The book is aimed at entrants into investment banking and dealing businesses, existing personnel in non-trading jobs, and people outside of the financial services industry trying to gain a view into what drives dealers in today’s highly integrated marketplace. A committed reader is guaranteed to leave with a deep understanding of all current issues.

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1. The Purpose and Structure of Financial Markets.

1.1 Overview.

1.2 Risk sharing.

1.3 The structure of financial markets.

1.4 Arbitrage: Pure vs. relative value.

1.5 Financial institutions: Asset transformers and broker-dealers.

1.6 Primary and secondary markets.

1.7 Market players: Hedgers vs. speculators.

1.8 Preview of the book.

PART ONE: SPOT.

2. Financial Math I—Spot.

2.1 Interest-rate basics.

2.2 Zero, coupon and amortizing rates.

2.3 The term structure of interest rates.

2.4 Interest-rate risk.

2.5 Equity markets math.

2.6 Currency markets.

3. Fixed Income Securities.

3.1 Money markets.

3.2 Capital markets: Bonds.

3.3 Interest-rate swaps.

3.4 Mortgage securities.

3.5 Asset-backed securities.

4. Equities, Currencies, and Commodities.

4.1 Equity markets.

4.2 Currency markets.

4.3 Commodity markets.

5. Spot Relative Value Trades.

5.1 Fixed-income strategies.

5.2 Equity portfolio strategies.

5.3 Spot currency arbitrage.

5.4 Commodity basis trades.

PART TWO: FORWARDS.

6. Financial Math II—Futures and Forwards.

6.1 Commodity futures mechanics.

6.2 Interest-rate futures and forwards.

6.3 Stock index futures.

6.4 Currency forwards and futures.

6.5 Convenience assets—backwardation and contango.

6.6 Commodity futures.

6.7 Spot–Forward arbitrage in interest rates.

6.8 Constructing the zero curve from forwards.

6.9 Recovering forwards from the yield curve.

6.10 Energy forwards and futures.

7. Spot–Forward Arbitrage.

7.1 Currency arbitrage.

7.2 Stock index arbitrage and program trading.

7.3 Bond futures arbitrage.

7.4 Spot–Forward arbitrage in fixed-income markets.

7.5 Dynamic hedging with a Euro strip.

7.6 Dynamic duration hedge.

8. Swap Markets.

8.1 Swap-driven finance.

8.2 The anatomy of swaps as packages of forwards.

8.3 The pricing and hedging of swaps.

8.4 Swap spread risk.

8.5 Structured finance.

8.6 Equity swaps.

8.7 Commodity and other swaps.

8.8 Swap market statistics.

PART THREE: OPTIONS.

9. Financial Math III—Options.

9.1 Call and put payoffs at expiry.

9.2 Composite payoffs at expiry.

9.3 Option values prior to expiry.

9.4 Options, forwards and risk-sharing.

9.5 Currency options.

9.6 Options on non-price variables.

9.7 Binomial options pricing.

9.8 Residual risk of options: Volatility.

9.9 Interest-rate options, caps, and floors.

9.10 Swaptions.

9.11 Exotic options.

10. Option Arbitrage.

10.1 Cash-and-carry static arbitrage.

10.2 Running an option book: Volatility arbitrage.

10.3 Portfolios of options on different underlyings.

10.4 Options spanning asset classes.

10.5 Option-adjusted spread (OAS).

10.6 Insurance.

APPENDIX: CREDIT RISK.

11 Default Risk (Financial Math IV) and Credit Derivatives.

11.1 A constant default probability model.

11.2 A credit migration model.

11.3 Alternative models.

11.4 Credit exposure calculations for derivatives.

11.5 Credit derivatives.

11.6 Implicit credit arbitrage plays.

11.7 Corporate bond trading.

Index.