The Trade Lifecycle -- Contents -- Foreword from the First Edition -- Why this book? -- Foreword to the Second Edition -- Preface -- Acknowledgements -- About the Author -- Part One Products and the Background to Trading -- 1 Trading -- 1.1 How and why do people trade? -- 1.2 Factors affecting trade -- Product appetite -- Risk appetite -- Exposure -- 1.3 Market participants -- Producer -- Consumer -- Speculator -- Market maker -- 1.4 Means by which trades are transacted -- Brokers -- Exchanges -- Over-the-counter -- 1.5 When is a trade live? -- 1.6 Consequences of trading -- 1.7 Trading in the financial services industry -- Two types of trading policy -- Why does a financial entity trade? -- 1.8 What do we mean by a trade? -- 1.9 Who works on the trade and when? -- 1.10 Summary -- 2 Risk -- 2.1 The concept of risk -- 2.2 Risk is inevitable -- 2.3 Quantifying risk -- 2.4 Methods of dealing with risk -- 2.5 Managing risk -- 2.6 Problems of unforeseen risk -- 2.7 Summary -- 3 Understanding Traded Products - Follow the Money -- 3.1 Spot trades -- 3.2 Future (forward) -- 3.3 Loan -- 3.4 Deposit -- 3.5 Swap -- 3.6 Foreign exchange swap -- 3.7 Equity spot -- 3.8 Bond spot -- 3.9 Option -- 3.10 Credit default swap -- 3.11 Summary -- 4 Asset Classes -- 4.1 Interest rates -- Interest and the time value of money -- Interest rate participants -- The asset class of interest rate products -- The discount curve -- Removing credit effects -- Tradeflow issues -- 4.2 Foreign exchange (Forex or FX) -- Spot -- Futures and forwards -- Currency swaps -- FX swap -- Baskets -- Reporting currency -- FX Drift -- Tradeflow issues -- 4.3 Equity -- Synthetic equities (index) -- Lifecycle issues pertinent to equity trades -- 4.4 Bonds and credit -- Bonds -- Other credit risk bearing instruments -- 4.5 Commodities -- Origin of financial trading -- What are commodities?.

OTC commodities -- Localised nature of production -- Time lag -- Utility of commodities -- Precious metals as a currency -- Physical settlement -- Other tradeflow issues -- 4.6 Trading across asset classes -- 4.7 Summary -- 5 Derivatives, Structures and Hybrids -- 5.1 Linear -- Differences between futures and forwards -- 5.2 Nonlinear -- Trade process issues relating to options -- 5.3 Some option terminology -- 5.4 Option valuation -- 5.5 Exotic options -- Examples of exotic options -- Issues with exotics -- 5.6 Structures and hybrids -- 5.7 Importance of simpler products -- 5.8 Trade matrix -- 5.9 Summary -- 6 Liquidity, Price and Leverage -- 6.1 Liquidity -- Two types of trading -- What is liquidity? -- Asset liquidity -- Measuring liquidity -- Risks associated with liquidity -- 6.2 Price -- Over-the-counter price -- Exchange price -- Broker price -- What can we infer from price? -- Cost of unwind -- Volumes -- 6.3 Leverage -- Advantages of leverage -- Disadvantages of leverage -- Measurement of leverage -- Current market position -- 6.4 Summary -- Part Two The Trade Lifecycle -- 7 Anatomy of a Trade -- 7.1 The underlying -- 7.2 General -- 7.3 Economic -- 7.4 Sales -- 7.5 Legal -- 7.6 Booking -- 7.7 Counterparty -- 7.8 Timeline -- Dates relating to a trade -- Example -- 7.9 Summary -- 8 Trade Lifecycle -- 8.1 Pre execution -- Provisional trades -- Orders -- 8.2 Execution and booking -- Execution -- Booking -- 8.3 Confirmation -- Matching -- Confirmation -- 8.4 Post booking -- Trade scrutiny -- Enrichment -- Cashflows -- Fees and duties -- Error reporting -- 8.5 Settlement -- The importance of settlement -- Settlement instructions -- Custodian -- Cash or physical -- Cash settlement of commodities -- Nostro accounts -- Risks -- Advantage of quick settlement -- Multiple settlement dates -- Breaks -- 8.6 What happens overnight.

Individual trade and aggregation with other trades -- Date and time -- Amalgamation between systems -- 8.7 Changes during lifetime -- Dividends -- Coupons -- Other corporate actions -- Changes as a result of market data -- Counterparty changes -- Collateral -- Changes to the trade -- Management of changes -- Risks -- 8.8 Reporting during lifetime -- 8.9 Exercise -- Exercise date -- When to exercise -- Cash or physical -- Exercise as a process -- Fugit -- Risks associated with exercise -- 8.10 Maturity -- Final settlement date -- 8.11 Example trade -- The trade lifecycle -- 8.12 Summary -- 9 Cashflows and Asset Holdings -- 9.1 Holdings -- 9.2 Value of holding -- 9.3 Reconciliation -- 9.4 Consolidated reporting -- 9.5 Realised and unrealised P&L -- 9.6 Diversification -- 9.7 Bank within a bank -- 9.8 Custody of securities -- Registered securities -- Bearer securities -- Use of custodians -- 9.9 Risks -- 9.10 Summary -- 10 Risk Management -- 10.1 Traders -- Desirable exposure -- Undesirable exposure -- 10.2 Risk control -- 10.3 Trading management -- 10.4 Senior management -- 10.5 How do risks arise? -- Spot trades -- Futures and forwards -- Options -- Exposures to fixed or float income streams -- Exposure to debt -- Exposure to group of products -- 10.6 Different reasons for trades -- 10.7 Hedging -- 10.8 What happens when the trader is not around? -- Availability of other traders -- Stop and limit orders -- 10.9 Types of risk -- Risk measures -- Additional risks for credit products -- Risks in general -- Dreaming ahead -- 10.10 Trading strategies -- Front book -- Back book -- 10.11 Hedging strategies -- Delta hedging -- Stop-loss hedging -- 10.12 Summary -- 11 Market Risk Control -- 11.1 Various methodologies -- Scenario analysis -- Value at Risk (VaR) -- Instantaneous measures of risk (sensitivity analysis) -- 11.2 Need for risk.

11.3 Allocation of risk -- 11.4 Monitoring of market risk -- Illiquid products -- New products -- 11.5 Controlling the risk -- Take steps to repair breach -- Exception to limit -- Changing the limits -- Posting reserve -- Do nothing -- 11.6 Responsibilities of the market risk control department -- Requirements -- Relationship with front office -- 11.7 Limitations of market risk departments -- Everything correlated -- The tails -- The human factor -- Balanced approach -- 11.8 Regulatory requirements -- Basel II -- Capital Adequacy Ratio (CAR) -- 11.9 Summary -- 12 Counterparty Risk Control -- 12.1 Reasons for non-fulfilment of obligations -- Delayed settlement -- Mistakes in settlement process -- 12.2 Consequences of counterparty default -- 12.3 Counterparty risk over time -- 12.4 How to measure the risk -- Expected loss -- Credit exposure -- Potential Future Exposure (PFE) -- Netting -- Back-to-back -- 12.5 Imposing limits -- 12.6 Who is the counterparty? -- 12.7 Collateral -- Example of a collateral agreement -- Advantages of collateral -- 12.8 Activities of the counterparty risk control department -- Set policies for estimating exposure -- Assign limits based on credit worthiness -- Measure exposure -- Deal with breaches -- Policies for new trade types -- Maintain legal data -- Manage margin payments and receipts -- Interface with management -- 12.9 What are the risks involved in analysing credit risk? -- Added complication of credit risk -- Insufficient consideration of counterparty risk -- Sudden counterparty changes -- 12.10 Payment systems -- Benefits of payment systems -- Risks associated with payment systems -- Example -- 12.11 Summary -- 13 Accounting -- 13.1 Balance sheet -- Fixed assets -- Investments -- Cash -- Debtors -- Creditors -- Capital -- Profit and loss -- Events that affect balance sheet items -- 13.2 Profit and loss account.

Realised -- Unrealised -- Accrued -- Incidental -- Worked example -- Individual trades -- Who is responsible for producing P&L? -- Risks associated with reporting P&L -- 13.3 Financial reports for hedge funds and asset managers -- Overview -- Fees -- Reports -- 13.4 Summary -- 14 P&L Attribution -- 14.1 Benefits -- Catching mistakes -- Reconciliation -- Better understanding of the trades and the market -- 14.2 The process -- Market movements -- Theta -- Unexplained -- 14.3 Example -- 14.4 Summary -- 15 People -- 15.1 Revenue generation -- Traders -- Trading assistants -- Structurers -- Sales -- 15.2 Activities that support revenue generation -- Researchers -- Middle office (product control) -- Back office (operations) -- Quantitative analyst -- Information technology -- 15.3 Control -- Legal -- Model validation -- Market risk control department -- Counterparty risk control department -- Finance -- Internal audit -- Compliance -- Trading manager -- Management -- Human risks -- 15.4 Summary -- 16 Regulation -- 16.1 Purpose of regulation -- Major regulatory authorities -- 16.2 What regulators require -- Liquidity -- Systemic risk and market infrastructure -- Remuneration, culture and conduct -- Structural reform -- Recovery and resolution -- Supervision and governance -- 16.3 The problems -- 16.4 Risk-weighted assets -- Effect of regulation in practice -- Example: rule for LCH Canadian trades -- 16.5 Credit valuation adjustment (CVA) -- What is CVA? -- How is it measured? -- How is credit risk measured? -- DVA -- FVA -- CVA mitigation -- CCP -- Multilateral netting -- Netting rules and jurisdiction -- Rehypothication -- Portfolio-based CVA -- 16.6 Summary -- Part Three What Really Happens -- 17 Insights into the Real World of Capital Markets - Here be Dragons! -- 17.1 How it used to be -- 17.2 Clash of cultures -- 17.3 The equality of money.

17.4 The politics of money.