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More About This Title Treasury Finance and Development Banking + Website: A Guide to Credit, Debt, and Risk
English
Credit and credit risk permeates every corner of the financial world. Previously credit tended to be acknowledged only when dealing with counterparty credit risk, high-yield debt or credit-linked derivatives, now it affects all things, including such fundamental concepts as assessing the present value of a future cash flow. The purpose of this book is to analyze credit from the beginning—the point at which any borrowing entity (sovereign, corporate, etc.) decides to raise capital through its treasury operation. To describe the debt management activity, the book presents examples from the development banking world which not only presents a clearer banking structure but in addition sits at the intersection of many topical issues (multi-lateral agencies, quasi-governmental entities, Emerging Markets, shrinking pool of AAA borrowers, etc.).
This book covers:
- Curve construction (instruments, collateralization, discounting, bootstrapping)
- Credit and fair valuing of loans (modeling, development institutions)
- Emerging markets and liquidity (liquidity, credit, capital control, development)
- Bond pricing (credit, illiquid bonds, recovery pricing)
- Treasury (funding as an asset swap structure, benchmarks for borrowing/investing)
- Risk and asset liability management (leverage, hedging, funding risk)
English
BIAGIO MAZZI, PHD, is a Senior Financial Officer on the Structured Notes Desk in the World Bank Treasury. Prior to the World Bank, Biago Mazzi was a Vice President at Morgan Stanley, where he was responsible for modeling exotic credit derivatives on the Emerging Markets Desk. Before working in fixed income, he was an equity derivatives quant at Barclays Capital and Banca Caboto. He holds a PhD in theoretical physics from the University of Cambridge.
English
List of Tables xvii
Acknowledgments xix
Introduction xxi
I.1 Treasury, Funding, and the Reasons behind This Book xxi
I.2 Funding Issues as Credit and Pricing Issues xxiii
I.3 Treasury Finance and Development Banking xxv
I.4 The Structure of the Book xxvi
CHAPTER 1 An Introductory View to Banking, Development Banking, and Treasury 1
1.1 A Representation of the Capital Flow in a Financial Institution 2
1.2 Lending 3
1.3 Borrowing 7
1.4 Investing and ALM 10
1.5 The Basic Structure of a Traditional Financial Institution 12
1.6 Development Banking 17
CHAPTER 2 Curve Construction 21
2.1 What Do We Mean by Curve Construction? 22
2.2 The Instruments Available for Curve Construction 24
2.3 Using Multiple Instruments to Build a Curve 37
2.4 Collateralized Curve Construction 42
2.5 Numerical Example: Bootstrapping an Interest Rate Curve 55
CHAPTER 3 Credit and the Fair Valuing of Loans 67
3.1 Credit as an Asset Class 67
3.2 A Brief Overview of Credit Modeling 75
3.3 Fair Value of Loans and the Special Case of Development Institutions 88
3.4 Numerical Example: Calculating the Fair Value of a Loan 95
CHAPTER 4 Emerging Markets and Liquidity 101
4.1 The Definition of Emerging Markets 101
4.2 The Main Issues with Emerging Markets 103
4.3 Emerging Markets and Development Banking 116
4.4 Case Studies of Development Projects 122
CHAPTER 5 Bond Pricing 127
5.1 What Is a Bond? 127
5.2 A Few Fundamental Concepts of the Bond World 129
5.3 Expressing Credit Explicitly When Pricing a Bond 138
5.4 Illiquid Bonds 150
5.5 Numerical Example: Estimating the Coupon of an Emerging Market Debt Instrument 164
CHAPTER 6 Treasury Revisited 171
6.1 Funding as an Asset Swap Structure 171
6.2 Funding Level Targets 179
6.3 The Fundamental Differences between Investment Banking and Development Banking 187
6.4 Benchmarks for Borrowing and Investing 189
CHAPTER 7 Risk and Asset Liability Management 207
7.1 The Issue of Leverage 208
7.2 Hedging 210
7.3 Managing Risk Related to Financial Observables 224
7.4 Funding Risk 242
CHAPTER 8 Conclusion 261
8.1 Credit Is Everywhere 261
8.2 The Fundamental Steps to Borrowing, Lending, and Investing: A Summary 263
APPENDIX A Implying Zero Rates from FX Forward Quotes 269
APPENDIX B CDS Spreads and Default Probabilities 271
APPENDIX C Modeling the Credit-Driven Prepayment Option of a Loan 273
APPENDIX D The Relation between Macaulay and Modified Durations 275
APPENDIX E The Impact of Discounting on an Asset Swap Spread 277
APPENDIX F Replication Leading to Risk-Neutral Probabilities 279
References 283
About the Web Site 289
Index 293
English
“This is an important and timely book that demonstrates the motivation and mathematics underlying the role of Treasury in banking. From first principles, the theory of development banking, emerging market finance, and funding is derived based on the underlying interest rate products available.”
—Jamie Walton, Global Head of Rates, FX and Emerging Markets Quants, Morgan Stanley
“An outstanding description of what banking is all about. From the point of view of a treasury in a
development bank, Biagio performs a deep analysis of the essential activities of banking, so useful in a moment when, after times of delusion, credit and funding are again recognized to be the heart of finance. Everyone in this field will find this book detailed, useful, and yet enjoyable.”
—Massimo Morini, Head of Interest Rate and Credit Models, Banca IMI
