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by Cara M. Marshall, Tanya Beder
Financial Engineering: The Evolution of a Profession
Cover
Series
Title Page
Copyright
Dedication
Introduction
THEME 1: DERIVATIVES WILL CONTINUE TO PLAY A CRITICAL, VALUABLE, AND PERMANENT ROLE IN THE GLOBAL CAPITAL MARKETS
THEME 2: RISK MEASUREMENT AND MANAGEMENT WILL CHANGE SUBSTANTIALLY FOLLOWING LESSONS LEARNED FROM THE MELTDOWN THAT MANIFESTED IN 2007
THEME 3: FINANCIALLY-ENGINEERED SECURITIES AND STRATEGIES WILL EVOLVE TO INCLUDE MORE TRANSPARENCY AND BETTER WARNING LABELS
THEME 4: THE DEGREE TO WHICH INCREASED REGULATION WILL STYMIE FINANCIAL ENGINEERING AND INNOVATION IS UNCERTAIN
Part I: Overview
Chapter 1: The History of Financial Engineering from Inception to Today*
WHAT IS FINANCIAL ENGINEERING?
WHY DIDN'T FINANCIAL ENGINEERING START SOONER?
INCEPTION AND THE EARLY STAGES (1970 TO 1997)
THE MASSIVE GROWTH PERIOD (1998 TO 2006)
THE RATIONALIZATION PERIOD (2007 TO DATE, ONGOING)
HISTORICAL READINGS
ABOUT THE AUTHOR
Chapter 2: Careers in Financial Engineering
INTRODUCTION
A WORLD OF OPPORTUNITIES
FUNCTIONAL AREAS
SPECIFIC CAREER PATHS
USING THE TABLES
COMPUTER PROGRAMMING SKILLS
CONCLUSION
ABOUT THE AUTHOR
Chapter 3: A Profile of Programs and Curricula with a Financial Engineering Component
INTRODUCTION
BACKGROUND INFORMATION ON FINANCIAL ENGINEERING PROGRAMS
CURRICULA
JOB PLACEMENT
CONCLUSION
APPENDIX: PROGRAMS CONTACTED
ABOUT THE AUTHOR
Part II: Financial Engineering and the Evolution of Major Markets
Chapter 4: The Fixed Income Market
INTRODUCTION
THE CASH MARKETS
DERIVATIVES MARKETS
PRICE–YIELD RELATIONSHIP
THE YIELD CURVE
INTEREST RATE MODELS
ABOUT THE AUTHOR
Chapter 5: The U.S. Mortgage Market
INTRODUCTION
A BRIEF HISTORY OF THE ORIGIN OF THE MARKET FOR MORTGAGE-BACKED SECURITIES
AGENCY MORTGAGE PASS-THROUGH SECURITIES
PRICING MORTGAGE-BACKED SECURITIES
BEYOND PASS-THROUGHS: COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
THE NON-AGENCY MARKET
FINANCIAL ENGINEERING AND THE FUTURE OF THE SECONDARY MORTGAGE MARKET
A NOTE ON THE GLOBAL GROWTH OF THE MORTGAGE MARKET
ABOUT THE AUTHOR
Chapter 6: The Equity Market
INTRODUCTION
CASH MARKET—ORIGINS
EQUITY DERIVATIVES
DECLINING TRADING COSTS INCREASE FINANCIAL ENGINEERING OPPORTUNITIES, AND FINANCIAL ENGINEERING OFTEN REDUCES TRADING COSTS
ARBITRAGE COMPLEXES
EQUITY STRUCTURED PRODUCTS AND EXCHANGE-TRADED FUNDS (ETFS)
PORTFOLIO TRADING AND STOCK INDEX FUTURES CONTRACTS
SHAREHOLDER PROTECTION
TAX EFFICIENCY
THOUGHTS ON IMPROVING ETFS
ABOUT THE AUTHORS
Chapter 7: The Foreign Exchange Market
INTRODUCTION
HOW FOREX IS TRADED: THE INSTITUTIONAL FRAMEWORK
HOW ARE EXCHANGE RATES DETERMINED?
DERIVATIVES AND THE PRIVATIZATION OF FOREX RISK MANAGEMENT
ABOUT THE AUTHOR
Chapter 8: The Commodity Market
HISTORICAL PERSPECTIVE
EXCHANGE-TRADED VERSUS OTC COMMODITY PRODUCTS
FUTURES CONTRACTS
RISK MANAGEMENT WITH COMMODITY FUTURES/OPTIONS
COMMODITY SWAPS
COMMODITY OPTIONS
FINANCIAL ENGINEERING IN COMMODITIES MARKETS
COMMODITY ETFS
REGULATION OF COMMODITY MARKETS
A FINANCIAL ENGINEERING EXERCISE: SYNTHESIZING BARTER
ABOUT THE AUTHORS
Chapter 9: Credit Markets
INTRODUCTION
PREDECESSOR PRODUCTS
APPLICATIONS
FIRST-GENERATION PRODUCTS: 1992–2000
SECOND-GENERATION PRODUCTS: 2001–2007
GOING FORWARD
ABOUT THE AUTHOR
Part III: Key Applications of Financial Engineering
Chapter 10: Securitized Products
INTRODUCTION
ORIGINS OF SECURITIZATION
MARKET SIZE AND SEGMENTS
TRANSACTION PROCESS
CREDIT RATINGS
ABOUT THE AUTHOR
Chapter 11: Structured Products
INTRODUCTION
A HISTORY
EQUITIES
CREDIT
CONCLUSION
ABOUT THE AUTHOR
Chapter 12: Thoughts on Retooling Risk Management
INTRODUCTION
REVISITING THE TONE AT THE TOP OF THE ORGANIZATION
CONDUCT A BOARD-LEVEL REVIEW OF VAR AND STRESS TESTING
ADDING WARNING LABELS TO RISK REPORTS
CONCLUSION AND AN ENDNOTE
ABOUT THE AUTHORS
Chapter 13: Financial Engineering and Macroeconomic Innovation
INTRODUCTION
A REFRESHER ON MONETARY POLICY
POLICY TOOLS OF CENTRAL BANKS
THE FEDERAL RESERVE AND THE LIQUIDITY CRISIS
EXPRESSING A VIEW: INVESTING WITH PRICE INSTABILITY
MACROECONOMIC DERIVATIVES
ABOUT THE AUTHORS
Chapter 14: Independent Valuation for Financially-Engineered Products
INTRODUCTION
THE UNIVERSE OF FINANCIALLY ENGINEERED PRODUCTS
THE FAIR VALUE HIERARCHY
MODELING ALTERNATIVES: CDOS
INCORPORATING THE EFFECTS OF ILLIQUIDITY IN VALUATION
THE ROLE OF THIRD-PARTY VALUATION PROVIDERS
CONCLUSION
ABOUT THE AUTHORS
Chapter 15: Quantitative Trading in Equities
INTRODUCTION
STRUCTURE OF QUANTITATIVE EQUITY MODELS
OUTLOOK
ABOUT THE AUTHOR
Chapter 16: Systematic Trading in Foreign Exchange
INTRODUCTION
IS SYSTEMATIC TRADING JUST FOR GEEKS AND QUANTS?
WHAT CAN SYSTEMATIC TRADING ANALYSIS DO FOR ME?
ADVANTAGES AND LIMITATIONS OF SYSTEMATIC TRADING
WHAT IS NECESSARY FOR A SYSTEM TO WORK?
WHAT CAN I REASONABLY EXPECT?
USES OF SYSTEMATIC TRADING METHODS
EVALUATION OF SYSTEMATIC TRADING IDEAS AND PRODUCTS
ABOUT THE AUTHORS
Part IV: Case Studies in Financial Engineering: The Good, the Bad, and the Ugly
Chapter 17: Case Studies Introduction
INTRODUCTION
ABOUT THE AUTHOR
Chapter 18: Mortgage Case Studies: Countrywide and Northern Rock
CASE STUDY ONE: COUNTRYWIDE FINANCIAL1
CASE STUDY TWO: NORTHERN ROCK2
ABOUT THE AUTHOR
Chapter 19: Derivatives Case Studies: SocGen, Barings, and Allied Irish/Allfirst
CASE STUDY ONE: SOCIéTé GéNéRALE1
CASE STUDY TWO: BARINGS2
CASE STUDY THREE: ALLIED IRISH/ALLFIRST3
ABOUT THE AUTHOR
Chapter 20: Fixed Income Case Study, Swap Market: The Allstate Corporation
THE ALLSTATE CORPORATION1
ABOUT THE AUTHOR
Chapter 21: Lessons from Funds: LTCM, Florida, and Orange County
CASE STUDY ONE: LONG-TERM CAPITAL MANAGEMENT1
CASE STUDY TWO: FLORIDA STATE BOARD OF ADMINISTRATION2
CASE STUDY THREE: ORANGE COUNTY MARKET RISK EVENT3
ABOUT THE AUTHOR
Chapter 22: Credit Derivatives Case Studies: AIG and Merrill Lynch
CASE STUDY ONE: AMERICAN INTERNATIONAL GROUP (AIG)1
CASE STUDY TWO: MERRILL LYNCH2
ABOUT THE AUTHOR
Part V: Special Topics in Financial Engineering
Chapter 23: Performance Fees
INTRODUCTION
PERFORMANCE FEES
HEDGE FUND VERSUS MUTUAL FUND FEES
ABOUT THE AUTHOR
Chapter 24: Musings About Hedging
THE HEDGING ORIENTATION
THE TRADING ORIENTATION
THE ACCOUNTING ORIENTATION
CONCLUSION
ABOUT THE AUTHOR
Chapter 25: Operational Risk
INTRODUCTION AND CURRENT STATE OF KNOWLEDGE
A BRIEF HISTORY OF THE BUSINESS OF OPERATIONAL RISK
OVERVIEW OF SUBJECT
MORE ON HEDGE FUNDS AND OPERATIONAL RISK
MITIGATING OPERATIONAL RISK
ABOUT THE AUTHOR
Chapter 26: Legal Risk
INTRODUCTION
KEY LEGAL RISKS
MITIGATING LEGAL RISK
THE REGULATORY LANDSCAPE
REGULATORY EVOLUTION
ABOUT THE AUTHOR
Chapter 27: Portable Alpha
INTRODUCTION
WHAT IS PORTABLE ALPHA?
THE APPEAL OF PORTABLE ALPHA
ABOUT THE AUTHORS
Chapter 28: The No-Arbitrage Condition in Financial Engineering: Its Use and Misuse
INTRODUCTION
THE OPTIMIZATION FORMULATION
POSSIBLE SOLUTIONS
MARKET EQUILIBRIUM
THE DUAL PROBLEM
PRICING RELATIONSHIPS
PERFECT CAPITAL MARKETS
A TWO-STATE, SINGLE-PERIOD EXAMPLE
INCORPORATING THE EVENT OF DEFAULT
A MULTIPERIOD FRAMEWORK
INCORPORATING DEFAULT
CONCLUSION
ABOUT THE AUTHOR
Chapter 29: Influencing Financial Innovation: The Management of Systemic Risks and the Role of the Public Sector
INTRODUCTION
FINANCIAL MARKET INNOVATION
INCOMPLETE MARKETS FOR INSURANCE RISK
PUBLIC POLICY CONSIDERATIONS
CONCLUSION
ABOUT THE AUTHORS
Part VI: Appendices
Appendix A: IT Tools for Financial Asset Management and Engineering
INTRODUCTION
BASIC MS-EXCEL® TOOLS
MATHEMATICA®, GAUSS™, MAPLE®, AND MATLAB®2
BLOOMBERG®3, INFORMATION, AND THE API
MORE COMPLEX MS-EXCEL COMPUTATIONS
MONTE CARLO SIMULATION
CONCLUSION
READER RESOURCES
ABOUT THE AUTHOR
Appendix B: About the Companion Website
MORE ABOUT THE SURVEY
About the Editors
Index
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