Financial Mathematics: Introduction, Topics, Examples & Course Outline

Continuing further from our previous article Financial Accounting, In this article, we will cover another well known and most sought after topic of Financial Mathematics. Money requires understanding, and that understanding can come only when you know maths quite well. Now the maths required for Finance is not algebra or trigonometry, but there is a seperate section called Financial Mathematics.
Here we cover some basic details about the Financial Mathematics course outline, what all is covered in Financial Mathematics and how useful is Financial Mathematics for survival in Financial World. Making correct calculations for profit / loss is as important as making the right investment decision. Moreover, with the introduction of complex financial products like derivatives, options, swaps, etc. it has become a necessity for not just the financial professionals and investors but even for the individuals to know and understand Financial Mathematics.
Even if you are not an investor or trader, chances are that you might have taken a loan or might be manageing a savings account. You need to understand the effective interest rate payments you make for your loan repayment or credit card and the effective interest you receive from your savings account.

The course on Financial Mathematics teaches you all these things. The course on Financial Mathematics includes the following:

Fundamentals of Financial Mathematics:

 -- Time Value of Money o Cash Flows and Discount Rates o Present Values o Future Values

 -- Investment Measures

 -- Returns: Calculation and Conventions

 -- Interest Rates, Yields and Rates of Return Compared

Fixed Income Analytics of Financial Mathematics:

 -- Price and Yield Calculations

 -- Yield Curves, Spot Rate Curves and Fixed Income Valuation

 -- Quantifying Interest Rate Risk


Equity Securities Analytics of Financial Mathematics:

 -- Pricing Models: Discounted Cash Flows, Earnings or Dividends

 -- Pricing Models: Earnings, Cash Flow, Sales or Book Value Multiples

 -- Capital Asset Pricing Model (CAPM)

 -- Beta and Systematic (Market) Risk

 -- Index Model and Equity Investment Selection

ALong with these topics and their theoretical knowledge, you may also be required to get a lesson in fundamental tools and applications like MS Excel, E-views, Matlab etc

Financial Accounting: Introduction, Topics, Examples & Course Outline

In this article, we will cover another well known and most sought after topic of Financial Accounting.
As we have seen, many scams have unfolded in the world, primarily in the stock markets listed companies, just because of the accounting issues. The cases of Enron, Worldcom, Parmalat, AlbertHein of Netherlands, etc. are well known. They are typical examples of how financial accounts can be manipulated to gain/ show imaginary profits and bloated sales figures. Ultimately, it is blamed on the financial accounting. Hence it is very very important for a firm or even an individual investor to be extra vigilent and careful about creating, writing or even reading these financial accounting numbers.

In this article, we will see the various topics and sub topics which are covered for Financial Accounting. Although we aim to give all the required information, the fin details may still need a thorough analysis and study.

Financial Statements within Financial Accounting:

-- Types of Financial Statements

-- How the different Financial Statements Relate to One Another

General Accounting Issues of Financial Accounting:

-- GAAP (Generally Accepted Accounting Principles)

-- Accounting Concepts and Conventions

Structure and Interpretation of Financial Statements of Financial Accounting:

-- Balance Sheet: Assets, Liabilities and Equities

-- Income Statement: Revenues, Expenses, Gains and Losses

-- Cash Flow Statement: Cash Provided by/used for Operations, Investments and Financing activities

Tools and Techniques for Analyzing Financial Information of Financial Accounting:

-- Financial Ratios

-- Use and Misuse of Financial Ratios in Analyzing Financial Statements

Swaps Processing: As Introduction to Swaps Market & Swaptions Terminology

In this article, we will talk about a most common form of financial derivative which is traded heavy as an OTC product and is called SWAP.
We will cover a brief outline about the Swaps Introduction, What affects the Swap pricing, Risks in Swap transactions, the Swap Market, Swaptions and other related topics.

The typical topics covered when you undergo a swap lesson or course are as follows:

--Overview of the swap market :
This would include a brief overview and introduction about the swaps market, the swaptions market, how the market works and who all are the swap market participants.

--Factors affecting Swap market and pricing: Interest Rate, Currency, Credit Default and Equity Swaps :
Characteristics of all these factors and how they affect the swap market and pricing mechanism

--The roles of the sales and trading desks in swaps market:
This would primarily cover the details of how swap deals take place, originate and contract details and what roles do these teams have to play

--Counterparty risk :
Swaps market primarily is an OTC or Over the Counter Market. Hence, this Counterparty risk is a significant risk in the swaps market.

--Price dissemination in a swaps market :
How Prices are disseminated for swaps market

--Collateral management in a swaps market :
Various aspects of Collateral management in a swaps market

--How swap deals are confirmed :
The methodolgy for swaps and swaption deals and how the process takes place. This is important since swap market is an OTC market, so the entire process should be clear.

--ISDA agreements and documentation :
Required regulatory procedures.

--The evolving infrastructure of the industry :
Swaps are emerging as the hot products for banks and other organizations to hedge their risks and re-structure their loans. Hence they are becoming very common.

--Functions of Clearing House and alternatives for swaps market:

--Calculation, advice, and settlement of payments for swaps :

--Issues for operations for swaps

Mortgage-Backed Securities: Securitization and Processing Introduction

In this article, we will learn about the Mortgage-Backed Securities, the Securitization process and Introduction to Securitization process . Though this article may not be covering the full minute details about entire Securitization process, but it will give you a clear introduction about the process and steps involved in the Securitization Process for Mortgage-Backed Securities. It will also talk about the various market participants, the types of Mortgage-Backed Securities, the models to be followed and related topics.

-- Participants in the Securitization and Processing of Mortgage-Backed Securities: Who all participate in the Securitization and Processing of Mortgage-Backed Securities? Here is the list of market and process participants
  -- Investors of Securitization Processing
  -- Originators in Securitization Processing: These are typically Banks, institutional investors, funding partners or Lenders
  -- Issuers: Something similar to the BRLM or Book running lead managers of a fresh issue. They are typically Agencies, Banks, Lenders
  -- Guarantor of Securitization Processing
  -- Dealers of Securitization Processing
  -- Servicers Organizations in Securitization Processing

-- Basic Mortgagle Facts about the Securitization and Processing of Mortgage-Backed Securities:
  -- Lien
  -- Amortization schedule
  -- Residential
  -- Commercial
  -- Characteristics of mortgages
  -- Types of mortgages
  -- Mortgage cash flows

-- Guarantees provided by the Government Sponsored Enterprise (GSE) in the Securitization and Processing of Mortgage-Backed Securities:
  -- Government National Mortgage Association
  -- Federal Home Loan Mortgage Corporation
  -- Federal National Mortgage Association

-- Fundamental Types of Mortgage Backed Securities: Basics of Mortgage Backed Securities
  -- Conforming
  -- Non-Conforming

-- Securitization Process Model in the Securitization and Processing of Mortgage-Backed Securities:
  -- Origination
  -- Securitization
  -- Secondary Market
  -- Investors
  -- Servicers
  -- Mortgage Rates versus MBS Coupon
  -- Cash Flows

-- Characteristics of the Mortgage Backed Securities:
  -- Types of mortgage pass-through securities
  -- Characteristics of pass-through securities
  -- Demographics
  -- Seasonal patterns
  -- Home sales
  -- Availability of money
  -- WAC - WAM - WALA
  -- Prepayments - PSA benchmark

-- An introduction to the MBS Marketplace (Securitization and Processing of Mortgage-Backed Securities):
  -- Over The Counter
  -- Trade Types
  -- Transaction Size
  -- Variance
  -- Settlement Periods

-- Process Lifecycle of a MBS Trade in the (Securitization and Processing of Mortgage-Backed Securities):
  -- Execution of Securitization Processing
  -- Risk Assesment and Management Process in Securitization Processing
  -- Trading and Allocation of capital and resources in Securitization Processing
  -- Settlement Processing of Securitization Processing

Fixed Income Trade Lifecycle: Introduction, Example, Process & Functions

In this article, we will explain the Fixed Income Trade Lifecycle. All topics, examples, introductions, steps and processes involved in Fixed Income Trade Lifecycle are explained.

Related: Fixed Income Securities Market: Introduction & Example
-- Fixed Income Products of Fixed income Market : What makes up a particular market? It's the assets that are traded (bought or sold) in that market. Hence, a good starting point for Fixed income Market Introduction will be the Fixed income Security types. Let's begin with the introduction of the assets traded in the Fixed Income Security Markets. Here is the list:

-- US Government Fixed Income Securities

-- Municipal Fixed Income Securities

-- Corporate Fixed Income Securities

-- MBS Fixed Income Securities

-- CMO Fixed Income Securities

-- ABS Fixed Income Securities

-- Participant of Fixed income Market :

-- Buy-side Fixed Income Market Participants: These are the typical big investors, which may include Insurance Companies, Investment firms, Portfolio Management companies, func houses, etc.

-- Sell-side Fixed Income Market Participants: These are the typical market makers. They act as broker dealers and maintain required liquidity in the market.

-- Industry Utilities Fixed Income Market Participants

-- Industry Service Organizations Fixed Income Market Participants

-- Fixed income Markets : Different products are traded differently. For e.g. though these is a lot of online shopping, but people still prefer to purchase fresh vegetables from the farmers in the local vegetable market. Similarly, most of the Fixed Income Securities being the OTC (Over the Counter) Securitites, are having different kinds of markets for them.

-- Marketplaces for Trading Fixed Income Market

-- Electronic Trading for Fixed Income Market

-- Telephonic Trading for Fixed Income Market

-- Inter-dealer Brokers Trading for Fixed Income Market, where trading is done between 2 brokers or dealers

-- Order Processing & Execution of Fixed income Market :

-- Order Receipt & acknowledgement

-- Routing to the clearing & settlement agency

-- Middle Office Functions of Fixed income Market :

-- Trade Entry into the system for enrichment and validatiopns

-- Trade Reporting to counterparty, custodian, regulators, etc.

-- Inventory Management - involves book keeping, margin requirements, etc.

-- Confirmation/Affirmation - Instructions sent electronically or snail mail for confirmation of trades and acknowledgements.

-- Trade Comparison in Fixed income Market :

-- Real Time Trade Matching

-- Industry Utility

-- Processing of Trade

-- Clearance Function in Fixed income Market :

-- Trade Guarantee

-- Central Counterparty

-- Novation

-- Industry Utility

-- Settlement in Fixed income Market :

-- Environments

-- Exchange of Value

-- Federal Reserve/Clearing Banks

-- Depository Trust Company

-- Fail Control & Financing Opportunities in Fixed income Market :

-- Fails

-- Financing

-- Securities Borrow/Loan

-- Inventory Control in Fixed income Market :

-- Depository Trust Company

-- Federal Reserve/Clearing Banks

-- Physical Securities

-- Stock Record in Fixed income Market :

-- Books & Records

-- Income or Money Collection & Income Distribution in Fixed income Market :

-- Interest

-- Principal Repayments

-- Corporate Action Processing of Fixed income Securities Market :

-- Types of Events

-- Event Processes

-- Trends Identifiers of Fixed income Market Trading:

-- Fixed Income Trading – On an Exchange?

-- The Impact of Credit Rating Agency Optimism

Interest Rate Futures: Introduction, Examples & Tutorials to Interest Rate Futures

Interest Rate Futures IRF are something that are gaining real good popularity. They are a kind of derivatives, which are based on interest rates, and offer hedging, arbitrage and speculative opportunities for various market participants.

Typically, it will be the banks which will get into Interest Rate Futures Contracts. However, with the invent and opening up of the Interest Rate Futures & other derivatives as listed products on leading stock exchanges of the world, now even the retail investors and traders can also put in their money into Interest Rate Futures & Derivatives.

In this article, we will talk about the various interest rates futures and derivatives. We will cover examples of Interest Rate Futures, Interest Rate Derivatives and provide a guideline to the topics covered as a course content for Interest Rate Futures & Derivatives.

Related How Interest rates affect stock prices

With the high volatility in the interest rates market and its negative correlation with the stock market returns (though debatable) and the recent recession, it has become clear that nothing in this world can remain stable and the same applies to the interest rate markets. Hence, just because you've bought a 20 year long bond which promised 10% annual return, it does not mean that the interest rates will remain the same during the whole 20 year period, and the price of the bond will also fluctuate because of the variation in the interest rates markets. Hence, it is very very important, not only for the traders and banks, but also for the retail investors like you and me, to be aware of the interest rates fluctutations and its affect on the overall market and the various financial instruments.

Here are the contents of any course on the Interest Rate Futures:

-- Interest Rate Futures terminology and definitions
-- Characteristics & Types of interest rate futures
-- Interest Rate Futures contracts as against the securities
-- Interest Rate Futures Risk management Methods and Procedures
-- Treasury Bond and Note for Interest Rate Futures Contracts

-- Interest Rate Futures - Underlying/deliverable instrument

-- Interest Rate Futures Basket delivery
-- Interest Rate Futures Conversion factors
-- Cheapest to deliver Interest Rate Futures and
-- Interest Rate Futures with regard to the implied repo rate
-- Implied put option for Interest Rate Futures
-- Trading in Interest Rate Futures
-- Risk management methods & applications for Interest Rate Futures
-- Interest Rate Futures and the Eurodollar Futures

-- Underlying instrument - Eurodollar deposit

-- Libor (London Inter Bank Offered Rate) - its affect on Interest Rate Futures
-- Methods of Interest Rate Futures Price Valuations - Index or discount pricing method, point values method and basis points method
-- Cash settlement only contracts
-- Cash market basis of final settlement price
-- Swaps for Interest Rate Futures


-- Terminology and definitions
-- Swap contract features for Interest Rate Futures
-- Interest rate swap contract cash flows and risks
-- Other types of interest rate swaps - amortizing, accreting and basis swaps
-- Risk management applications
-- Swaptions and Interest Rate Futures

CurrencyShares Euro Trust FXE: Euro USD Forex ETF Product: Review, Analysis & Details

Since the introduction of Euro in the European region, the Euro-USD Forex Exchange rates has been fluctuating widely. However, since the last 2 years or so, Euro has really becoming strong as compared to USD dollar (Forex Rate) and if you go by the recession that had hit primarily the US markets, it has led to Euro becoming more and more stronger.
Moreover, there have been some news items mentioning that some countries (like in Middle-East) are reportedly attempting the get rid of the Dollar Dependence and trying to sell oil contracts in their own respective currencies. All this is leading to a lot of volatility in the USD FOrex Exchagne Rate.
This fluctuations in forex rates have severly hit the exporters, importers, MNC companies across the globe and now everyone is attempting to look for a Forex Risk Management and Forex Hedging.

Wont it be nice if we can have a product which allows us to make investments in the Euro-USD forex, like a mutual fund or an Exchange Traded Fund (ETF), which is traded on an exchange and enables enough liquidity for investing, trading and hedging purposes for Forex Rates Fluctuations?
In this article, we will talk about such Forex Rate ETF or FOrex Exchange Traded Prodcuts, which offer enough liquidity for investing, trading and hedging purposes for Forex Rates Fluctuations

The CurrencyShares Euro Trust FXE from Rydex Investments is one such good option available to investors who can benefit from investing or trading in the units of this exchagne traded product and achieve the aim of hedging against forex rates fluctuations.

What is CurrencyShares Euro Trust FXE?
CurrencyShares Euro Trust FXE, is an exchange traded product tracking the price of the euro, in USD. Hence, it can be easily used for arbitrage traders or market makers who are betting their money on EUR-USD forex contracts or by traders (exporters/ importers) who want to hedge themselves from the fluctuations in EUR-USD forex prices.

Which Benchmark does the CurrencyShares Euro Trust FXE follow?
The benchmark product followed by CurrencyShares Euro Trust FXE is the WM Reuters Euro Closign Spot rates, which are quoted in USD.

What is the unit for investment in CurrencyShares Euro Trust FXE?
The no. of EUR per share for CurrencyShares Euro Trust FXE is 100.

What are the trading benefits of Currency Shares Euro Trust FXE?
For traders, it allows short selling, which means that traders can also go short on the EUR-USD contracts and benefit from them.
-- Protects against wide currency flcutuations and hence reduces the risk
-- Enables short term trading benefits
-- Allows easy trading in Forex Contracts without an overseas brokerage account
-- Low brokerage and transaction costs
-- CurrencyShares will be backed by the assets of the Trust

What has been the historical performance of CurrencyShares Euro Trust FXE?
This graph below will illustrate how the EUR-USD has been fluctuating for this CurrencyShares Euro Trust FXE product. Also note that there appears to be a perfect correlation of this EUR-USD Forex Product with the EUR-USD forex rates.



Is this product risk free?
Nothing in this world comes for free and the same goes for this product. Check the ups and downs in the graph above for this product. It will tell you that there is no one direction for this product. EUR-USD price fluctuations can go either way.