The Trade Lifecycle: Behind the Scenes of the Trading Process

417 Pages·2015·11.36 MB·English

by  Robert P. Baker

The Trade
Lifecycle
ForothertitlesintheWileyFinanceseries
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The Trade
Lifecycle
Behind the Scenes of
the Trading Process
Second Edition
ROBERT P. BAKER
Thiseditionfirstpublished2015
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Baker,RobertP.,
Thetradelifecyclebehindthescenesofthetradingprocess/RobertP.Baker.—Secondedition.
pagescm.—(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-1-118-99946-2(cloth)
1.Commodityexchanges. 2.Commercialproducts. 3.Risk. I.Title.
HG6046.B3232015
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ISBN978-1-118-99946-2(hbk)ISBN978-1-119-00357-1(ebk)
ISBN978-1-119-00368-7(ebk)ISBN978-1-119-01439-3(ebk)
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Tothememoryofmydearmother

Contents
ForewordfromtheFirstEdition xvii
ForewordtotheSecondEdition xix
Preface xxi
Acknowledgements xxiii
AbouttheAuthor xxv
PARTONE
ProductsandtheBackgroundtoTrading
CHAPTER1
Trading 3
1.1 Howandwhydopeopletrade? 3
1.2 Factorsaffectingtrade 3
1.3 Marketparticipants 4
1.4 Meansbywhichtradesaretransacted 5
1.5 Whenisatradelive? 7
1.6 Consequencesoftrading 7
1.7 Tradinginthefinancialservicesindustry 8
1.8 Whatdowemeanbyatrade? 10
1.9 Whoworksonthetradeandwhen? 11
1.10 Summary 12
CHAPTER2
Risk 13
2.1 Theconceptofrisk 13
2.2 Riskisinevitable 13
2.3 Quantifyingrisk 14
2.4 Methodsofdealingwithrisk 15
vii
viii CONTENTS
2.5 Managingrisk 15
2.6 Problemsofunforeseenrisk 16
2.7 Summary 16
CHAPTER3
UnderstandingTradedProducts–FollowtheMoney 17
3.1 Spottrades 18
3.2 Future(forward) 20
3.3 Loan 21
3.4 Deposit 23
3.5 Swap 23
3.6 Foreignexchangeswap 25
3.7 Equityspot 26
3.8 Bondspot 27
3.9 Option 27
3.10 Creditdefaultswap 30
3.11 Summary 31
CHAPTER4
AssetClasses 33
4.1 Interestrates 33
4.2 Foreignexchange(ForexorFX) 40
4.3 Equity 44
4.4 Bondsandcredit 46
4.5 Commodities 53
4.6 Tradingacrossassetclasses 58
4.7 Summary 59
CHAPTER5
Derivatives,StructuresandHybrids 61
5.1 Linear 61
5.2 Nonlinear 62
5.3 Someoptionterminology 66
5.4 Optionvaluation 67
5.5 Exoticoptions 67
5.6 Structuresandhybrids 69
5.7 Importanceofsimplerproducts 70
5.8 Tradematrix 71
5.9 Summary 72
CHAPTER6
Liquidity,PriceandLeverage 73
6.1 Liquidity 73
6.2 Price 75
Contents ix
6.3 Leverage 76
6.4 Summary 79
PARTTWO
TheTradeLifecycle
CHAPTER7
AnatomyofaTrade 83
7.1 Theunderlying 83
7.2 General 83
7.3 Economic 84
7.4 Sales 84
7.5 Legal 84
7.6 Booking 85
7.7 Counterparty 85
7.8 Timeline 86
7.9 Summary 87
CHAPTER8
TradeLifecycle 89
8.1 Preexecution 89
8.2 Executionandbooking 91
8.3 Confirmation 94
8.4 Postbooking 96
8.5 Settlement 97
8.6 Whathappensovernight 101
8.7 Changesduringlifetime 105
8.8 Reportingduringlifetime 110
8.9 Exercise 110
8.10 Maturity 112
8.11 Exampletrade 113
8.12 Summary 115
CHAPTER9
CashflowsandAssetHoldings 117
9.1 Holdings 119
9.2 Valueofholding 120
9.3 Reconciliation 121
9.4 Consolidatedreporting 122
9.5 RealisedandunrealisedP&L 122
9.6 Diversification 122
9.7 Bankwithinabank 123