Derivatives Markets (3rd Edition) (Pearson Series in by Robert L. McDonald

By Robert L. McDonald

To be financially literate in today’s industry, one should have an effective realizing of derivatives options and tools and the makes use of of these tools in corporations.  The 3rd variation has an obtainable mathematical presentation, and extra importantly, is helping readers achieve instinct by way of linking theories and thoughts including an enticing narrative that emphasizes the middle monetary ideas underlying the pricing and makes use of of derivatives.

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Extra resources for Derivatives Markets (3rd Edition) (Pearson Series in Finance)

Example text

The Averages are largely unaware of the ways in which global financial markets affect their lives. Here are a few: . The Averages invest their savings in mutual funds that own stocks and bonds from companies around the world. The transaction cost of buying stocks and bonds in this 9 10 Chapter 1. Introduction to Derivatives way is low. Moreover, the Averages selected mutual funds that provide diversified investments. 10 . . The Averages live in an area susceptible to tornadoes and insure their home.

For example, financial firms, such as banks, are highly regulated and have capital requirements. They may have assets and liabilities in different currencies, with different maturities, and with different credit risks. Hence banks could be expected to use interest rate derivatives, currency derivatives, and credit derivatives to manage risks in those areas. Manufacturing firms that buy raw materials and sell in global markets might use commodity and currency derivatives, but their incentives to manage risk are less clear-cut because they are not regulated in the same ways as financial firms.

As we’ve seen in the example of the Averages, financial markets enable at least some of these risks to be shared. Risk arises from natural events, such as earthquakes, floods, and hurricanes, and from unnatural events such as wars and political conflicts. Drought and pestilence destroy agriculture every year in some part of the world. Some economies boom as others falter. On a more personal scale, people are born, die, retire, find jobs, lose jobs, marry, divorce, and become ill. Given that risk exists, it is natural to have arrangements where the lucky share with the unlucky.

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