A Financial Bestiary

Cover for "A Financial Bestiary"

Cover for “A Financial Bestiary”

This book now has eight five star ***** reviews on Amazon.

My book helps people make the leap from finance as it appears in academic textbooks to finance as it is used in practice in investment banks, pension funds and hedge funds. It is ideal for people just starting out in their financial career or those who have some financial experience who want to broaden and refresh their knowledge. This is a book that you will use as a reference for years to come.

The book contains over a hundred diagrams and graphs and 82 worked exercises with full solutions. It is over 500 pages long and took five years to write. If you want more detail on any topic please get in touch and, although I won’t make any promises, it may go into the next edition.

A bestiary was a medieval book containing pictures and descriptions of mythical beasts each with its own moral tale to edify the reader. This is a bestiary of finance, and as such starts with a picture book of jobs and traded instruments in finance. Then the “Foundations” section sets out the broad picture of who does what and why in financial markets. Finally there are detailed chapters on financial instruments grouped into sections on “Fixed Income”, “Credit”, and “Forwards, Futures and Options”. The book contains many figures and fully worked exercises to clarify the concepts.

What people are saying about the book

“Ramin Nakisa’s ‘Bestiary’ is written with engaging simplicity and considerable clarity, so that the reader is seduced into comprehending complex financial concepts before they realise what is happening to them. It is an essential guide for both the novice trying to understand the world of finance for the first time, and for the seasoned market professional trying to keep track of the ever more Byzantine range of products and concepts.”

Paul Donovan, Managing Director Global Economics at UBS

“Both easy to read and understand for beginners in the world of finance, and an excellent reference book for experienced professionals. It covers all the major financial instruments in summary and in reasonable depth, together with a good maths primer and a description of the parties who buy, sell and trade these instruments. Well recommended for anyone who wants to understand finance.” Amazon 5 out of 5 stars

“Generally finance and financial markets related books seems very academic, math-oriented and it gets a bit boring unless you have an exam to prepare for (even then……). However, Ramin’s book captures your attention and most importantly keeps it. You are always intrigued and wondering what’s next. Let me see if what does it have to say about X or Y or Z…..

Anyone with fundamental knowledge of maths can follow the easy lay out of the maths involved, and techniques used are brilliant. It is definitely not a book which will gather dust for a long time until you know things like the back of your palm (which will take a while, but journey would be smoother). I am just glad that amidst the desert of mostly topical and specialised books for which you probably need a PhD in Maths just to be able to read them, Ramin’s book is a refreshing Oasis…” Amazon 5 stars

“Despite having limited financial experience, and having read several other books claiming to ‘explain FX and options in a systematic and understandable way,’ no book comes close to Dr. Nakisa’s. Not only is it an understandable book, but it uses real life illustrations and modern-day pricing models to walk the reader through the fundamentals of everything to do with trading… The book is broken down into succinct, concise chapters and each one helps to build the full and complete picture… A big thumbs up from every standpoint!” Amazon 5 stars

I thoroughly enjoyed reading – and surprisingly understanding – A Financial Bestiary. Ramin’s depth of experience combined with his writing style and ability to convey complex messages simply makes this a must-read for anyone looking to expand their knowledge of the financial markets at a practical level. Amazon 5 stars

This book is excellent, it is clear that Ramin is an insider and understands the financial markets and instruments. For those who want an insider’s perspective a “must” read. Amazon 5 stars

This book provides an ideal insight into the world of finance, definitely a read for those wanting a simple step by step guide of finance. Amazon 5 stars

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Contents

Part I: The Bestiary The bestiary is split into two parts: a bestiary of roles and a bestiary of securities. I’ve tried to keep it to one page per role and security. In the bestiary of roles I have included a biography and description of someone who does that job, and asked them to describe what they do in their own words. The bestiary of securities is intended as a quick reference. If readers want more detail they can delve into the text of the book. Part II: Foundations
Chapter 1: The Big Picture This sets out the scaffold of concepts on which we can build our deeper understanding. For starters, what is investment? Who does it and what do they do? I try to explain who the players are and what they are trying to achieve, in particular the difference between alpha (market outperformance) and beta (market tracking). I also introduce the concepts of arbitrage and what we mean by risk and return and how investors can balance risk and return through asset allocation.Chapter 2: Institutions Here we list the institutional investors in the market. These are important players because they deal in large sizes and can single-handedly move markets. Institutions include central banks, pension funds, hedge funds, private equity, and governments.
Chapter 3: Mathematics Refresher The vast majority of finance can be understood using no more than multiplication, division, addition and subtraction. However some mathematical ideas crop up frequently such as descriptive statistics, probability distributions, Monte Carlo sampling, linear regression, and the sum of a geometric series. A common question in finance is: are these two distributions the same? We show how to quickly compare distributions graphically with some examples. Part III: Fixed Income
Chapter 4: Interest Rates In order to understand bonds and swaps it is important to understand the difference between fixed and floating cash flows and time value of money. We introduce the calculation of present value and future value using simple, compound and continuous rates. We introduce three kinds of rate: zero, par and forward and show how this trinity of rates is entangled by interest rate arbitrage. Then we meet some of the money market instruments that give rise to the three types of rate and how they can be used to build a yield curve.
Chapter 5: Bonds Bonds come in all shapes and sizes and we start by dissecting a real bond from a Bloomberg screen-shot. Then we see how bond prices are quoted as both a price and a yield to maturity. Bond investors need to monitor interest rates and use two key risk measures: duration and DV01. This can be understood either using equations or graphically so we present risk measures using both. Then we cover all the whistles and bells that come with bonds: floaters, asset swaps and liability swaps, repo, bond futures, corporate bonds and credit risky yield curves, convertible bonds, covered bonds, inflation-linked bonds, mortgage backed securities and securitization.
Chapter 6: Swaps Interest rate swaps are traded in staggering volumes so this chapter introduces fixed-for-floating swaps using a detailed example. We show the relationship between fixed rate bonds, floaters and swaps and also how to calculate the value of a swap and its interest rate sensitivity. Swaps are used to put on curve trades so we show how to play interest rate curves using flatteners, steepeners and butterflies. Having described the vanilla swap we describe some of the many variations of swap: forward starting swaps, overnight indexed swaps, FX swaps, cross-currency basis swaps, total return swaps and portfolio swaps, swaps with varying notional, inflation swaps and variance swaps. Part IV: Credit
Chapter 7: Credit Derivatives Credit default swaps are the simplest form of credit derivative and we show why they are traded and how they are priced. CDS pricing depends on the probability of default, so we discuss credit events that trigger a default and the credit auctions that are used to determine the recovery rate after a default. The credit Big Bang has made significant changes to the way in which CDS are priced and quoted, so we describe it in some detail. Credit spread can be measured in many ways and we describe and give detailed example calculations for three measures: asset swap margin (ASM), Z-spread and I-spread. Another way of taking a position in credit is a credit linked note (CLN) and we also introduce CDS indices as they are such a liquid part of the credit market.
Chapter 8: Structured Credit Collateralized Debt Obligations are notoriously difficult to price. Before embarking on any mathematics we start with an analogy to create an intuitive understanding of structured credit. The analogy is concentric castles where each tier of fortifications added another level of security. Each region of the castle is like a tranche of the CDO ranging from the outer region which is riskiest (the equity tranche) through the middle region (mezz tranche) to the inner region (senior tranche). Having introduced the terminology and the intuition we incorporate the idea of trading correlation and the effect of correlation on pricing. As usual we have a simple fully-worked example to make the pricing concepts concrete. Part V: Forwards, Futures & Options
Chapter 9: Forwards and Futures In order to understand call and put options it is critical to understand forwards and futures and the cost of carry. We start with forwards and explain the general case of spot-forward arbitrage, then consider particular examples of cost of carry: commodities, currencies, equities, and bonds. Then we introduce the exchange-traded counterpart of forwards, which are futures. We explain how futures standardize the underlying in order to allow efficient price discovery. Another practical difference between forwards and futures is margin, so this is explained in detail. Each futures market has its own idiosyncrasies and we describe some of these along with a broad classification of the different underlyings. The chapter ends with an explanation of futures term structure curves, contango, backwardation and the factors that drive the shape of the curve.
Chapter 10: Call and Put Options Just as with CDOs we start with an analogy to help build our intuition of options. In this case we use a gambling variation of the game of hop-scotch (tested on my own children). Then we describe call and put payoffs, put-call parity, synthetic calls, puts and forwards and option break-evens.
Chapter 11: Option Pricing and Risk We begin with two pricing methods: binomial trees and Black-Scholes. Then we give a description of risk measures for options known as the greeks: delta, gamma, theta, vega, and rho. It is extremely useful to have a rough back-of-the-envelope method to price options and we give an extremely useful approximation: the two-fifths rule. Options have a term structure of volatility (implied volatility vs. term) and often display a volatility smile (implied volatility vs. strike) and these are discussed. The people who price options in practice are market makers, and in order to understand how they hedge their position we explain how to hedge a position statically and dynamically (gamma scalping). The chapter ends with American options and exotic options.
Chapter 12: Option Strategies and Structured Notes The final chapter is divided into a section on option strategies including: the straddle, strangle, buy-write, protective put, collar, call spread, put spread, risk reversal, butterfly, condor, box, and call and put time spread. Finally we choose four structured products that show how options and other securities can be combined in novel ways to produce innovative ways of expressing views on markets: principal protected notes, reverse convertibles, range-accrual notes and auto-callables.