Fundamentals of Financial Instruments. Sunil K. Parameswaran

Fundamentals of Financial Instruments

Published by John Wiley & Sons Singapore Pte. Ltd.

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Edition History John Wiley & Sons Singapore Pte. Ltd. (1e, 2011)

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Library of Congress Cataloging-in-Publication Data is Available:

9781119816614 (Hardback)

9781119816645 (ePDF)

9781119816638 (ePub)

Cover Design: Wiley

Cover Image: © naqiewei/Getty Images

Author photo: Courtesy of Sunil Parameswaran

To my students in India, Australia, Singapore, and the United States over the past 30 years.

Preface

Readers the world over have appreciated the first edition of this book, which appeared over a decade ago. Some people pointed out that I should include more material on financial institutions and the key features of the markets in which financial products trade.

Consequently, I have included a detailed chapter on mutual funds, pension funds, and exchange-traded funds. There is also a new chapter on orders and exchanges, which deals with continuous markets in detail, with a brief focus on call markets as well. Macroeconomic issues are key for understanding financial markets, and hence there is a new chapter on such issues. The chapter is by no means exhaustive, and people wishing to acquire a more detailed perspective would have to look for an economics text.

Interest rate derivatives are perhaps the hardest product to explain in futures and options. Consequently, while the book continues to have three separate chapters on futures, options, and swaps, I have opted to include a chapter on interest rate derivatives and on financial products with such derivatives built in, such as callable bonds and putable bonds.

Excel has many useful functions for students and professionals in the field of Finance. I have described the use of many of these functions at key places in the book.

The previous edition had some statistical information on markets, and certain qualitative descriptive features, which I felt were better to remove. I have eliminated such features in the second edition. I feel that a chapter on clearing and settlement may be relevant for the kind of audience that this book aims to address. I will bring that in if and when there is a third edition.

Readers are welcome to share their comments and suggestions with me. Constructive advice and criticism is welcome and will be incorporated while undertaking revision of the material in future. My email is: [email protected]

I hope that the book serves as a source of pertinent and comprehensive knowledge for readers everywhere.

Sunil K. Parameswaran

Director & CEO

Tarheel Consultancy Services

Manipal, India

November 2021

Preface to the First Edition

This book grew out of my lecture notes used for corporate training programs in India and abroad. The feedback from participants has been invaluable in polishing and refining the exposition. The eventual flow and clarity that I believe I have been able to achieve is in no small measure due to the critical and incisive inputs of my students as well as professional acquaintances.

There is typically no course exclusively on financial instruments in most MBA curricula. Consequently, this topic invariably gets combined with material on financial institutions as part of a course on Financial Markets. I, however, believe that there is a strong case for offering a comprehensive course on financial instruments for second-year MBA students. However, care should be taken to ensure that material which is covered in traditional courses like Financial Derivatives and Fixed Income Securities is not repeated any more than is necessary. Many students who take such a course may not be majoring in Finance and consequently may not take specialized courses such as Derivatives. For them therefore the specter of substantial overlap is less of an issue. Even for students of Finance, despite the inevitable repetition of facets of topics such as Bonds, Futures, and Options, a course on instruments is a comprehensive and integrated offering that will serve them in good stead in the future.

The book starts from first principles and builds in intensity. Exposure to one or more courses on Financial Management will certainly be useful for the reader as he or she navigates through the material. While the book is a standalone treatise on the subject, readers may like to augment it with standard texts on issues in Finance such as Security Analysis, Bond Markets, Futures & Options, and International Finance.

The issues covered in this book are universal and of relevance for students of Finance as well as market professionals irrespective of where they may happen to be located. However, most of the illustrations and examples pertain to markets in the developed world, particularly the United States, and the products that trade in them. Consequently the book should have appeal for readers in all parts of the world.

I hope that the book serves as a source of pertinent and comprehensive knowledge for readers everywhere.

Sunil K. Parameswaran

T.A. Pai Management Institute

Manipal – 576104

Karnataka, India

Acknowledgments

I am indebted to all my students in India and Australia who went through

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