and why they have been voted the most innovative investment vehicle of the last two
decades. A discussion of late trading reinforces the fact that mutual funds trade only at
4pm each day. This distinguishes them from closed-end funds and ETFs.
Students usually enjoy learning about the strategies followed by hedge funds and the
fees earned by hedge fund managers. I explain that the hedge fund manager has a call
option on the assets being managed and therefore has an incentive to take high risks.
Amaranth is a classic example of a hedge fund where a trader took advantage of the call
option.
The Further Questions are all fairly short and can be assigned to illustrate points
made in class.
Chapter 5: Trading in Financial Markets
The material on how margin accounts work for different types of transactions has been
moved to Chapter 18 for the fourth edition. New material on recent changes in the way
OTC derivatives are traded has been added. The amount of time spent in class on this
chapter will depend on the background of students. If they have taken an introductory
course on investments or derivatives, relatively little time needs be devoted to the chapter.
In other situations instructors may wish to spend two or three hours making sure that
students understand what derivative products are and how they are used.
After explaining the difference between exchange-traded and over-the-counter mar-
kets, the chapter describes how short positions are created and moves on to discuss plain
vanilla derivatives. It concludes by discussing non-traditional derivatives, exotic options
and structured products.
It can be fun to discuss any or all of the five business snapshots in class.
Any of the problems can be used as hand-in assignment questions. Problems 5.30,
5.32, and 5.33 can be used for class discussion.
Chapter 6: The Credit Crisis of 2007
This material is similar to the material in Chapter 6 of the third edition. I find that
it is appropriate to have a discussion of the crisis relatively early in the course. I have
taught variations on the material in this chapter to many different groups of executives and
students. It always goes down well. Participants always feel a great sense of achievement
when they understand the products that were created from mortgages. No doubt many
instructors will wish to change some of the slides to incorporate their own views on the
credit crisis.
The first part of the chapter explains the bubble in U.S. house prices. The chapter
then moves on explain the products that were created from mortgages in securitizations.
ABSs were formed at the first level of securitization. ABS CDOs were created at the second
level of securitization. Further securitizations sometimes produced a CDO of CDO. I spend
some time on Table 6.1 to make sure students understand the way the tranches work and
the risk.
The BBB tranche of the ABS in Figure 6.5 is much thinner than the tranches in the
earlier examples. But it is worth noting that in practice the BBB tranche in Figure 6.5
were often be split into three sub-tranches so that the tranches constituting the Mezz ABS
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