This practical manual will help bankers to innovate and sell useful financial products. Written by a leading expert in financial instrument innovation, this book will demystify key financial instruments, their structures, benefits, risks,and rewards. It examines the process of innovating and structuring successful instruments and sheds new light on the why of their development. Using worked examples and high-profile case studies, you will learn to successfully use and avoid the abuse of all types of derivative products.
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" It is sad to say that many books on the market that deal with derivatives are either overwhelmingly dull or over-whelmingly complex... Warren Edwardes' book strives to break with this tradition - and succeeds... His secret is simplicity. Key Financial Instruments is neither over long nor over complex. Running through the book is an unmistakable underlying sense of humour. In addition, Edwardes always grounds his text in reality."- FOW, November 2001
From the Inside Flap
Preface The international financial markets have seen a plethora of products over the last two decades. Many of them have gained a great deal of publicity but found little customer demand. Ultimately a good instrument is one that sells repeatedly, meeting a genuine customer requirement. Nevertheless, complex tailormade products developed can raise the profile of a bank and generate plain vanilla or standard unstructured business. Part I sets the scene, providing an introduction to the world of financial instruments and derivatives, some thoughts on how to capture new ideas and on what drives financial instrument innovation. Markets are not as global as they seem and the development process does not always spread from developed to emerging markets – Chapter 2, How to capture the big new IDEA, covers an ingenious mortgage product developed in South Africa in 1993. It was only launched in the UK with great fanfare in 1998. Part II looks at some key financial instruments seen in the development of the financial markets derivatives. This part is not designed to be exhaustive as dozens of books have covered the same ground, but provides a sufficient background to the following parts of the book. However, it covers the key financial instruments of forwards, futures, swaps and options as applied to the management of risk in interest rates, currencies, equity, commodities and inflation and looks at the construction of hybrid products using building blocks. Part II is rounded off with a brief look at capital market products and an in-depth analysis of derivatives for the retail client. In Part III, I present two case studies on the break forward and perpetual swaps, financial products I developed in the 1980s. The entire innovation process is described from concepts to creativity to communication and closing. There are very few genuine new financial products. Many products developed more than a decade ago are now finding themselves being re-invented. The product featured in the first case study, the break forward was re-invented in 1998. Amazingly this was done by the very same bank that originally created it. Part IV on risk management includes hedge choice and performance measurement, a substantial chapter on legal risk management by Iona Levine, who set up and heads the derivatives legal practice at Hammond Suddards and a chapter on the taxation aspects of derivatives and risk management. Part V looks at current developments and trends, featuring the new developments of credit derivatives and insurance derivatives, and also includes Chapter 13, Dangers and disasters; profits and principles', which looks at financial market ethical issues. The part closes with some crystal ball gazing at likely developments and a concluding section, 'Less technophilis – have faith in fools'. Derivatives were first constructed as a means of hedging risk. In fact they were known as 'hedging' or 'risk management' products developed before the 'D' word was coined in the mid-1980s. It is natural, therefore, for me to include as Appendix 1, 'Financial risk types'. Appendix 2 is 'Financial risk management instruments.' The list is not simply a dry shopping-list of financial products. It is an opinionated commentary with words of warning on these key instruments. This is not just a book about derivatives. The 'key financial instruments' described here include innovative cash instruments that may or may not have required derivatives in their construction. Appendix 3 is a glossary of 'Risk management terms' used elsewhere in the book or in the markets. Appendix 4 provides a detailed look at Islamic financial products because an objective look at developments in this market illustrates the thought and management processes required in financial instrument innovation. There are three kinds of lies - lies, damned lies and statistics - Benjamin Disraeli
Almost every financial markets book includes statistics on how much business in a certain type of bond or financial market derivative has grown exponentially over the past decade. This book does not contain such meaningless statistics of market volumes. Because of the volume of interbank trading and the fickleness of financial markets, such statistics which purport to measure liquidity cannot be used as a reliable guide to what end-users want to know. Can I get out of a position at a reasonable price when I want to? It is worth recalling that trading in derivatives with the London local authorities such as Hammersmith & Fulham also grew exponentially until they came grinding to a halt. And one of my products, the Scout generated several column inches of reporting and is featured in many a financial market dictionary. There was not a single Scout sold. History shows that it is also wise to be careful of official market statistics. There have been cases of interdealer circular transactions designed to inflate reported turnover. One such case I am aware of occurred in 1991. And it did not happen in emerging futures exchanges in Asia or Latin America. It took place in one of the world's major financial centres, London. So ignore total volume statistics, nearly all of which is interbank and provides little indication of underlying interest and the projected level of liquidity in a particular market required to ensure an orderly exit from a position. When you want to get out of a trade you may find that everybody else may also be rushing for the exit. This book will assist finance directors and corporate treasurers who are at the receiving end of sales pitches by structured derivatives marketers. It will help senior bankers to re-charge their creative force and help them to recognize past developments rather than re-invent wheels. It will clarify ideas perhaps not fully understood. Finance students and new bankers in their understanding of the financial instrument development process will also find this book useful, as will corporate and personal bankers and financial advisers who advise on products with embedded derivatives such as guaranteed investments or rate capped loans. Finally, all businessmen and business students will enhance their understanding of the creativity process in, arguably, the most innovative sector of the economy. On a point of style, the masculine form is used for clarity rather than exclusion. He is used rather than alternating between he and she or using the inelegant s/he. It is important to clarify that this book offers generic insights and broad strategies, rather than specific investment, financing, taxation or legal advice. For such advice, the reader is strongly advised to consult a professional adviser. Warren Edwazdes, Serinyà, Girona, Spain
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Most Helpful Customer Reviews
4 of 4 people found the following review helpful:
5.0 out of 5 stars
lives up to the endorsements,
By henrywilliams@altavista.net (london) - See all my reviews
This review is from: Key Financial Instruments: Understanding and Innovation in the World of Derivatives (Hardcover)
This book certainly lives up to the endorsements on the jacket. It is a very readable and, dare I say it, gripping book. check out the book's preview site (I found it searching "Key financial instruments" on altavista.com) There is also a webpage for updates and reader FAQ.
3 of 3 people found the following review helpful:
5.0 out of 5 stars
readable from cover to cover,
By george simmons (london) - See all my reviews
This review is from: Key Financial Instruments: Understanding and Innovation in the World of Derivatives (Hardcover)
The book is readable from cover to cover. And don't stop at the appendices. They too contain useful insights.
3 of 3 people found the following review helpful:
5.0 out of 5 stars
different from the usually dry "textbooks".,
By emzurita@altavista.net (barcelona) - See all my reviews
This review is from: Key Financial Instruments: Understanding and Innovation in the World of Derivatives (Hardcover)
I'm a lawyer and was looking for an introduction to the financial markets. This book is very different from the usually dry "textbooks". It is full of anecdotes that brings the subject of derivatives to life. I strongly recommend it.
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