This chapter is about bond nerds. Specifically, hedge fund managers who make money by finding small price differences between bonds that should be priced the same (or very close). The strategies are called fixed income relative value and credit arbitrage. They sound boring. But the math behind them is wild.
Theory is nice. But at some point you have to price actual products that real people are trading. Chapter 38 of Wilmott’s book takes two interesting fixed-income contracts and walks through how to price them from scratch. No hand waving. Just the math, the logic, and even the code.
Swaps are one of the biggest markets in finance. The total notional principal is comfortably in the hundreds of trillions of dollars. Chapter 14 of Wilmott’s book explains how they work, why they exist, and how they connect to the bond pricing we covered in the previous post.
We are leaving the world of options for a bit and entering the world of fixed income. This is the world of bonds, interest rates, and cashflows. Chapter 13 of Wilmott’s book is a self-contained introduction that does not require anything from earlier chapters. If you have ever wondered what a yield curve is or why bond traders care about something called “duration,” this is the post for you.
We made it. Nine chapters. One complete retelling series. And now the question: was this book actually worth the time?
So we made it. Eighteen posts later, we’ve walked through the entire book. Let me try to pull it all together and tell you what I think.
This is the start of a retelling series where I break down a serious fixed income textbook into something you can actually read without falling asleep.
Emerging market debt is one of those things that sounds exotic until you look at the numbers. Then it just sounds obvious.
Most books about trading fall into one of two buckets. Either they’re pure theory with no real application. Or they’re war stories that sound cool but don’t help you build actual strategies. This book is neither.