Risk Management and Analysis

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