Managing risk with financial futures: hedging, pricing, and arbitrage
Today's fast-changing markets are forcing financial institutions, investors and corporations to bear more risk than ever before. A miscalculation or a surprise move in interest rates or foreign currencies can wreak havoc on an institution's bottom line and competitive posture. Despite these perils, there is a shroud of mystery surrounding the very instruments designed to manage these risks - financial futures. Managing Risk with Financial Futures sheds much-needed light on financial futures. It describes how financial futures work and how they can be used to manage the risks associated with today's volatile financial markets. In a logical, step-by-step approach, noted financial futures authority Robert Daigler thoroughly explains every aspect of these fascinating instruments, from pricing to arbitrage to risk management. This book is the most comprehensive and authoritative overview of the financial futures markets ever written. Broad topics addressed include: the mechanics and regulation of the futures markets; pricing and arbitrage of financial futures; characteristics of interest rate, stock index and currency futures; and hedging and risk management strategies. After explaining the principles that underlie the financial futures markets, Dr. Daigler discusses specific risk management strategies. He shows how financial futures can be used to hedge fixed income and equity portfolios, asset/liability gaps, and corporate borrowing costs. In addition, he reveals special hedging applications for insurance companies. Managing Risk with Financial Futures goes much further than any other book in explaining how futures can be used safely to reduce risk and bolster returns. Such complex topicsas duration-based hedging, immunization and hedge ratios are addressed fully, from both a theoretical and practical point of view. Financial futures are a supremely important part of the financial world. Never before have they been written about with such depth and clarity.
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Quotations Characteristics and Concepts
Terminology and Concepts for Futures Markets
PRICING AND ARBITRAGE
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arbitrage profits arbitrage transaction arbitrageur basis points basis risk bond portfolio bond price cash and futures cash asset cash bond cash flows cash index cash instrument cash market cash position cash price cash T-bill change in interest Chapter conversion factor corporate cost of carry coupon coupon bonds creates currency futures delivery options determine difference dollar duration employed Equation Eurodollar example financial futures financial institutions financing rate forecasts forward contract forward rate funds futures and cash futures arbitrage futures contract futures expiration futures hedge futures markets futures position futures price hedge ratio hedger hedging effectiveness immunization investment Journal of Futures liabilities Macaulay duration margin MMCDs period portfolio insurance portfolio manager price changes procedure program trading provides pure arbitrage quasi-arbitrage regression repo rate risk-return sell short hedge short-term stock index futures strategy T-bill futures T-bond futures transactions costs Treasury volatility yield curve yield to maturity