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Financial Instruments and Markets: A Casebook


Create value while you manage risk
Today’s increasingly volatile financial markets have caused an explosion of new financial instruments designed to transfer risk––from collateralized mortgage-backed securities to swaptions that trade directly between financial actors. And now these complex financial instruments have become standard operating procedure at most large and mid-sized businesses. Managers overseeing any substantial business, financial or non-financial, must thoroughly understand these financial instruments and their value in hedging and diversifying to succeed.

With this unique casebook, you’ll have the opportunity to gain the analytical, institutional, and functional knowledge you need to use these instruments to solve new problems. Featuring cases from the authors’ MBA and Executive Education level courses at Harvard Business School, the book covers the basics of financial instruments, from terminology to pricing, and the markets in which these instruments trade. Throughout, the emphasis is on how these securities accomplish risk transfer from actors who do not want risk to those who are willing to take it on—for a fee of course.

These cases include:

  • Deutsche Bank: Finding Relative Value Trades
  • Ticonderoga Capital: Inverse Floating Rate Bonds
  • 100-Year Liabilities at Prudential Insurance
  • Swedish Lottery Bonds
  • The Enron Odyssey: The Special Purpose of SPEs
  • Building Hedge Funds at Prospero Capital
  • Dell Computer Corporation: Share Repurchase Program
  • First American Bank: Credit Default Swaps
  • Morgan Stanley and TRAC-X: The Battle for the CDS Indexes Market
  • and more

George Chacko joined the Harvard Business School Faculty in the Finance Area in 1997. He currently teaches a second-year course on Capital Markets in the MBA Program, and he teaches a Ph.D. course on Asset Pricing that is jointly offered by the Business School and the Harvard Economics Department. He has also taught Corporate Financial Engineering in both the MBA program and the Executive Education program at HBS, as well as a first-year course on Corporate Finance in the MBA program.

Professor Chacko holds a Ph.D. in Business Economics from Harvard University, and dual Master's degrees in Business Economics (Harvard University) and Business Administration (University of Chicago). He holds a Bachelor's degree in Electrical Engineering from the Massachusetts Institute of Technology. Professor Chacko's experiences prior to HBS have included work at a major financial services firm, and a large consulting firm. He currently consults with with financial institutions ranging from commercial/investment banks and insurance companies to hedge funds.

Professor Chacko's research has focused on three areas: (1) the structure of fixed income markets and the design of instruments that trade in those markets; (2) the study of portfolio choice by individuals and institutions; and (3) the analysis and application of derivative securities.


About the Authors.

1. Introduction.


Module FI-1: Fixed-Income Securities: Concepts. 

2. Reading Note—Note on Bond Valuation & Returns.            

3. Case—Deutsche Bank: Finding Relative Value Trades.               

4. Reading Note—Note on Duration and Convexity.             

5. Case—Ticonderoga Capital: Inverse Floating Rate Bonds.                                         

6. Case—100-Year Liabilities at Prudential Insurance.

Module FI-1: Fixed-Income Securities:Applications.

7. Case—Deutsche Bank: Discussing the Equity Risk Premium.

8. Case—Swedish Lottery Bonds.                                     

9. Case—Bank Leu’s Prima Cat Bond Fond.

10. Case—Catastrophe Bonds at Swiss Re.                                 

11. Case—Mortgage Backs at Ticonderoga.                            

12. Case—KAMCO and the Cross-Border Securitization of Korean Non-Performing Loans.

13. Case—Nexgen: Structuring Collateralized Debt Obligations (CDOs).

14. Reading Notes—Forward and Swap Contracts.                                            

15. Case—The Enron Odyssey (A):The Special Purpose of SPEs.


Module DS-1: Equity Options: Concepts.

16. Reading Notes—Note on Basic Option Properties.                                            

17. Dell Computer Corporation: Share Repurchase Program. 

18. Reading Notes—Note on Option Valuation.

19. Sally Jameson—1999.

Module DS-2: Equity Options: Applications.

20. Case—Pine Street Capital.

21. Case—Tribune Company: The PHONES Proposal.

22. Case—Cox Communications, Inc., 1999.

23. Case—DigaMem Inc.

24. Case—ALZA and Bio-Electro Systems (A): Technological and Financial Innovation.

Module DS-3: Credit Derivatives.

25. Reading Notes— Note on Credit Derviatives.

26. Case—First American Bank: Credit Default Swaps.                         

27. Case—Morgan Stanley and TRAC-X: The Battle for the CDS Indexes Market.

Module DS-4: Interest Rate Derviatives. 

28. Reading Note—Introduction to Interest Rate Options.                                       

29. Case—Advising on Currency Risk at ICICI Bank.               

Module DS-5: Equity and Options Exchanges. 

30. Case—Deutsche Borse.                                                          

31. Case—The Chicago Board Options Exchange.       

32. Case—The International Securities Exchange: New Ground in Options Markets.

Module DS-6: Real Options. 

33: Case—RTY Telecom: Network Expansion.