p>17.5 Binomial Trees 297</p> <p>17.6 Expanding the Tree 300</p> <p>17.7 Black-Scholes Model 302</p> <p>17.8 Black-Scholes Assumptions 305</p> <p>17.9 Chapter Summary 305</p> <p>Appendix: Measuring Historic Volatility 306</p> <p><b>18 Option Pricing and Risks 309</b></p> <p>18.1 Chapter Overview 309</p> <p>18.2 Intrinsic and Time Value Behaviour 309</p> <p>18.3 Volatility Assumption and Option Pricing 311</p> <p>18.4 Delta (Δ or δ) 312</p> <p>18.5 Delta Behaviour 313</p> <p>18.6 Gamma (Γ or γ ) 314</p> <p>18.7 Readjusting the Delta Hedge 315</p> <p>18.8 Gamma Behaviour 316</p> <p>18.9 Theta (Θ) 318</p> <p>18.10 Vega 319</p> <p>18.11 Rho (<i>p</i>) and Summary of Greeks 319</p> <p>18.12 Chapter Summary 321</p> <p>Appendix: Delta and Gamma Hedging 322</p> <p><b>19 Option Strategies 325</b></p> <p>19.1 Chapter Overview 325</p> <p>19.2 Hedging with Put Options 325</p> <p>19.3 Covered Call Writing 329</p> <p>19.4 Collars 330</p> <p>19.5 Bull and Bear Spreads 332</p> <p>19.6 Other Spread Trades 334</p> <p>19.7 Volatility Revisited 336</p> <p>19.8 Volatility Trading: Straddles and Strangles 338</p> <p>19.9 Current Payoff Profiles 339</p> <p>19.10 Profits and Risks on Straddles 341</p> <p>19.11 Chapter Summary 343</p> <p><b>20 Additional Option Applications 345</b></p> <p>20.1 Chapter Overview 345</p> <p>20.2 OTC and Exchange-traded Currency Options 345</p> <p>20.3 Hedging FX Exposures with Options: Case Study 346</p> <p>20.4 Pricing Currency Options 348</p> <p>20.5 Interest Rate Options 349</p> <p>20.6 Exchange-Traded Interest Rate Options 350</p> <p>20.7 Caps, Floors, and Collars 352</p> <p>20.8 Interest Rate Cap: Case Study 353</p> <p>20.9 Pricing Caps and Floors: Black Model 355</p> <p>20.10 Swaptions 357</p> <p>20.11 Interest Rate Strategies 359</p> <p>20.12 Convertible Bonds 360</p> <p>20.13 CB Measures of Value 361</p> <p>20.14 Conversion Premium and Parity 363</p> <p>20.15 Convertible Arbitrage 364</p> <p>20.16 Chapter Summary 366</p> <p>Glossary of Financial Terms 369</p> <p>Index 415</p>

<p><i>About the author</i> <p><b>ANDREW M. CHISHOLM</b> has designed, developed and taught programmes in derivatives and finance since 1984. In that time he has worked with many of the largest financial institutions around the world, teaching corporate financiers, traders, sales and marketing staff, risk managers, analysts, fund managers, operations and technology professionals. He has worked extensively on seminars at senior management level as well as training programmes designed to introduce new graduate and MBA entrants to the securities industry. He was formerly Head of Professional Development for Europe at JP Morgan and is author of Derivatives Demystified published by John Wiley and Sons in 2004.

<p><b>An Introduction to International Capital Markets Products, Strategies, Participants</b></br> Second Edition</br> Andrew Chisholm <p><i>"Clear, comprehensive and with many practical examples and case studies. An invaluable guide to the modern international capital markets and to the key products and techniques used in the industry."</i></br> <b>Sir George Mathewson CBE, DUniv, LLD, FRSE, FCIBS.</b> Chairman of the Council of Economic Advisers in Scotland and Former Chairman of The Royal Bank of Scotland Group plc. <p>Fully revised and updated from the hugely popular first edition, this book is an accessible and convenient one-volume introduction to international capital markets, ideal for those entering or planning to enter investment banking or asset management. As well as serving as an invaluable reference tool for professionals already working in the industry looking to extend their knowledge base it will also benefit all those working in trading, sales and support roles. <p>Describing how the key products and markets work, who the principle participants are and their overall goals and objectives, Andrew Chisholm provides a thorough overview of the global capital markets. The book covers a wide range of equity, debt, foreign exchange and credit instruments as well as the principal derivative products. In a step-by-step fashion, making extensive use of real world cases and examples, it explains money markets, foreign exchange, bond markets, cash equity markets, equity valuation techniques, swaps, forwards, futures, credit derivatives, options, option risk management and convertible bonds. An extensive glossary also explains concisely many of the 'jargon' expressions used in the financial markets. <p>Boasting an international focus, examples are drawn from major international markets around the world. It makes extensive use of numerical examples and case studies to help explain a wide range of cash and derivative products used in the capital markets business. It covers both debt and equity products and includes new material on credit products such as collateralized debt obligations and credit derivative structures; equity fundamental analysis, portfolio theory and convertible bonds. Market data has been fully updated from the first edition and recent events such as the 'credit crisis' are discussed.

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