jdaw1

Caution: the PDF is a bit behind the HTML. My fault. In particular, the (excellent) chart on the recent crash in fixed0-income price is not in the PDF.

Coupon is the bond’s interest rate, per 100 nominal. Yield is the effective return on the money per 100 cash paid, so allowing for price. Coupon ≢ Yield.

Agreed, strongly. Which is why the online edition has some “Cautionary words”:

> Pricing Money is a beginner’s guide: it says so in big letters on the front cover. I believe it to be an excellent beginner’s guide — presumably many authors believe their own books to be excellent — but, being a beginner’s guide, it will not immediately make you a world-renowned expert.

> It was written around the turn of the pedant’s millennium. In some parts it shows its age. It has been slightly freshened by the addition of green-boxed updates, but these have been written very concisely, more to point to developments than to explain them fully.

> Please do learn from and be informed by Pricing Money. But also be cautious: it is not enough to make you a world-renowned expert; it does not list the many details that are both dull and necessary; some things have changed since it was written; it cannot be your risk manager.

Society allows the people to trade futures, but makes it difficult. US brokers seem to make it very easy for “randos” to own equities, but difficult to trade futures. Recently, when I wanted to trade a one-by-one call spread on a commodity future (not saying which) via Interactive Brokers, the required initial margin would have been eight times my maximum possible loss. Bonkers! Hence trade not done.

And what would you rather happen? That you were prohibited?

As others have said, your counterparty won’t know who you are: hedge fund; commercial hedger; rando — unknown.

There’s a free HTML version on my website, which has some green-boxed updates. But even without those, the book is an excellent beginner’s guide to the interest rate markets. (I am the author, so might be thought not to have a NPoV.)

Farmer agrees to sell an agricultural commodity to a grocer, for a price fixed now, with delivery after the harvest. Assume price falls a lot, and then the grocer goes bust. Ouch! Then the farmer must instead sell on the open market, at the lower price, and so becomes unable to make the payments on the mortgage on the tractor. Ouch ouch!

The farmer did want the price certainty that allows the risk of being more leveraged (tractor mortgage). But the farmer was not the optimal person to hold the credit risk of the grocer.

And the farmer might have sold without the intent to deliver. It might be that the delivery specification, or location, or whatever, isn’t perfect for the farmer. But if the farmer is confident that the prices will move together, then it still works.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work.

You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your own, your house burns down. That risk exists, and you are not the optimal holder of it. Hence insurance. A Lincolnshire farmer — and yes, I like the non-abstract solidly of the example — is not the optimal holder of the ‘risk’ that the Australian and Kansas wheat harvests are super-bountiful. Markets allow that risk to be transferred to a non-farmer better able to hold the risk.

Of course, with markets come some ‘unproductive’ stuff. Likewise, democracy is good, but that is not necessarily praising the optimality of all parts of campaign finance legislation.

Let me also mention that I am the author of the definitive reference book on old Vintage Port: Port Vintages (and seemingly the board disallows a link).