An introduction to financial markets : a quantitative approach /: a quantitative approach. (2017)

• Record Type: Book
• Further Information: Note: Paolo Brandimarte.
• Authors: Brandimarte, Paolo
• Contents: Preface xv About the Companion Website xix Part I Overview 1 Financial Markets: Functions, Institutions, and Traded Assets 1 1.1 What is the purpose of finance? 2 1.2 Traded assets 12 1.2.1 The balance sheet 15 1.2.2 Assets vs. securities 20 1.2.3 Equity 22 1.2.4 Fixed income 24 1.2.5 FOREX markets 27 1.2.6 Derivatives 29 1.3 Market participants and their roles 46 1.3.1 Commercial vs. investment banks 48 1.3.2 Investment funds and insurance companies 49 1.3.3 Dealers and brokers 51 1.3.4 Hedgers, speculators, and arbitrageurs 51 1.4 Market structure and trading strategies 53 1.4.1 Primary and secondary markets 53 1.4.2 Over-the-counter vs. exchange-traded derivatives 53 1.4.3 Auction mechanisms and the limit order book 53 1.4.4 Buying on margin and leverage 55 1.4.5 Short-selling 58 1.5 Market indexes 60 Problems 63 Further reading 65 Bibliography 65 2 Basic Problems in Quantitative Finance 67 2.1 Portfolio optimization 68 2.1.1 Static portfolio optimization: Mean–variance efficiency 70 2.1.2 Dynamic decision-making under uncertainty: A stylized consumption–saving model 75 2.2 Risk measurement and management 80 2.2.1 Sensitivity of asset prices to underlying risk factors 81 2.2.2 Risk measures in a non-normal world: Value-atrisk 84 2.2.3 Risk management: Introductory hedging examples 93 2.2.4 Financial vs. nonfinancial risk factors 100 2.3 The no-arbitrage principle in asset pricing 102 2.3.1 Why do we need asset pricing models? 103 2.3.2 Arbitrage strategies 104 2.3.3 Pricing by no-arbitrage 108 2.3.4 Option pricing in a binomial model 112 2.3.5 The limitations of the no-arbitrage principle 116 2.4 The mathematics of arbitrage 117 2.4.1 Linearity of the pricing functional and law of one price 119 2.4.2 Dominant strategies 120 2.4.3 No-arbitrage principle and risk-neutral measures 125 S2.1 Multiobjective optimization 129 S2.2 Summary of LP duality 133 Problems 137 Further reading 139 Bibliography 139 Part II Fixed income assets 3 Elementary Theory of Interest Rates 143 3.1 The time value of money: Shifting money forward in time 146 3.1.1 Simple vs. compounded rates 147 3.1.2 Quoted vs. effective rates: Compounding frequencies 150 3.2 The time value of money: Shifting money backward in time 153 3.2.1 Discount factors and pricing a zero-coupon bond 154 3.2.2 Discount factors vs. interest rates 158 3.3 Nominal vs. real interest rates 161 3.4 The term structure of interest rates 163 3.5 Elementary bond pricing 165 3.5.1 Pricing coupon-bearing bonds 165 3.5.2 From bond prices to term structures, and vice versa 168 3.5.3 What is a risk-free rate, anyway? 171 3.5.4 Yield-to-maturity 174 3.5.5 Interest rate risk 180 3.5.6 Pricing floating rate bonds 188 3.6 A digression: Elementary investment analysis 190 3.6.1 Net present value 191 3.6.2 Internal rate of return 192 3.6.3 Real options 193 3.7 Spot vs. forward interest rates 193 3.7.1 The forward and the spot rate curves 197 3.7.2 Discretely compounded forward rates 197 3.7.3 Forward discount factors 198 3.7.4 The expectation hypothesis 199 3.7.5 A word of caution: Model risk and hidden assumptions 202 S3.1 Proof of Equation (3.42) 203 Problems 203 Further reading 205 Bibliography 205 4 Forward Rate Agreements, Interest Rate Futures, and Vanilla Swaps 207 4.1 LIBOR and EURIBOR rates 208 4.2 Forward rate agreements 209 4.2.1 A hedging view of forward rates 210 4.2.2 FRAs as bond trades 214 4.2.3 A numerical example 215 4.3 Eurodollar futures 216 4.4 Vanilla interest rate swaps 220 4.4.1 Swap valuation: Approach 1 221 4.4.2 Swap valuation: Approach 2 223 4.4.3 The swap curve and the term structure 225 Problems 226 Further reading 226 Bibliography 226 5 Fixed-Income Markets 229 5.1 Day count conventions 230 5.2 Bond markets 231 5.2.1 Bond credit ratings 233 5.2.2 Quoting bond prices 233 5.2.3 Bonds with embedded options 235 5.3 Interest rate derivatives 237 5.3.1 Swap markets 237 5.3.2 Bond futures and options 238 5.4 The repo market and other money market instruments 239 5.5 Securitization 240 Problems 244 Further reading 244 Bibliography 244 6 Interest Rate Risk Management 247 6.1 Duration as a first-order sensitivity measure 248 6.1.1 Duration of fixed-coupon bonds 250 6.1.2 Duration of a floater 254 6.1.3 Dollar duration and interest rate swaps 255 6.2 Further interpretations of duration 257 6.2.1 Duration and investment horizons 258 6.2.2 Duration and yield volatility 260 6.2.3 Duration and quantile-based risk measures 260 6.3 Classical duration-based immunization 261 6.3.1 Cash flow matching 262 6.3.2 Duration matching 263 6.4 Immunization by interest rate derivatives 265 6.4.1 Using interest rate swaps in asset–liability management 266 6.5 A second-order refinement: Convexity 266 6.6 Multifactor models in interest rate risk management 269 Problems 271 Further reading 272 Bibliography 273 Part III Equity portfolios 7 Decision-Making under Uncertainty: The Static Case 277 7.1 Introductory examples 278 7.2 Should we just consider expected values of returns and monetary outcomes? 282 7.2.1 Formalizing static decision-making under uncertainty 283 7.2.2 The flaw of averages 284 7.3 A conceptual tool: The utility function 288 7.3.1 A few standard utility functions 293 7.3.2 Limitations of utility functions 297 7.4 Mean–risk models 299 7.4.1 Coherent risk measures 300 7.4.2 Standard deviation and variance as risk measures 302 7.4.3 Quantile-based risk measures: V@R and CV@R 303 7.4.4 Formulation of mean–risk models 309 7.5 Stochastic dominance 310 S7.1 Theorem proofs 314 S7.1.1 Proof of Theorem 7.2 314 S7.1.2 Proof of Theorem 7.4 315 Problems 315 Further reading 317 Bibliography 317 8 Mean–Variance Efficient Portfolios 319 8.1 Risk aversion and capital allocation to risky assets 320 8.1.1 The role of risk aversion 324 8.2 The mean–variance efficient frontier with risky assets 325 8.2.1 Diversification and portfolio risk 325 8.2.2 The efficient frontier in the case of two risky assets 326 8.2.3 The efficient frontier in the case of n risky assets 329 8.3 Mean–variance efficiency with a risk-free asset: The separation property 332 8.4 Maximizing the Sharpe ratio 337 8.4.1 Technical issues in Sharpe ratio maximization 340 8.5 Mean–variance efficiency vs. expected utility 341 8.6 Instability in mean–variance portfolio optimization 343 S8.1 The attainable set for two risky assets is a hyperbola 345 S8.2 Explicit solution of mean–variance optimization in matrix form 346 Problems 348 Further reading 349 Bibliography 349 9 Factor Models 351 9.1 Statistical issues in mean–variance portfolio optimization 352</p&
• Edition: 1st
• Publisher Details: Hoboken, New Jersey : John Wiley & Sons, Inc
• Publication Date: 2017
• Extent: 1 online resource
• Subjects: 332; Financial institutions; Finance -- Mathematics
• Languages: English
• ISBNs: 9781118594667; 9781118594773
• Related ISBNs: 9781118014776
• Notes: Note: Description based on CIP data; resource not viewed.
• Access Rights: Legal Deposit; Only available on premises controlled by the deposit library and to one user at any one time; The Legal Deposit Libraries (Non-Print Works) Regulations (UK).
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