This book about fixed income has been inspired by over two decades of work in the
market from offices in London, Frankfurt and Tokyo. During this time, the author
had the good fortune to be close to, and sometimes involved in, an eclectic mix of events.
Although working for a large investment bank and the European Central Bank has
made it possible to collect this experience, the book does not represent the views of
either. Any opinions about central banking should in particular not be taken as those
of the Eurosystem.
This book is also inspired by a building, namely the British Museum in London, a
detail of which is pictured above. This inspiration has three aspects. The first is that the
architecture of the building cannot be understood by looking only at its historic base,
or only at Sir Norman Foster’s modern additions. Fixed income markets can similarly
not be properly understood by considering only their conventions, or only the modern
mathematical apparatus that has been created to analyse them. Although this book will
present complex mathematics determining the risk characteristics of various instruments, some design features of these instruments are archaic. These features remain
today for no better reason than that there was never a need to change them.
This book deals with the fixed income markets and the best point to start is to define
what this means. The book will follow market usage by defining fixed income instruments as contracts that specify payment obligations that are not linked to the economic
situation of the obligor. It also excludes from the scope contracts that establish payments
depending on the performance of physical assets, such as commodities or weather. The
book will further discuss a range of fixed income derivatives, namely contracts that specify obligations that depend on the performance of fixed income instruments.