Table of Contents
Preface xiii
A Comment on the Events of 2008 xxiii
Acknowledgments xxv
Part One What Is a Stock? 1
Chapter 1 Equity Fundamentals (Part 1): Introduction to Financial Statements 3
Introduction 3
Equity and Corporation 4
Introduction to Financial Statements 5
The Balance Sheet 6
The Income Statement 15
Statement of Cash Flows 20
Summary 24
Chapter 2 Equity Fundamentals (Part 2): Financial Ratios, Valuation, and Corporate Actions 27
Introduction 27
Financial Ratios 28
Growth and Value 38
Bloomberg 39
Valuation 40
Technical Analysis 51
Corporate Actions 54
Summary 64
Part Two Products and Services 67
Chapter 3 Cash Market 69
Introduction 69
How a Stock Exchange Functions 69
Exchange Structure 76
Order Types 81
How the Cash Trading Business Works 102
Communication 112
Purchasing a Stock in a Foreign Currency 115
Summary 121
Chapter 4 Equity Indices 123
Introduction 123
Index Construction 125
What an Index Doesn’t Tell Us 129
Valuation and Calculation 131
Replicating Portfolio 134
Trading an Index Portfolio 136
Index Changes 139
Index Dividend Points 142
Total Return Index Calculation 144
Multicurrency Indices 145
Equity Indices in Practice 147
International Indices 156
Summary 165
Chapter 5 Program Trading 167
Introduction 167
Explanation of a Sample Trade 173
When Is Program Trading More Beneficial? 182
Portfolio Analytics 184
Transition Management 189
Principal Trades 191
Summary 201
Chapter 6 Exchange-Traded Funds (ETFs) 203
Introduction 203
Trading Mechanics 205
Net Asset Value (NAV) 207
Popularity 208
Trading versus Holding 212
ETFs in Practice 214
Summary 214
Chapter 7 Forwards and Futures 217
Introduction 217
Calculation of Fair Value 219
Futures 223
Index Arbitrage 233
The Futures Roll 240
Exchange for Physical (EFP) 245
Basis Trades 254
Futures Contracts in Practice 259
Technical Comment on the Accuracy of Approximations 263
Summary 264
Chapter 8 Swaps 267
Introduction 267
Motivation for a Swap 267
A Long Equity Swap Example 269
The Swap in Detail: Definitions and Terminology 272
Calculation of Payments 277
Short Swap 279
Back-to-Back Swaps 280
Swaps as a Trading Tool 281
A Comment on Hedging 286
Swap Valuation: Accrual versus NPV 287
Currency Exposure 289
ISDA 293
Risks and Other Considerations 294
Summary 296
Chapter 9 Options (Part 1) 299
Introduction 299
Definitions and Terminology 300
Payoff Structure 301
Option Values Prior to Maturity 311
Quantitative Considerations 323
The Black-Scholes Derivation 326
Types of Volatility 337
Summary 341
Chapter 10 Options (Part 2) 343
Volatility Trading 343
Option Sensitivities: The “Greeks” 354
Implied Volatility Revisited 374
OTC and Exotic Options 377
Summary 383
Chapter 11 The Trading Floor 385
Introduction 385
Organization of the Sales and Trading Businesses 386
Other Groups 390
Summary 404
Part Three Economics 405
Chapter 12 Macroeconomics for Trading and Sales 407
Introduction 407
Capital Asset Pricing Model (CAPM) 408
Overview of Macroeconomics 408
The Fed 417
Moving beyond the Big Three: Other Macroeconomic Concepts 424
Other Variables 426
A Final Observation 428
Summary 429
Chapter 13 Economic Data Releases 431
Introduction 431
Preliminary Definitions 433
Principal U.S. Economic Indicators 436
Rest of the World Economics 456
Europe 457
European Economic Statistics 462
Asia 466
The Market’s Reaction Function 471
What the Market Tells Us about the Economy 476
Summary 480
Appendix Mathematical Review 481
Introduction 481
Functions 482
Compound Interest and Exponential Growth 483
Calculus 487
Random Variables, Probability, and Statistics 494
Summary 505
Notes 507
About the Author 519
Index 521
