Derivatives Demystified by John Braddock, managing director of the Structured Products Groups at Oppenheimer & Co. in New York, is an outstanding introduction to the subject matter. He approaches derivatives from the transactional viewpoint, showing how a product is created, developed, sold, and used in the marketplace. After describing why an organization would use structured products, he outlines the duties of the officers and directors to their shareholders in managing the risk inherent in such products, in the context of the U.S legal environment. The author then gives a brief outline of the structured product creation, development, and offering process, which for most people outside the investment banking world is a black box.
After outlining the very basic mathematics of derivatives, Braddock devotes a chapter to each of several significant types of products, such as asset-linked notes, convertible securities, exotic options, warrants, and swaps. In each chapter, he gives detailed examples of who would use each of the products, what financial problems could be solved by their use and what role they would serve within an organization’s capital structure. There is a chapter on monetizing and hedging strategies for concentrated equity positions and one on the capital-raising strategies in the era of derivative products.
What makes this book particularly valuable is the Resource Guide at the end of the book. Braddock gives a remarkable x-ray of the life of derivative products, providing a sample offering expenses spreadsheet, SEC rule filling comment letter, customer suitability memo, marketing memos, syndicate invitation, even a roadshow marketing schedule! Most informative for a real novice will be the sample structured product term sheets. Anyone looking at a term sheet for the first time will often wonder what the connection is between the legal document and something called a swap or equity-linked note, and these samples may ease the passage between the financial theory and the legal reality.