Synthetic and Structured Assets (The Wiley Finance Series)

281 Pages·2006·1.63 MB·English

by  Erik Banks

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Synthetic and Structured Assets
A Practical Guide to Investment and Risk
Erik Banks
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JWBK067-FM JWBK067-Banks December22,2005 7:49 CharCount=0
Synthetic and Structured Assets
i
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ForothertitlesintheWileyFinanceSeries
pleaseseewww.wiley.com/finance
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JWBK067-FM JWBK067-Banks December22,2005 7:49 CharCount=0
Synthetic and Structured Assets
A Practical Guide to Investment and Risk
Erik Banks
iii
JWBK067-FM JWBK067-Banks December22,2005 7:49 CharCount=0
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LibraryofCongressCataloging-in-PublicationData
Banks,Erik.
Syntheticandstructuredassets/ErikBanks.
p.cm.—(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN-13:978-0-470-01713-5(cloth:alk.paper)
ISBN-10:0-470-01713-9(cloth:alk:paper)
1.Securities. 2.Structurednotes(Securities) 3.Derivativesecurities. I.Title. II.Series.
HG4521.B3463 2006
332.63(cid:2)2—dc22 2005034995
BritishLibraryCataloguinginPublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
ISBN13 978-0-470-01713-5(HB)
ISBN10 0-470-01713-9(HB)
Typesetin10/12ptTimesbyTechBooks,NewDelhi,India
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Contents
Acknowledgements ix
Abouttheauthor xi
1 IntroductiontoSyntheticandStructuredAssets 1
1.1 Developmentofstructuredandsyntheticassets 2
1.2 Driversofmarketactivity 3
1.3 Newproductdesign 5
1.4 Overviewofthetext 7
2 FinancialBuildingBlocks 9
2.1 Introduction 9
2.2 Concepts 9
2.2.1 Risks 9
2.2.2 Timevalueofmoneyandinterestrates 11
2.3 Derivativeinstruments 16
2.3.1 Derivatives 16
2.4 Hostsecurities/liabilities 38
2.4.1 Publicnotes/shelfregistrations 38
2.4.2 Privateplacements 38
2.4.3 Transferableloans 39
2.5 Issuing/repackagingvehicles 39
2.5.1 Specialpurposeentities 40
2.5.2 Trusts 41
2.5.3 Investmentcompaniesandpartnerships 42
2.6 Financialengineeringandproductdesign 43
3 Callable,Puttable,andStrippedSecurities 45
3.1 Introduction 45
3.2 Developmentandmarketdrivers 45
3.3 Productmechanicsandapplications 47
3.3.1 Callablebonds 47
3.3.2 Puttablebonds 52
3.3.3 Strippedsecurities 53
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vi Contents
4 Mortgage-andAsset-backedSecurities 59
4.1 Introduction 59
4.2 Developmentandmarketdrivers 59
4.3 Productmechanicsandapplications 62
4.3.1 Mortgage-backedsecurities 62
4.3.2 Asset-backedsecurities 90
5 StructuredNotesandLoans 99
5.1 Introduction 99
5.2 Developmentandmarketdrivers 99
5.3 Productmechanicsandapplications 102
5.3.1 Generalstructuralissues 102
5.3.2 Interest-rate-linkednotes 104
5.3.3 Currency-linkednotes 107
5.3.4 Commodity-linkednotesandloans 109
5.3.5 Equity-linkednotes 110
5.3.6 Credit-linkednotes 113
6 CollateralizedDebtObligations 121
6.1 Introduction 121
6.2 Developmentandmarketdrivers 121
6.3 Productmechanicsandapplications 123
6.3.1 Generalstructuralissues 124
6.3.2 CashflowCDOsandmarketvalueCDOs 133
6.3.3 BalancesheetandarbitrageCDOs 134
6.3.4 StructuredandsyntheticCDOs 135
7 Insurance-linkedSecuritiesandContingentCapital 141
7.1 Introduction 141
7.2 Developmentandmarketdrivers 141
7.3 Productmechanicsandapplications 143
7.3.1 Insurance-linkedsecurities 144
7.3.2 Contingentcapitalstructures 153
8 ConvertibleBondsandEquityHybrids 163
8.1 Introduction 163
8.2 Developmentandmarketdrivers 163
8.3 Productmechanicsandapplications 165
8.3.1 Convertiblebondsandvariations 166
8.3.2 Bondswithwarrants 172
8.3.3 Buy/write(coveredcall)securities 173
8.3.4 Otherequityhybrids 177
9 InvestmentFunds 181
9.1 Introduction 181
9.2 Developmentandmarketdrivers 181
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Contents vii
9.3 Productmechanicsandapplications 184
9.3.1 Structure,diversification,andmanagement 184
9.3.2 Open-endfunds 186
9.3.3 Closed-endfunds 193
9.3.4 Hedgefunds 195
9.3.5 Exchange-tradedfunds 200
10 DerivativeReplication,Repackaging,andStructuring 205
10.1 Introduction 205
10.2 Developmentandmarketdrivers 205
10.3 Productmechanicsandapplications 207
10.3.1 Syntheticlongandshortoptionandswappositions 207
10.3.2 Multipleswap/optionpositions 214
10.3.3 Asset swaps, liability swaps, and callable/puttable asset swap
packages 231
10.3.4 Creditderivativesandsyntheticcreditpositions 238
11 Risk,Legal,andRegulatoryIssues 247
11.1 Introduction 247
11.2 Riskandfinancialcontrols 247
11.2.1 Market,liquidityandcreditriskmanagement 247
11.2.2 Internalfinancialandoperationalcontrols 248
11.2.3 Internalaudit 249
11.3 Legalcontrols 249
11.3.1 ISDAdocumentationframework 250
11.4 Regulatoryandaccountingissues 255
11.4.1 Regulatorycapital 255
11.4.2 Regulatoryreview 257
11.4.3 AccountingtreatmentunderFAS133andIAS39 257
SelectedReferences 261
Index 263