Mastering Financial Calculations

Success in today's sophisticated financial markets increasingly depends on a firm understanding of key financial concepts and mathematical techniques — these essential calculations can no longer be left to the 'rocket scientists'. This explains them in a clear and comprehensive way for a wide audience.

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 example 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.

Mastering Financial Calculations covers the full range of market instruments:

• Money markets and futures
• Zero-coupon analysis
• Interest rate and currency swaps
• Bond markets
• Foreign exchange
• Options

Mastering Financial Calculations is written by a market professional for the professional market, delivering definitive, practical techniques direct from the cutting edge.

• Part 1: The Basics
1. Financial Arithmetic Basics
• Some opening remarks on formulas
• Use of an 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-Forwards and Forward Rate Agreements (FRA)
• 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 of 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 and par yields
• Forward-forwards yields
• Summary
• 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 idea behind option pricing
• Pricing models
• OTC option vs. exchange-traded options
• The Greek letters
• Hedging with options
• Some "packaged" options
• Some trading strategies
• Some less straightforward options
• Exercises
• Part 5: Further Exercises, Hints and Answers
10. Further Exercises
11. Hints and Answers to Exercises
• Hints on exercises
• Answer to exercises
• Answers to further exercises
• 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: OSI (SWIFT) codes for currencies

All the nitty-gritty details you need to know to understand finance. Worth the money.