Introduction

The book has been conceived as a workbook, as well as a reference book,

with an emphasis on examples and exercises. It has grown out of workshops
on financial mathematics which I have run for many years, including some for
the ACIs former Financial Calculations exam. The book is therefore also suitable for the student who chooses to take exams without any formal tuition
course. There is however considerably more background material than is
required for any exam aimed specifically at calculations. The intention is to
benefit the reader technically as well as making the book more readable.

The structure of the book

The book is set out in five parts:

The basics
This covers the fundamental concepts of time value of money, discounting,
present values and calculations with interest rates.

Interest rate instruments

This looks at the range of instruments based on interest rates or yields in both the
money markets and capital markets simple deposits, CDs, bills and CP, FRAs
and futures, and bonds. The market background and use for each instrument is
given as a structure within which to see the calculations. This section also covers
zero coupon rates, yield curves, duration and convexity.

Foreign exchange
This looks at all the foreign exchange instruments from basic spot, through
swaps, outrights, short dates, forward-forwards and time options, to SAFEs.
Again, the context of each instrument in the market is explained, together
with the link with the money markets.

Swaps and options

This part explains both interest rate and currency swaps, and options.
Examples are given of the basic uses as well as some of the combination
option strategies. It also introduces option pricing concepts and the Greeks.

Further exercises, hints and answers

This section begins with some further exercises covering several areas of the
book for readers who would like more practice. These are followed by hints
and answers to the exercises which are found throughout the book.

Key features of the book

Key points
Throughout the book, key points have been highlighted for emphasis.

xiv