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.
Most people know what a mortgage is. You borrow money to buy a house, you make monthly payments, and after 20 or 30 years you own the house free and clear. But what happens to all those mortgages after the bank gives them out? They get bundled together and sold to investors. That is a mortgage-backed security. Chapter 34 of Wilmott’s book explains how these things work, why they are tricky to price, and what makes them different from every other fixed-income product.
Chapter 7 of “Behavioral Finance for Private Banking” is about structured products. If you’ve never heard of them, don’t worry. Most people haven’t. But by the end of 2007, there were more than 340 billion Swiss francs invested in them in Switzerland alone. That’s 6.5% of all assets under management. Over 20,000 different structured products listed on the Swiss stock exchange.