Derivates Unlocked: A Practitioner's Perspective offers the reader a practical explanation of the key concepts underpinning financial derivatives. Resolutely selective and user-friendly, this book constitutes an introduction to the basic pricing, design and use cases of derivatives products in modern global finance.
Derivates Unlocked: A Practitioner's Perspective offers the reader a practical explanation of the key concepts underpinning financial derivatives. Resolutely selective and user-friendly, this book constitutes an introduction to the basic pricing, design and use cases of derivatives products in modern global finance.
The book is articulated around two parallel streams of content. On the one hand, the Derivatives Toolbox comes as a set of calculation and pricing rules behind the building blocks of most derivatives products, such as discounting, duration, interest rates and credit default swaps, forwards and options. The methodology is approachable, simplified whenever possible, and does not require advanced mathematical training.
On the other hand, the Case Studies, largely inspired by real European corporate finance and risk management situations, allow the reader to make explicit use of the design and pricing principles learned as they progress through the Toolbox and to grasp the effective power of derivatives solutions.
Features:
- Easy to follow for non-specialists, helping them build a solid and empirical foundation to encourage continued learning.
- Provides a unique and balanced combination between learning essential pricing tools for the main derivatives products and the real-life applications of the technology across corporate and financial institutions.
- Contains numerous case studies and other support material making it suitable for both students and practitioners.
Introduction. What to Expect. The Toolbox. The Case Studies. Defining
Financial Derivatives. The Derivatives Marketplace Structure. Market Size.
Chapter
1. The Toolbox: Risk-Free Rate and Discounting. 1.1 The Derivatives
Risk-Free Rate. 1.2 Compounding and Present Value Calculation. 1.3 The Case
of Discounting Bond Cash Flows. 1.4 Discount Factors. 1.5 Zero-Coupon
Discounting.
Chapter
2. The Toolbox: Duration and Convexity. 2.1 The Case of
Fixed Rate Bonds. 2.2 From Fixed Rate Bonds to Discrete Cash Flows. 2.3
Convexity of Fixed Cash Flows. 2.4 The Case of the Austria Bond 2.1% due
2117.
Chapter
3. The Toolbox: Interest Rate Swaps. Introduction. 3.1 Fix to
O/N Index Swap. 3.2 Forward-Starting Floating Rate Indices. 3.3 IRS as a Risk
Transfer Tool. 3.4 Unwinding an Interest Rate Swap. 3.5 Terminating a Bond +
Swap Financing. 3.6 RFR and IBOR Swap Curves.
Chapter
4. Case Study: Bond
Portfolio Duration Hedging. 4.1 The Bond Portfolio DV01. 4.2 Swaps PV01. 4.3
Calibrating the Fix Paying Swaps.
Chapter
5. Case Study: Synthetic Fixed Rate
Bond Financing. 5.1 Introduction. 5.2 Loan + Swap Versus Bond Arbitrage. 5.3
Conclusions.
Chapter
6. The Toolbox: Forward Prices. Introduction. 6.1 The
Case of Interest Rates. 6.2 A Foreign Exchange Example. 6.3 The Cost of Carry
Replication. 6.4 Forward Prices Across Asset Classes. 6.5 Shape and Meaning
of Forward Curves. 6.6 Combining Forwards Across Asset Classes: The Oilco
Example.
Chapter
7. The Toolbox: Credit Default Swaps. 7.1 The Credit Risk
Premium. 7.2 Single-Name Credit Default Swaps. 7.3 CDS Indices. 7.4 Portfolio
Credit Default Swaps.
Chapter
8. The Toolbox: Credit and Other Mark-to-Market
Induced Risks. 8.1 The Issue at Hand. 8.2 Assessing Potential Mark-to-Market
Changes. 8.3 Boiling Down MtM Drivers. 8.4 Hedge Accounting Key Principles.
8.5 Management of Derivatives-Induced Credit Risk. 8.6 Additional
Considerations on MtM Risks.
Chapter
9. Case Study: BigCo's Cross-Currency
Swaps and Synthetic Euro Financing. 9.1 Introduction. 9.2 Proposed Solution.
9.3 Simplified Pricing Methodology. 9.4 Spreadsheet-Based Pricing. 9.5 The
Case of Liberty Global.
Chapter
10. Case Study: TNZ's Strategic Balance Sheet
FX Hedging. 10.1 Introduction. 10.2 Nature of the Balance Sheet FX Risk. 10.3
Possible Solutions. 10.4 The Economics of X-Ccy Swaps and Forwards. 10.5
Accounting Analysis. 10.6 The Hedging Cost Trade-Off. 10.7 Execution
Considerations. 10.8 The Ukraine Invasion.
Chapter
11. Toolbox: Probability
Distribution of Asset Returns. Introduction. 11.1 Continuous Compounding.
11.2 The Example of the S&P 500 Daily Returns. 11.3 Normal Distributions:
Summary Description and Attributes. 11.4 Using the Normality of Log Returns
to Assess Risks.
Chapter
12. Toolbox: Introduction to Options. 12.1 An
Intuitive Approach to Option Pricing. 12.2 Principles of Options Contracts.
12.3 Standard Option Pay-Off Representations. 12.4 Using Models to Price
Options. 12.5 The Greeks. 12.6 Delta Hedging. 12.7 Non-Standard Options. 12.8
At-The-Money-Forward Options. 12.9 Non-ATMF Option Pricing.
Chapter
13. Case
Study: Delco's Hedging and Financing of Single Stock Stake. 13.1
Introduction. 13.2 Pricing of the Collar Strategy. 13.3 NewTech Shares Exit
Price Scenarios. 13.4 Execution Considerations. 13.5 Financing. 13.6
Conclusion.
Chapter
14. Case Study: Accelerated Vodafone's Stake Acquisition
and Financing. 14.1 Initial Block of Shares. 14.2 Collar Structure. 14.3
Financing.
Chapter
15. Case Study: TopCo's Leveraged Employee Shareholding
Plan. 15.1 Introduction. 15.2 Leveraged Investment in Shares. 15.3 Pricing of
the ESF Scheme. 15.4 TopCo Call Options Back-of-the-Envelope Pricing. 15.5
Execution Considerations. 15.6 The French Market for Leveraged Employee
Plans.
Chapter
16. Tool Box: Structured Notes. 16.1 Securitising Derivatives.
16.2 Capital Protected Notes. 16.3 Capital-at-Risk Structures.
Chapter
17.
Case Study: NewBank's Synthetic Securitisation and Credit-Linked Notes. A
Note on Banks' Balance Sheets. 17.1 Basics on Regulatory Capital. 17.2 The
Case of NewBank. 17.3 Synthetic Securitisation Key Principles. 17.4 SPV-Based
Funded Structure. 17.5 Credit Protection Agreement. 17.6 NewBank Regulatory
Capital Benefits. 17.7 Risk and Reward: The View Point of the CLN Investor.
17.8 The Case of PGGM.
Chapter
18. Case Study: NewBank's Collateral Exchange
Financing. 18.1 NewBanks Funding Paradigm. 18.2 Transaction Structure. 18.3
Transaction Terms. 18.4 Pricing and Relative Value.
Philippe Dufournier has spent over 30 years in investment banking in London with a career focused on the structuring, sales and origination of innovative derivatives and capital markets transactions for European corporates and financial institutions.
Throughout the 1990s, he gained significant expertise in derivatives structuring and sales whilst at Bankers Trust in London, a pioneer of the global derivatives markets. He joined Lehman Brothers in 2001 as Head of European Derivatives Structuring and Sales where he founded the Structured Solutions Group. In 2007, he was made Head of Global Finance for EMEA, in charge of Primary Markets Origination and Private Derivatives Solutions. He kept that role as he transitioned to Nomura International in 2008. In 2015 he joined Mediobanca, first as Head of Corporate Lending and Acquisition Finance and then as Head of the UK Branch until 2020.
During his career, Philippe directly contributed to the training and mentoring of over 20 classes of summer interns, analysts and associates. Over the last 3 years, he has been teaching financial derivatives courses in the Finance Masters of the Institute for Finance and Technology at University College London.
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