Financial Derivatives in Theory and Practice by P. J. Hunt
By P. J. Hunt
I do not comprehend why the former reviewer acknowledged the e-book includes no mathematical proofs, yet this assertion is totally fake. i've got the booklet in entrance of me right here, and it feels like the entire theorems are followed with whole proofs. i do not suggest to supply a whole evaluation right here, however the contents appears stable, and so does the alternative of issues. It definitely merits greater than 2 stars. whereas the extent of mathematical sophistication isn't really that of Karatzas & Shreeve's, it truly is definitely above the extent of loads of prople in finance other than people with a mathematical historical past. For a less complicated ebook it's your decision to learn Hull or whatever else (you have approximately 500,000 different books to choose between, isn't really that great?)
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Extra resources for Financial Derivatives in Theory and Practice
The coupon accrued is identical whatever current interest rates may be. It’s worth purchasing this book as it contains accessible accounts of a number of fixed income analytic techniques. THE GOVERNMENT BOND BASIS 43 certainty. So, if we now consider a 3-month forward contract on a bond against the current spot price of the same bond, the investor must assess: . the coupon income that would be received during the 3-month period; . the interest charge on funds borrowed during the 3-month period.
The market mechanism and continuous trading will ensure that the fair BOND FUTURES CONTRACTS 17 price is achieved, as arbitrage profit opportunities are eliminated. We can determine the bond future’s price given: . the coupon of the underlying bond, and its price in the cash market; . the interest rate for borrowing or lending funds, from the trade date to the maturity date of the futures contract. This is known as the repo rate. For the purpose of deriving this pricing model we can ignore bid–offer spreads and borrowing and lending spreads.
The fund manager will want to hedge against a rise in interest rates between now and the bond sale date, to protect the value of the portfolio. When putting on the hedge position the key is to trade the correct number of futures contracts. This is determined by using the hedge ratio of the bond and the future, which is a function of the volatilities of the two instruments. The number of contracts to trade is BOND FUTURES CONTRACTS 23 calculated using the hedge ratio, which is given by: Hedge ratio ¼ Volatility of bond to be hedged : Volatility of hedging instrument Therefore, one needs to use the volatility values of each instrument.