Summary |
There are many classes of derivatives. This book focuses on four types: (1) options, (2) futures, (3) interest rate swaps, and (4) mortgage derivatives. While generally separable into categories, the instruments that make up these classes often complete for the risk manager’s attention. In a wide range of situations and with varying degrees of effectiveness, an instrument can be found in each of these categories that solves the risk transference problem. For example, a firm that finance its fixed rate assets with floating rate debt is concerned about a near-term rate rise and may choose to transfer that risk through futures, interest rate options, or a swap. A thrift institution with sizable mortgage holdings, concerned that a drop in rates will force the reinvestment of the prepaid balances at unfavorably low rates, can transfer that risk with one of any number of mortgage derivative instruments. Ultimately, the selection of a particular instrument depends upon each instrument’s payoff characteristics and its cost (pricing) compared to all other competitive instruments. To make an intelligent selection-that is, to know how much of the desired payoff profile to part with in exchange for a better price-one must understand each instrument, how to use it, and how to price it. This is what the book is about.
|
