Derivatives Simplified: An Introduction to Risk Management

This timely book coincides with the introduction of derivatives or futures trading in the capital market and an increasing interest in the subject of derivatives in India. Derivatives are financial instruments or contracts, whose value is determined by the value of an underlying. They are used extensively the world over, for risk management as also for trading and speculative purposes. They are, however, double-edged weapons. Properly used, derivatives can effectively edge financial and other types of risks, while their improper use often results in financial catastrophe. A sound understanding of the fundamentals of derivatives is, therefore, very important for those participating in financial markets. This comprehensive book constitutes an excellent introduction to derivatives and their use in risk management. The authors provide exceptionally clear explanations of different derivative products, their individual characteristics, usage and pricing in a straightforward and effective manner. Starting with the underlying concepts behind derivatives, the authors explain what derivatives are and how they can decrease (or increase) risk and how they work. The authors draw on their considerable experience as money managers to discuss: The origin and growth of derivatives trading, Who uses it, when, why and how? Sources of financial risk and hedging The difference between forwards and futures, their respective markets, forward rate agreements (FRA) and pricing. Types of swaps and their economic rationale Options and their use, pricing and types of volatility. Management of risk and analysis of some select derivatives disasters. A significant feature of the book is that it allows the reader to progress from simple to complex products. The authors avoid the use of non-essential mathematics and instead provide the requisite maths and statistics in three appendices. Furthermore, the method of using each product is supported by easy to follow examples. This book will be of immense value to all finance professionals including practising bankers, risk managers in banks and financial institutions, stockbrokers, insurance personnel, mutual fund mangers and financial consultants. In addition, it will be a very useful text for various risk management courses in finance, management, commerce and economics, besides serving as a valuable reference for the staff training colleges of various organizations.