Wednesday, May 10, 2017
This set is not for the casual reader who has only a passing interest in derivatives. It’s a textbook for those who want a solid foundation in derivatives, a foundation from which to engage in financial engineering, managing a trading book, or managing client portfolios. Or for those who simply have a keen interest in financial markets and want more in-depth insight into how derivatives can be used to hedge as well as to speculate.
Here’s but a single example of how derivatives, in this case equity swaps, can be useful: reducing insider exposure. Let’s say the personal wealth of the founder of a publicly traded company is almost entirely exposed to the fortunes of that company. The founder controls about 10% of the company and wants to retain this degree of control, so he doesn’t want to sell any of his shares. A swap dealer might offer him the following deal: the founder would pay the dealer the return on some of his shares in exchange for a diversified portfolio return. In this way the founder would keep his level of control but reduce his risk.