"Mastering Financial Calculations" starts by introducing the fundamentals of financial market arithmetic, including the core concepts of discounting, net present value, effective yields and cashflow analysis, and then shows you step-by-step how to master the essential calculations and financial techniques for using the full range of products in the markets. The links between the different instruments and the resulting arbitrage opportunities are fully explored, together with the practical difficulties. Making use of many worked examples and practical exercises, the book goes on to explain concepts such as forward pricing, duration analysis, the different approaches to bond yield calculations, zero-coupon and yield curve analysis, swap valuation and option pricing in a clear and accessible way, at each stage illustrating their application using a programmable calculator. Whether you are a trader, fund manager, corporate treasurer, programmer, accountant, risk manager or market student, this book will give you the ability to manipulate and apply the relevant techniques with speed and confidence in your marketplace. The book includes essential course material and practice exercises for ACI qualifications.
1. Financial Arithmetic Basics
Some opening remarks on formulas
Use of HP calculator
Simple and compound interest
Nominal and effective rates
Future value/present value; time value of money
Discount factors
Cashflow analysis
Interpolation and extrapolation
Exercises
PART 2: Interest Rate Instruments
2. The Money Market
Overview
Day/year conventions
Money market instruments
Money Market calculations
Discount instruments
CDs paying more than one coupon
Exercises
3. Forward-forward and Forward Rate Agreements (FRAs)
Forward-forwards, FRAs and futures
Applications of FRAs
Exercises
4. Interest Rate Futures
Overview
Exchange structure and margins
Futures compared with FRAs
Pricing and hedging FRAs with futures
Trading with interest rate futures
Exercises
5. Bond Market Calculations
Overview of capital markets instruments
Features and variations
Introduction to bond pricing
Different yield measures and price calculations
A summary to the various approaches to price / yield
Duration, modified duration and convexity
Bond futures
Cash-and-carry arbitrage
Exercises
6. Zero-Coupon Rates and Yield Curves
Zero-coupon yields a and par yields
Forward-forward yields
Longer-dated FRAs
Exercises
PART 3: Foreign Exchange
7. Foreign Exchange
Introduction
Spot exchange rates
Forward exchange rates
Cross-rate Forwards
Short dates
Calculation summary
Value dates
Forward-forwards
Time options
Long-dated forwards
Synthetic agreements for forward exchange (SAFEs)
Arbitraging and creating FRAs
Discounting future foreign exchange risk
Exercises
PART 4: Swaps and Options
8. Interest Rate and Currency Swaps
Basic concepts and applications
Pricing
Valuing swaps
Hedging an interest rate swap
Amortising and forward-start swaps
Currency swaps
Exercises
9. Options
Overview
The ideas behind option pricing
Pricing models
OTC options vs. exchange-traded options
The Greek letters
Hedging with options
Some 'packaged' options
Some trading strategies
Some less straightforward options
Some less straightforward options
Exercises
PART 5: Practice ACI Exam, Hints and Answers
10. A Complete Practice Exam
11. Hints and Answers to Exercises and Practice Exam
Hints on exercises
Answers to exercises
Answers to practice exam
Appendix 1: Using an HP calculator
Appendix 2: A summary of market day/year conventions
Appendix 3: A summary of calculation procedures
Appendix 4: Glossary
Appendix 5: ISO (SWIFT) codes for currencies
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