I.1 TREASURY, FUNDING, AND THE REASDNS REHIND THIS BOOK
Any economic activity, or practically any activity for that matter, needs to be funded somehow. The parallel between these funds, or cash, and the blood in an organism has been abused at great length but it remains a powerful one. While we are used to the idea of corporations or governments raising cash for investments, we are less familiar with the idea of financial institutions doing the same. When we study finance, and in particular the derivatives world, we often assume that the money used for these transactions is basically already there. This of course is not the case since financial institutions need to raise the liquidity they subsequently use to finance derivatives transactions. At the center of the operation of raising funds is the treasury, a specific desk or unit in an investment bank or a separate division in the case of a corporation.
Funding, through the action of borrowing, is intimately connected to the concept of credit and since the financial crisis of 2007 to 2009, credit has been a central topic in any financial discussion. When discussing financial theory at a more or less quantitative level, the cost of funding has never entered as a deciding factor. Now (as it is elegantly described by Piterbarg ) this can no longer hold true.
There is a fair amount of literature covering treasury operations, but none that addresses the need of understanding at the same time the role of a treasury desk and its impact on the valuation of financial instruments. The works by Bragg  or Cooper  or Horcher  are very specific to the operational aspects of a treasury and deal in great detail with its practical aspects. Of similar practical nature is the work of Jeffrey  where the role of treasury is seen through its corporate goals. In these books we see how a treasury can either participate in the corporate growth of an institution or how an institution can deal with specific challenges such as cash and debt management or currency risk. Of the literature that does focus on valuation issues of the risk-neutral type one might encounter on a trading desk, there is work by Kitter  with a good analysis, for example, of interest
rate curve construction which, because of age, does not include the crucial developments that have taken place during the first decade of the twenty- first century. Banks' work  is another text that, while very similar in spirit to the present one, unfortunately lacks a very topical update on the recent financial crisis. Oricchio's work  is close to our goals but, focusing on highly illiquid credit, his treatment straddles the boundaries of risk neutrality within which we shall always try to remain.
What exactly are our goals? Who is the ideal reader of this book? While, as we said, treasuries are present in all corporations (and sovereign entities), we shall be focusing mainly on treasuries within financial institutions. We are going to show how the role of funding is crucial for these institutions and how it affects the way all activities are seen and transactions priced. Most important we shall highlight how focusing on the cost of funding introduces specific risk management considerations. Moreover we shall offer a special focus on the role of funding when it comes to development banking. The ideal reader of this book is the practitioner with experience in fixed income or another asset class, new to treasury and to concepts such as funding, asset swaps, or loan pricing. Of course, because of the special focus on development banking, the ideal reader might be a practitioner in an institution applying the tools of investment banking toward development goals. A basic knowledge of concepts such as optionality and types of options is assumed; while they will be briefly introduced again, a knowledge of simple fixed income concepts such as accrual or forward rates would be preferable. Except for the fairly brief one on the prepayment options of loans, no discussion will involve stochastic formalism: a solid grasp on financial modeling in the strict sense is not needed, any knowledge of it, however, can only be beneficial. To summarize as only a head hunter could, the ideal reader would be someone that, at some point in his or her career, has read and understood a substantial amount of Hull.
Particularly since the issue of funding is so crucial to the functioning of any entity and in particular a financial institution, the approach has been to look at problems in terms of fundamentals: the mathematical tone of the book is kept at a minimum precisely because questions and answers have been based on fundamentally practical problems. Formalism has been modified in a way to suit the problems at hand sometimes, particularly when discussing the discounted value of bonds, with a twist that hopefully will add clarity rather than confusion. The same way mathematical physics needs to follow the logical laws of nature, finance, once we allow for the complexity of the instruments on which it is built, needs to follow very sensible rules based on profit, choice, and uncertainty. It is by this type of common sense that we describe the world of debt: as we shall see, all sorts of formulas can be written to value and describe the price of a bond; however, at the end it is just a number that rises and falls according to the investors' interest.
Next to mathematical simplicity, we have striven for brevity. This book is intended as a tale of credit. We shall discuss how it is a tool for the practitioner to see credit in terms of spread, and how the markets, through different phenomena, affect those spreads. In the belief that once the basic understanding is obtained–there is no better way to learn than through action– the size and scope of this book have been kept within the boundaries of this purpose. We have relied heavily on actual market data literally snapped from brokers' screens to show how to proceed with individual learning. A goal we hope to have achieved with this book is to show where to look and how to extract knowledge. Once this is achieved, there are few things as valuable as a few hours spent browsing Reuters (or an equivalent market data repository).
-  Meaning, of course, John Hull's Options, Futures, and Other Derivatives.