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By Robert Dubil

A really transparent method of featuring the advanced fabric. this is often my favourite publication with complicated assurance. writer makes use of loads of examples with genuine numbers in order that it really is more straightforward to appreciate what the numbers are and what they mean.

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Example text

For example, a money market desk arranges an issuance of short-term paper whose coupon depends on a stock index. It then arranges a trade between the customer and its swap desk to alter the interest rate exposure profile and between the customer and the equity derivatives desk to eliminate the customer’s exposure to equity risk. The customer ends up with low cost of financing and no equity risks. The dealer firm lays off the swap and equity risk with another institution. Hundreds of such intermarket transactions take place every day in the dealing houses in London, New York, and Hong Kong.

These rely on cost-of-carry arguments. Chapter 6 also develops further the concept of the yield curve by 24 An Arbitrage Guide to Financial Markets showing how forwards are incorporated into it. Chapter 9, ‘‘Financial Math III’’, starts with basic payoff diagrams and static arbitrage relationships for options. It then describes the details of option valuation models that rely on the notion of dynamic cash-and-carry replication of option payoffs. It draws the fundamental distinction between hedgers who manufacture payoffs and speculators who bet on future outcomes.

Each of the three parts of the book starts with a chapter containing a technical primer, followed by more descriptive chapters containing applications of the analytics in arbitrage-based trading strategies. The primers, labeled Financial Math I, II, and III, are intensely analytical, but at a mathematically low level. We avoid using calculus and instead rely on numerical examples of real financial transactions. This should help not only novice readers, but also readers with science backgrounds, who often follow the equations, but often find it difficult to relate them to actual money-making activities.

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