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• Foreword
• Preface
• Acknowledgments
• About the CFA Institute Investment Series
• CHAPTER 1 Derivative Markets and Instruments
• Learning Outcomes
• 1. Derivatives: Introduction, Definitions, and Uses
• 2. The Structure of Derivative Markets
• 2.1. Exchange-Traded Derivatives Markets
• 2.2. Over-the-Counter Derivatives Markets
• 3. Types of Derivatives: Introduction, Forward Contracts
• 3.1. Forward Commitments
• 4. Types of Derivatives: Futures
• 5. Types of Derivatives: Swaps
• 6. Contingent Claims: Options
• 6.1. Options
• 7. Contingent Claims: Credit Derivatives
• 8. Types of Derivatives: Asset-Backed Securities and Hybrids
• 8.1. Hybrids
• 9. Derivatives Underlyings
• 9.1. Equities
• 9.2. Fixed-Income Instruments and Interest Rates
• 9.3. Currencies
• 9.4. Commodities
• 9.5. Credit
• 9.6. Other
• 10. The Purposes and Benefits of Derivatives
• 10.1. Risk Allocation, Transfer, and Management
• 10.2. Information Discovery
• 10.3. Operational Advantages
• 10.4. Market Efficiency
• 11. Criticisms and Misuses of Derivatives
• 11.1. Speculation and Gambling
• 11.2. Destabilization and Systemic Risk
• 12. Elementary Principles of Derivative Pricing
• 12.1. Storage
• 12.2. Arbitrage
• Summary
• Problems
• CHAPTER 2 Basics of Derivative Pricing and Valuation
• Learning Outcomes
• 1. Introduction
• 2. Basic Derivative Concepts, Pricing the Underlying
• 2.1. Basic Derivative Concepts
• 2.2. Pricing the Underlying
• 3. The Principle of Arbitrage
• 3.1. The (In)Frequency of Arbitrage Opportunities
• 3.2. Arbitrage and Derivatives
• 3.3. Arbitrage and Replication
• 3.4. Risk Aversion, Risk Neutrality, and Arbitrage-Free Pricing
• 3.5. Limits to Arbitrage
• 4. Pricing and Valuation of Forward Contracts: Pricing vs. Valuation; Expiration; Initiation
• 4.1. Pricing and Valuation of Forward Commitments
• 5. Pricing and Valuation of Forward Contracts: Between Initiation and Expiration; Forward Rate Agreements
• 5.1. A Word about Forward Contracts on Interest Rates
• 6. Pricing and Valuation of Futures Contracts
• 7. Pricing and Valuation of Swap Contracts
• 8. Pricing and Valuation of Options
• 8.1. European Option Pricing
• 9. Lower Limits for Prices of European Options
• 10. Put–Call Parity, Put–Call–Forward Parity
• 10.1. Put–Call–Forward Parity
• 11. Binomial Valuation of Options
• 12. American Option Pricing
• Summary
• Problems
• CHAPTER 3 Pricing and Valuation of Forward Commitments
• Learning Outcomes
• 1. Introduction to Pricing and Valuation of Forward Commitments
• 1.1. Principles of Arbitrage-Free Pricing and Valuation of Forward Commitments
• 1.2. Pricing and Valuing Generic Forward and Futures Contracts
• 2. Carry Arbitrage
• 2.1. Carry Arbitrage Model When There Are No Underlying Cash Flows
• 2.2. Carry Arbitrage Model When Underlying Has Cash Flows
• 3. Pricing Equity Forwards and Futures
• 3.1. Equity Forward and Futures Contracts
• 3.2. Interest Rate Forward and Futures Contracts
• 4. Pricing Fixed-Income Forward and Futures Contracts
• 4.1. Comparing Forward and Futures Contracts
• 5. Pricing and Valuing Swap Contracts
• 5.1. Interest Rate Swap Contracts
• 6. Pricing and Valuing Currency Swap Contracts
• 7. Pricing and Valuing Equity Swap Contracts
• Summary
• Problems
• CHAPTER 4 Valuation of Contingent Claims
• Learning Outcomes
• 1. Introduction and Principles of a No-Arbitrage Approach to Valuation
• 1.1. Principles of a No-Arbitrage Approach to Valuation
• 2. Binomial Option Valuation Model
• 3. One-Period Binomial Model
• 4. Binomial Model: Two-Period (Call Options)
• 5. Binomial Model: Two-Period (Put Options)
• 6. Binomial Model: Two-Period (Role of Dividends & Comprehensive Example)
• 7. Interest Rate Options & Multiperiod Model
• 7.1. Multiperiod Model
• 8. Black–Scholes–Merton (BSM) Option Valuation Model, Introduction and Assumptions of the BSM Model
• 8.1. Introductory Material
• 8.2. Assumptions of the BSM Model
• 9. BSM Model: Components
• 10. BSM Model: Carry Benefits and Applications
• 11. Black Option Valuation Model and European Options on Futures
• 11.1. European Options on Futures
• 12. Interest Rate Options
• 13. Swaptions
• 14. Option Greeks and Implied Volatility: Delta
• 14.1. Delta
• 15. Gamma
• 16. Theta
• 17. Vega
• 18. Rho
• 19. Implied Volatility
• Summary
• Problems
• CHAPTER 5 Credit Default Swaps
• Learning Outcomes
• 1. Introduction
• 2. Basic Definitions and Concepts
• 2.1. Types of CDS
• 3. Important Features of CDS Markets and Instruments, Credit and Succession Events, and Settlement Proposals
• 3.1. Credit and Succession Events
• 3.2. Settlement Protocols
• 3.3. CDS Index Products
• 3.4. Market Characteristics
• 4. Basics of Valuation and Pricing
• 4.1. Basic Pricing Concepts
• 4.2. The Credit Curve and CDS Pricing Conventions
• 4.3. CDS Pricing Conventions
• 4.4. Valuation Changes in CDS during Their Lives
• 4.5. Monetizing Gains and Losses
• 5. Applications of CDS
• 5.1. Managing Credit Exposures
• 6. Valuation Differences and Basis Trading
• Summary
• Problems
• CHAPTER 6 Introduction to Commodities and Commodity Derivatives
• Learning Outcomes
• 1. Introduction
• 2. Commodity Sectors
• 2.1. Commodity Sectors
• 3. Life Cycle of Commodities
• 3.1. Energy
• 3.2. Industrial/Precious Metals
• 3.3. Livestock
• 3.4. Grains
• 3.5. Softs
• 4. Valuation of Commodities
• 5. Commodities Futures Markets: Participants
• 5.1. Futures Market Participants
• 6. Commodity Spot and Futures Pricing
• 7. Theories of Futures Returns
• 7.1. Theories of Futures Returns
• 8. Components of Futures Returns
• 9. Contango, Backwardation, and the Roll Return
• 10. Commodity Swaps
• 10.1. Total Return Swap
• 10.2. Basis Swap
• 10.3. Variance Swaps and Volatility Swaps
• 11. Commodity Indexes
• 11.1. S&P GSCI
• 11.2. Bloomberg Commodity Index
• 11.3. Deutsche Bank Liquid Commodity Index
• 11.4. Thomson Reuters/CoreCommodity CRB Index
• 11.5. Rogers International Commodity Index
• 11.6. Rebalancing Frequency
• 11.7. Commodity Index Summary
• Summary
• References
• Problems
• CHAPTER 7 Currency Management: An Introduction
• Learning Outcomes
• 1. Introduction
• 2. Review of Foreign Exchange Concepts
• 2.1. Spot Markets
• 2.2. Forward Markets
• 2.3. FX Swap Markets
• 2.4. Currency Options
• 3. Currency Risk and Portfolio Risk and Return
• 3.1. Return Decomposition
• 3.2. Volatility Decomposition
• 4. Strategic Decisions in Currency Management: Overview
• 4.1. The Investment Policy Statement
• 4.2. The Portfolio Optimization Problem
• 4.3. Choice of Currency Exposures
• 5. Strategic Decisions in Currency Management: Spectrum of Currency Risk Management Strategies
• 5.1. Passive Hedging
• 5.2. Discretionary Hedging
• 5.3. Active Currency Management
• 5.4. Currency Overlay
• 6. Strategic Decisions in Currency Management: Formulating a Currency Management Program
• 7. Active Currency Management: Based on Economic Fundamentals, Technical Analysis, and the Carry Trade
• 7.1. Active Currency Management Based on Economic Fundamentals
• 7.2. Active Currency Management Based on Technical Analysis
• 7.3. Active Currency Management Based on the Carry Trade
• 8. Active Currency Management: Based on Volatility Trading
• 9. Currency Management Tools: Forward Contracts, FX Swaps, and Currency Options
• 9.1. Forward Contracts
• 9.2. Currency Options
• 10. Currency Management Strategies
• 10.1. Over-/Under-Hedging Using Forward Contracts
• 10.2. Protective Put Using OTM Options
• 10.3. Risk Reversal (or Collar)
• 10.4. Put Spread
• 10.5. Seagull Spread
• 10.6. Exotic Options
• 10.7. Section Summary
• 11. Hedging Multiple Foreign Currencies
• 11.1. Cross Hedges and Macro Hedges
• 11.2. Minimum-Variance Hedge Ratio
• 11.3. Basis Risk
• 12. Currency Management Tools and Strategies: A Summary
• 13. Currency Management for Emerging Market Currencies
• 13.1. Special Considerations in Managing Emerging Market Currency Exposures
• 13.2. Non-Deliverable Forwards
• Summary
• References
• Problems
• CHAPTER 8 Options Strategies
• Learning Outcomes
• 1. Introduction
• 2. Position Equivalencies
• 2.1. Synthetic Forward Position
• 2.2. Synthetic Put and Call
• 3. Covered Calls and Protective Puts
• 3.1. Investment Objectives of Covered Calls
• 4. Investment Objectives of Protective Puts
• 4.1. Loss Protection/Upside Preservation
• 4.2. Profit and Loss at Expiration
• 5. Equivalence to Long Asset/Short Forward Position
• 5.1. Writing Puts
• 6. Risk Reduction Using Covered Calls and Protective Puts
• 6.1. Covered Calls
• 6.2. Protective Puts
• 6.3. Buying Calls and Writing Puts on a Short Position
• 7. Spreads and Combinations
• 7.1. Bull Spreads and Bear Spreads
• 8. Straddle
• 8.1. Collars
• 8.2. Calendar Spread
• 9. Implied Volatility and Volatility Skew
• 10. Investment Objectives and Strategy Selection
• 10.1. The Necessity of Setting an Objective
• 10.2. Criteria for Identifying Appropriate Option Strategies
• 11. Uses of Options in Portfolio Management
• 11.1. Covered Call Writing
• 11.2. Put Writing
• 11.3. Long Straddle
• 11.4. Collar
• 11.5. Calendar Spread
• 12. Hedging an Expected Increase in Equity Market Volatility
• 12.1. Establishing or Modifying Equity Risk Exposure
• Summary
• Problems
• CHAPTER 9 Swaps, Forwards, and Futures Strategies
• Learning Outcomes
• 1. Managing Interest Rate Risk with Swaps
• 1.1. Changing Risk Exposures with Swaps, Futures, and Forwards
• 2. Managing Interest Rate Risk with Forwards, Futures, and Fixed-Income Futures
• 2.1. Fixed-Income Futures
• 3. Managing Currency Exposure
• 3.1. Currency Swaps
• 3.2. Currency Forwards and Futures
• 4. Managing Equity Risk
• 4.1. Equity Swaps
• 4.2. Equity Forwards and Futures
• 4.3. Cash Equitization
• 5. Volatility Derivatives: Futures and Options
• 5.1. Volatility Futures and Options
• 6. Volatility Derivatives: Variance Swaps
• 7. Using Derivatives to Manage Equity Exposure and Tracking Error
• 7.1. Cash Equitization
• 8. Using Derivatives in Asset Allocation
• 8.1. Changing Allocations between Asset Classes Using Futures
• 8.2. Rebalancing an Asset Allocation Using Futures
• 8.3. Changing Allocations between Asset Classes Using Swaps
• 9. Using Derivatives to Infer Market Expectations
• 9.1. Using Fed Funds Futures to Infer the Expected Average Federal Funds Rate
• 9.2. Inferring Market Expectations
• Summary
• Problems
• CHAPTER 10 Introduction to Risk Management
• Learning Outcomes
• 1. Introduction
• 2. The Risk Management Process
• 3. The Risk Management Framework
• 4. Risk Governance – An Enterprise View
• 4.1. An Enterprise View of Risk Governance
• 5. Risk Tolerance
• 6. Risk Budgeting
• 7. Identification of Risk – Financial and Non-Financial Risk
• 7.1. Financial Risks
• 7.2. Non-Financial Risks
• 8. Identification of Risk – Interactions Between Risks
• 9. Measuring and Modifying Risk – Drivers and Metrics
• 9.1. Drivers
• 9.2. Metrics
• 10. Methods of Risk Modification – Prevention, Avoidance, and Acceptance
• 10.1. Risk Prevention and Avoidance
• 10.2. Risk Acceptance: Self-Insurance and Diversification
• 11. Methods of Risk Modification – Transfer, Shifting, Choosing a Method for Modifying
• 11.1. Risk Shifting
• 11.2. How to Choose Which Method for Modifying Risk
• Summary
• Problems
• CHAPTER 11 Measuring and Managing Market Risk
• Learning Outcomes
• 1. Introduction
• 1.1. Understanding Value at Risk
• 2. Estimating VaR
• 3. The Parametric Method of VaR Estimation
• 4. The Historical Simulation Method of VaR Estimation
• 5. The Monte Carlo Simulation Method of VaR Estimation
• 6. Advantages and Limitations of VaR and Extensions of VaR
• 6.1. Advantages of VaR
• 6.2. Limitations of VaR
• 6.3. Extensions of VaR
• 7. Other Key Risk Measures – Sensitivity Risk Measures; Sensitivity Risk Measures
• 7.1. Sensitivity Risk Measures
• 8. Scenario Risk Measures
• 8.1. Historical Scenarios
• 8.2. Hypothetical Scenarios
• 9. Sensitivity and Scenario Risk Measures and VaR
• 9.1. Advantages and Limitations of Sensitivity Risk Measures and Scenario Risk Measures
• 10. Using Constraints in Market Risk Management
• 10.1. Risk Budgeting
• 10.2. Position Limits
• 10.3. Scenario Limits
• 10.4. Stop-Loss Limits
• 10.5. Risk Measures and Capital Allocation
• 11. Applications of Risk Measures
• 11.1. Market Participants and the Different Risk Measures They Use
• 12. Pension Funds and Insurers
• 12.1. Insurers
• Summary
• Reference
• Problems
• CHAPTER 12 Risk Management for Individuals
• Learning Outcomes
• 1. Introduction
• 2. Human Capital, Financial Capital, and Economic Net Worth
• 2.1. Human Capital
• 2.2. Financial Capital
• 2.3. Economic Net Worth
• 3. A Framework for Individual Risk Management
• 3.1. The Risk Management Strategy for Individuals
• 3.2. Financial Stages of Life
• 4. The Individual Balance Sheet
• 4.1. Traditional Balance Sheet
• 4.2. Economic (Holistic) Balance Sheet
• 4.3. Changes in Economic Net Worth
• 5. Individual Risk Exposures
• 5.1. Earnings Risk
• 5.2. Premature Death Risk
• 5.3. Longevity Risk
• 5.4. Property Risk
• 5.5. Liability Risk
• 5.6. Health Risk
• 6. Life Insurance: Uses, Types, and Elements
• 6.1. Life Insurance
• 7. Life Insurance: Pricing, Policy Cost Comparison, and Determining Amount Needed
• 7.1. Mortality Expectations
• 7.2. Calculation of the Net Premium and Gross Premium
• 7.3. Cash Values and Policy Reserves
• 7.4. Consumer Comparisons of Life Insurance Costs
• 7.5. How Much Life Insurance Does One Need?
• 8. Other Types of Insurance
• 8.1. Property Insurance
• 8.2. Health/Medical Insurance
• 8.3. Liability Insurance
• 8.4. Other Types of Insurance
• 9. Annuities: Types, Structure, and Classification
• 9.1. Parties to an Annuity Contract
• 9.2. Classification of Annuities
• 10. Annuities: Advantages and Disadvantages of Fixed and Variable Annuities
• 10.1. Volatility of Benefit Amount
• 10.2. Flexibility
• 10.3. Future Market Expectations
• 10.4. Fees
• 10.5. Inflation Concerns
• 10.6. Payout Methods
• 10.7. Annuity Benefit Taxation
• 10.8. Appropriateness of Annuities
• 11. Risk Management Implementation: Determining the Optimal Strategy and Case Analysis
• 11.1. Determining the Optimal Risk Management Strategy
• 11.2. Analyzing an Insurance Program
• 12. The Effect of Human Capital on Asset Allocation and Risk Reduction
• 12.1. Asset Allocation and Risk Reduction
• Summary
• References
• Problems
• CHAPTER 13 Case Study in Risk Management: Private Wealth
• Learning Outcomes
• 1. Introduction and Case Background
• 1.1. Background of Eurolandia
• 1.2. The Schmitt Family in Their Early Career Stage
• 2. Identification and Analysis of Risk Exposures: Early Career Stage
• 2.1. Specify the Schmitts’ Financial Objectives
• 2.2. Identification of Risk Exposures
• 2.3. Analysis of Identified Risk
• 3. Risk Management Recommendations: Early Career Stage
• 3.1. Recommendations for Managing Risks
• 3.2. Monitoring Outcomes and Risk Exposures
• 4. Risk Management Considerations Associated with Home Purchase
• 4.1. Review of Risk Management Arrangements Following the House Purchase
• 5. Identification and Analysis of Risk Exposures: Career Development Stage
• 5.1. Case Facts: The Schmitts Are 45
• 5.2. Financial Objectives in the Career Development Stage
• 5.3. Identification and Evaluation of Risks in the Career Development Stage
• 6. Risk Management Recommendations: Career Development Stage
• 6.1. Disability Insurance
• 6.2. Life Insurance
• 6.3. Investment Risk Recommendations
• 6.4. Retirement Planning Recommendation
• 6.5. Additional Suggestions
• 7. Identification and Analysis of Risk Exposures: Peak Accumulation Stage
• 7.1. Review of Objectives, Risks, and Methods of Addressing Them
• 8. Assessment of and Recommendations concerning Risk to Retirement Lifestyle and Bequest Goals: Peak Accumulation Stage
• 8.1. Analysis of Investment Portfolio
• 8.2. Analysis of Asset Allocation
• 8.3. Recommendations for Risk Management at Peak Accumulation Stage
• 9. Identification and Analysis of Retirement Objectives, Assets, and Drawdown Plan: Retirement Stage
• 9.1. Key Issues and Objectives
• 9.2. Analysis of Retirement Assets and Drawdown Plan
• 10. Income and Investment Portfolio Recommendations: Retirement Stage
• 10.1. Investment Portfolio Analysis and Recommendations
• 10.2. The Advisor’s Recommendations for Investment Portfolio in Retirement
• Summary
• Problems
• CHAPTER 14 Integrated Cases in Risk Management: Institutional
• Learning Outcomes
• 1. Introduction
• 2. Financial Risks Faced by Institutional Investors
• 2.1. Long-Term Perspective
• 2.2. Dimensions of Financial Risk Management
• 2.3. Risk Considerations for Long-Term Investors
• 2.4. Risks Associated with Illiquid Asset Classes
• 2.5. Managing Liquidity Risk
• 2.6. Enterprise Risk Management for Institutional Investors
• 3. Environmental and Social Risks Faced by Institutional Investors
• 3.1. Universal Ownership, Externalities, and Responsible Investing
• 3.2. Material Environmental Issues for an Institutional Investor
• 3.3. Material Social Issues for an Institutional Investor
• References
• Glossary
• About the Editors and Authors
• Index
• End User License Agreement