Demystifying Exotic Products: Interest Rates, Equities and by Chia Tan

By Chia Tan

In recent years, derivatives were inaccurately labelled the monetary guns of mass destruction liable for the worst monetary challenge in fresh background. Inherently complicated and dangerous for the ill-informed funding expert they could even though even be gainfully harnessed.

This ebook is a pragmatic advisor to the complexities of unique items written basically in accordance with the basis that derivatives aren't homogenous, and never inevitably dangerous.

By exploring universal issues in the back of the development of varied dependent items in rates of interest, equities and foreign currency, and investigating the commercial atmosphere that promoted the explosive progress of those items, this ebook might help readers make experience in their relevance during this interval of financial uncertainty. hence, by way of explaining unique items with easy arithmetic, it is going to reduction readers in realizing their power use in convinced funding concepts while having an organization regulate over risk.

Exotic items needn't be inaccessible. via knowing the goods on hand traders could make expert judgements making sure good points are in keeping with their funding goals and threat personal tastes. writer Chia Chiang Tan takes readers during the dangers and rewards of every product, illustrating while items can harm funding innovations and the way to prevent them, resulting in appropriate, ecocnomic investments.

Ultimately, this publication will offer practitioners with an figuring out of derivatives, permitting them to figure out for themselves which items will healthy their funding approach, and the way to exploit them in keeping with the industrial setting and inherent risks.

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Extra info for Demystifying Exotic Products: Interest Rates, Equities and Foreign Exchange

Sample text

A note of $100 face value has a principal of $100. ) 14 Demystifying Exotic Products Principal protection refers to an arrangement that ensures that the investor’s principal is repaid at maturity of the note, independent of market conditions. The Zero-Coupon Bond A zero-coupon bond pays no coupon during its life, but just the principal amount at maturity. Assuming interest rates are greater than zero, such a bond must be worth less than the principal amount today. This is sometimes known as the time value of money.

Illiquidity It should be stressed that structured products are usually illiquid. They are tailor-made by banks to clients’ investment preferences, and cannot be easily disposed of in a secondary market. You can get the issuing institution to cancel or restructure the contract (usually at a higher margin than the initial deal since the institution no longer has to price competitively). Alternatively, you can get another institution to prepare a structure whose cashflows offset the payments given by the earlier contract.

No-arbitrage considerations lead to the martingale equation in a complete market. Specifi­ cally, if Vt and At are domestic assets, then Vt = E QA At VT , AT where Q A is the measure corresponding to the numeraire asset At , E Q A [•] is an expectation with respect to the measure Q A , and t < T are any two points in time. A martingale is a process whose expected value at a future time is its value today. e. VAtt ) has expected value equal to its current value. (Please do not be too bothered about the concept of measure.

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