FixedIncome Securities. Assignment


 Aubrey Tyler
 2 years ago
 Views:
Transcription
1 FIN 472 Professor Robert B.H. Hauswald FixedIncome Securities Kogod School of Business, AU Assignment Please be reminded that you are expected to use contemporary computer software to solve the following problems. 1. Forward Rate Curve. You are given the following prices for Tstrips P t where t refers to the remaining maturity in years P 1 P 2 P 3 P 4 P (a) Extract discount factors and a discount yield curve from this data. (b) Calculate and plot the one year forward rate curve, i.e., f 1,t+1, t 1. (c) Under what assumption is the forward rate curve a predictor for the future spot rate curve? 2. Forward Contracts. Using the previous problem s data, i.e., the Tstrip prices P t, t = 1,..., 5 consider the following questions: (a) Loan commitment. You are a loan officer in a local bank. What rate would you quote a customer who wishes to lock in the interest rate for a loan commencing in three years and ending four years from to day? (b) Forward deposit. Your company concluded an agreement to deliver an assembly line whose final payment of USD 100m (upon completion) will be received at the end of year 3. You would like to invest this payment for two years. What kind of interest rate can you lockin by engaging in a forward transaction? (c) FRA. In order to offset a future variable interest rate liability you would like to buy a 24/ % FRA. How much would you offer for this security? Explain. (d) FRN. You are offered a 5 year floater paying Treasury + 35; how much are you willing to pay for this security? Explain the mechanics and hypotheses underlying your calculation. (e) Fixedforfloating swap. You wish to buy a five year 7.00% for Treasury + 50 bpts interest rate swap (careful: buying a swap means that you wish to pay what and receive what?). What price would you consider fair? 3. Bond Futures Contract. Use resources on the internet (where are the instruments traded? 2 American, 1 European exchange!) to answer the following questions. For each answer indicate the URL (internet address starting with where you found the relevant information. (a) Contract specification. What about other countries government bond futures contracts? (b) Relative yield of bondfutures. (c) Cost of carry. (d) Repo rate implied by futures price and relation to cheapesttodeliver.
2 (e) Deliverables and cheapesttodeliver. (f) Conversion factors: formula and explanation. (g) Cash/futures price equivalents: cashandcarry (C&C) arbitrage. (h) Duration hedging with futures. 4. UpFront Swap Value. As the risk manager of a commercial bank you need to neutralize certain interest rate exposures. Upfront fees to or from the counterparty are determined in terms of fair values of swaps. (a) Suppose you wish to swap your semiannual fixed 6.50% 5year liability into a floating PRIME + 15 bpts liability. Given the following discount yield curve calculate the fair value of the swap. Are you getting paid or do you need to compensate the counterparty? Payment dates (years) Discount yields r t (%) (b) Suppose you wish to swap your annual floating LIBOR+80 bpts liability into a fixed 6.25% 5 year liability. Given the following discount yield curve calculate the fair value of the swap. Are you getting paid or do you need to compensate the counterparty? Payment dates (years) Discount yields r t (%) (c) What are two different ways to conceptualize swaps? 5. Par Swaps and Swap Rates. In class, we determined the value of a swap by calculating an upfront fee that would equate the present expected value of the floating cashflows to the present expected value of the fixed ones. However, there is an alternative definition of swaps that solves for the fixed rate in terms of the other variables rather than the fee from floating and fixed rates. Here, the fixed rate is set in such a way so as to equate the floating with the fixed leg in expected present value terms. This means that one has to solve for c = c t = fixed in c t (1 + r t ) t = f t 1,t (1 + r t ) t c : c f t 1,t (1 + r t ) t = 0. (1) In swap terminology, c is the swap rate: it is the fixed rate that has the same present value as the forward (reset) rates. Swaps where the fixed rate c is set so that the expected present value of floating and fixed payments are equalized are called par swaps. Using basic annuity mathematics you should derive an analytic solution to the swap rate in (1); otherwise, use an appropriate spreadsheet function. (a) On the basis of the following information, determine the swap rate on a five year floatingforfixed swap (i.e., receiving fixed, paying floating Eurodollar deposit); the floating payments are determined from the zerolibor curve: 2
3 Payment Dates TBill Prices EuroUSD Deposit (years) P (0, T ) L (0, T ) (b) A commercial bank has sold a 6 year TbillforEurodollar (LIBOR) swap precisely one year ago with a swap rate of 6.5%; as a consequence, the bank receives fixed and pays floating. Being in charge of riskmanagement at this bank you wonder what the value of the swap (notional principal: USD 20m) is given the information in the above table. (c) Your counterpart phoned you about the preceding 6.5%, 5 years remaining maturity swap and proposes to reduce the notional principal by USD 500,000. Before giving a final answer, you would like to know what the new value of the swap will be. 6. PlainVanilla Swap. Consider a 3 year plainvanilla fixedforfloating swap with annual resetting where the variable rate is equal to the annualized future oneyear spot rate. Annual payments are netted and the notional amount is USD 10m. A receives floating, B receives fixed. (a) Swap rate: given the following strip prices, calculate swap rate A should pay B: Maturity T (years) Strip prices P (0, T ) (b) Swap duration: given the preceding strip information, what are the dollar durations ( $ ) of the swap from A s and B s perspective, respectively? (c) Future swap value: calculate the fair value of the swap at t = 1 from A s perspective given that A s yield curve model predicts the following strip prices in one year s time: Maturity T (years) Strip prices P (1, T ) Swap Hedging. You are a swap dealer at a major investment bank. Recently, you have been less than successful in finding offsetting deals to unload the risks that you warehoused in buying and selling swaps (in terms of paying or receiving fixed, what does it mean to buy or sell a swap?). You are currently evaluating alternatives to deal with this problem. (a) Spot market: you sold a 7 year 6MLIBOR swap. How would you hedge the resulting exposure in the Treasury and Eurodollar spot markets? Explain. (b) Futures market: you bought a 5 year 1YLIBOR swap. How would you hedge the resulting exposure in the Treasury and Eurodollar futures markets? Explain. 3
4 8. Foreign Currency Swap Value. A further variant of the generic swap is the FX swap. Here, two parties borrow in different currencies and then agree to swap both principal and future loan payments. There are four basic variants that arise from the combination of fixedforfloating and the two currencies. Take a plain vanilla currency swap between parties A and B and currencies GBP and USD. A borrowed in Sterling but needs dollars, B borrowed in dollar but needs Sterling. Hence, the two parties agree to swap principals and liabilities at t = 0: 7.25% (GBP) GBP 50m USD 80.5m A B r USD % (USD) swap rate (USD) 7.25% (GBP) At maturity, the principals are returned to the respective creditors: USD 80.5m A GBP 50m B An FX swap s valuation is straightforward: just use the upfront fee method. Incidentally, FX swaps preceded and inspired interest rate swaps, which explains why the latter were initially valued by the upfront fee approach. The required data is obvious: the spot FX rate, the respective loans specifications and the two yield curves. Let S GBP/USD (0) be the current price of 1 USD in terms of GBP and V F X (0) the present value of the loan in F X using the appropriate F X yield curve. Then the value of the preceding FX swap is V GBP/USD (0) = V GBP (0) S GBP/USD (0) V USD (0) (2) where the GBP party receives or pays an appropriate fee. In reality, principals are adjusted so that V GBP/USD (0) = 0 at the inception of the swap or, once again, an FX swap rate is computed. Also notice that the maturities of the two loans are assumed to coincide but that the loans could carry either a fixed or a variable rate. (a) On the basis of the relation (2) and in complete analogy with the plainvanilla interest rate swap, define the swap rate for USD payments. Derive an analytic expression for the USD swap rate and explain what this rate represents. (b) Suppose that swap payments are made semiannually, the maturity of the GBP/USD swap is 4 years and that the current USD/GBP spot exchange rate is USD /GBP (careful: which spot rate do you need and how do you get it?). Determine the USD swap rate from the following information: Payment Dates TBill Prices Sterling GiltStrip Prices (years) P USD (0, T ) P GBP (0, T )
5 9. Inverse Floaters and Swaps. The relationship between floaters and swaps is quite obvious: a floater is one of the two underlying instruments of a swap. Hence, it should be quite intuitive that a similar relationship exists between inverse floaters and swaps. Recall that inverse floaters make variable coupon payments N (k r t 1,t ) at t for some fixed rate k. Suppose that P (0, 3) = and that the k of a 3Y LIBOR inverse floater with annual resetting is set at k = %. Also, suppose that a newly negotiated 3Y plainvanilla 1Y LIBOR swap pays a fixed par swap rate of c = %. What is the value of the inverse floater at t = 0? You do not need to use a replication argument that synthetically creates the inverse floater from the swap and the 3Y zero similar to our usual replication equations: a simple cashflow diagram should be sufficient. 5
FIN 472 FixedIncome Securities Forward Rates
FIN 472 FixedIncome Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU InterestRate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward
More informationFIN 472 FixedIncome Securities Forward Rates
FIN 472 FixedIncome Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU InterestRate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward
More informationAdvanced forms of currency swaps
Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A
More informationFixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity
Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,
More informationUnderstanding Cross Currency Swaps. A Guide for Microfinance Practitioners
Understanding Cross Currency Swaps A Guide for Microfinance Practitioners Cross Currency Swaps Use: A Currency Swap is the best way to fully hedge a loan transaction as the terms can be structured to exactly
More informationINTEREST RATE SWAPS September 1999
INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:
More informationInterest Rate Swaps. Key Concepts and Buzzwords. Readings Tuckman, Chapter 18. Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps
Interest Rate Swaps Key Concepts and Buzzwords Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps Readings Tuckman, Chapter 18. Counterparty, Notional amount, Plain vanilla swap, Swap rate Interest
More informationChapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull
Chapter 4 Interest Rates 1 Types of Rates Treasury rates LIBOR rates Repo rates 2 Treasury Rates Rates on instruments issued by a government in its own currency 3 LIBOR and LIBID LIBOR is the rate of interest
More informationFIN 684 FixedIncome Analysis From Repos to Monetary Policy. Funding Positions
FIN 684 FixedIncome Analysis From Repos to Monetary Policy Professor Robert B.H. Hauswald Kogod School of Business, AU Funding Positions Shortterm funding: repos and money markets funding trading positions
More informationFIXEDINCOME SECURITIES. Chapter 10. Swaps
FIXEDINCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange
More informationSolutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,
FIN 472 Professor Robert Hauswald FixedIncome Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the
More informationINTEREST RATE SWAP (IRS)
INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...
More informationInterest Rate Swaps and Fixed Income Portfolio Analysis
White Paper Interest Rate Swaps and Fixed Income Portfolio Analysis Copyright 2014 FactSet Research Systems Inc. All rights reserved. Interest Rate Swaps and Fixed Income Portfolio Analysis Contents Introduction...
More informationChapter 7 Swaps. Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull
Chapter 7 Swaps 1 Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules 2 An Example of a Plain Vanilla Interest Rate Swap! An agreement
More informationFIN 472 FixedIncome Securities Debt Instruments
FIN 472 FixedIncome Securities Debt Instruments Professor Robert B.H. Hauswald Kogod School of Business, AU The Most Famous Bond? Bond finance raises the most money fixed income instruments types of bonds
More informationEurodollar Futures, and Forwards
5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging
More informationChapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull
Chapter 4 Interest Rates 1 Types of Rates! Treasury rate! LIBOR! Fed funds rate! Repo rate 2 Treasury Rate! Rate on instrument issued by a government in its own currency 3 LIBOR! LIBOR is the rate of interest
More informationInterest Rate and Currency Swaps
Interest Rate and Currency Swaps Eiteman et al., Chapter 14 Winter 2004 Bond Basics Consider the following: ZeroCoupon ZeroCoupon OneYear Implied Maturity Bond Yield Bond Price Forward Rate t r 0 (0,t)
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall
More informationValuation of a Forward Rate Agreement (pp )
Valuation of a Forward Rate Agreement (pp. 9596) A forwardrate agreement (FRA) is a forward contract where it is agreed that a certain interest rate R K will apply to a certain principal to a specified
More informationIn terms of expected returns, MSFT should invest in the U.K.
Rauli Susmel Dept. of Finance Univ. of Houston FINA 4360 International Financial Management 12/4/02 Chapter 21 Shortterm Investing MNCs have many choices for investing Home return(usd) = deposit interest
More informationASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006
1 ASSET LIABILITY MANAGEMENT Significance and Basic Methods Dr Philip Symes Introduction 2 Asset liability management (ALM) is the management of financial assets by a company to make returns. ALM is necessary
More informationVALUATION OF PLAIN VANILLA INTEREST RATES SWAPS
Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interestrate swaps have grown tremendously over the last 10 years. With this development,
More informationa. On what day would the 1% filter rule have issued its first signal? Was this a buy or a sell signal? At what price did the trade occur?
Answers to Chapter #7 Exercises 1. Examine the daily closing price data on the DM/$ rate in file E07.WK1 that was used to construct Figure 7.5. Suppose you were using a 1% filter rule to trade the DM and
More informationCHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS
CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the difference between a swap broker and a swap dealer. Answer:
More information550.444 Introduction to Financial Derivatives
550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter
More informationEquityindexlinked swaps
Equityindexlinked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3month LIBOR) and the
More informationYIELD CURVE GENERATION
1 YIELD CURVE GENERATION Dr Philip Symes Agenda 2 I. INTRODUCTION II. YIELD CURVES III. TYPES OF YIELD CURVES IV. USES OF YIELD CURVES V. YIELD TO MATURITY VI. BOND PRICING & VALUATION Introduction 3 A
More informationInterest Rate Futures. Chapter 6
Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant
More informationForward contracts and futures
Forward contracts and futures A forward is an agreement between two parties to buy or sell an asset at a predetermined future time for a certain price. Goal To hedge against the price fluctuation of commodity.
More informationCHAPTER 11 CURRENCY AND INTEREST RATE FUTURES
Answers to endofchapter exercises ARBITRAGE IN THE CURRENCY FUTURES MARKET 1. Consider the following: Spot Rate: $ 0.65/DM German 1yr interest rate: 9% US 1yr interest rate: 5% CHAPTER 11 CURRENCY
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationLearning Curve Forward Rate Agreements Anuk Teasdale
Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,
More information19. Interest Rate Swaps
19. Interest Rate Swaps Reading: Stigum 19 on Swaps. See also Hull who builds from the idea (mentioned in Stigum) that swaps are like a portfolio of forward contracts. Daily Financial Times includes bidask
More informationSingle Name Credit Derivatives:
Single ame Credit Derivatives: Products & Valuation Stephen M Schaefer London Business School Credit Risk Elective Summer 2012 Objectives To understand What singlename credit derivatives are How single
More informationA Short Introduction to Credit Default Swaps
A Short Introduction to Credit Default Swaps by Dr. Michail Anthropelos Spring 2010 1. Introduction The credit default swap (CDS) is the most common and widely used member of a large family of securities
More informationACI THE FINANCIAL MARKETS ASSOCIATION
ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARDFORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE
More informationIntroduction to Financial Derivatives
550.444 Introduction to Financial Derivatives Week of October 22, 2012 Swaps Where we are Previously: Interest Rate Futures (Chapter 6, OFOD) and FRAs Last Week: Mid Term (& Review) This Week: Swaps (Chapter
More informationDerivatives Interest Rate Futures. Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles
Derivatives Interest Rate Futures Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Interest Rate Derivatives Forward rate agreement (FRA): OTC contract
More informationBond Valuation. Capital Budgeting and Corporate Objectives
Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond markets» What
More informationFinancialInstitutions Management. Solutions 4. 8. The following are the foreign currency positions of an FI, expressed in the foreign currency.
Solutions 4 Chapter 14: oreign Exchange Risk 8. The following are the foreign currency positions of an I, expressed in the foreign currency. Currency Assets Liabilities X Bought X Sold Swiss franc (S)
More informationFIN 683 Financial Institutions Management ForeignCurrency Risk
FIN 683 Financial Institutions Management ForeignCurrency Risk Professor Robert B.H. Hauswald Kogod School of Business, AU Global Banks Globalization of financial markets has increased foreign exposure
More informationIntroduction to Fixed Income (IFI) Course Syllabus
Introduction to Fixed Income (IFI) Course Syllabus 1. Fixed income markets 1.1 Understand the function of fixed income markets 1.2 Know the main fixed income market products: Loans Bonds Money market instruments
More informationInternational Bond and Money Markets. Quiz Questions. TrueFalse Questions
Chapter 9 International Bond and Money Markets Quiz Questions TrueFalse Questions 1. The abolition of the Interest Equalization Tax, Regulation M, the cold war, and the US and UK foreign exchange controls
More informationForwards and Futures
Prof. Alex Shapiro Lecture Notes 16 Forwards and Futures I. Readings and Suggested Practice Problems II. Forward Contracts III. Futures Contracts IV. ForwardSpot Parity V. Stock Index ForwardSpot Parity
More informationCHAPTER 6. Different Types of Swaps 1
CHAPTER 6 Different Types of Swaps 1 In the previous chapter, we introduced two simple kinds of generic swaps: interest rate and currency swaps. These are usually known as plain vanilla deals because the
More informationLOCKING IN TREASURY RATES WITH TREASURY LOCKS
LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interestrate sensitive financial decisions often involve a waiting period before they can be implemented. This delay exposes institutions to the risk that
More informationFinancialInstitutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:
FIN 683 Professor Robert Hauswald FinancialInstitutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks  Interest Rate Risks 6. A financial institution has the following market
More informationChapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.
Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity
More informationWhat are Swaps? Spring 2014. Stephen Sapp
What are Swaps? Spring 2014 Stephen Sapp Basic Idea of Swaps I have signed up for the Wine of the Month Club and you have signed up for the Beer of the Month Club. As winter approaches, I would like to
More informationFinance 350: Problem Set 6 Alternative Solutions
Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas
More informationFTS Real Time System Project: Arbitrage Free Pricing and Carry Costs: Application of the Cost of Carry Model to Stock Index Futures
FTS Real Time System Project: Arbitrage Free Pricing and Carry Costs: Application of the Cost of Carry Model to Stock Index Futures Question: How do you apply the cost of carry model of arbitrage free
More informationLecture 09: Multiperiod Model Fixed Income, Futures, Swaps
Lecture 09: Multiperiod Model Fixed Income, Futures, Swaps Prof. Markus K. Brunnermeier Slide 091 Overview 1. Bond basics 2. Duration 3. Term structure of the real interest rate 4. Forwards and futures
More informationIntroduction to Eris Exchange Interest Rate Swap Futures
Introduction to Eris Exchange Interest Rate Swap Futures Overview Eris Exchange interest rate swap futures ( Eris contracts ) have been designed to replicate the net cash flows associated with plainvanilla,
More informationBond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview
Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation
More informationJanuary 1, Year 1 Equipment... 100,000 Note Payable... 100,000
Illustrations of Accounting for Derivatives Extension of Chapter 11 Web This reading illustrates the accounting for the interest rate swaps in Examples 13 and 14 in Chapter 11. Web problem DERIVATIVE 1
More informationEndofchapter Questions for Practice (with Answers)
MFIN6003 Derivative Securities Dr. Huiyan Qiu Endofchapter Questions for Practice (with Answers) Following is a list of selected endofchapter questions for practice from McDonald s Derivatives Markets.
More informationSwaps: complex structures
Swaps: complex structures Complex swap structures refer to nonstandard swaps whose coupons, notional, accrual and calendar used for coupon determination and payments are tailored made to serve client
More informationLearning Curve Interest Rate Futures Contracts Moorad Choudhry
Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in shortterm interest rate derivatives is a large and liquid one, and the instruments involved are
More informationUnderstanding FX Forwards. A Guide for Microfinance Practitioners
Understanding FX Forwards A Guide for Microfinance Practitioners Forwards Use: Forward exchange contracts are used by market participants to lock in an exchange rate on a specific date. An Outright Forward
More informationIntroduction to swaps
Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (TexasAustin) and Donald
More informationInterest rate Derivatives
Interest rate Derivatives There is a wide variety of interest rate options available. The most widely offered are interest rate caps and floors. Increasingly we also see swaptions offered. This note will
More informationFinancial Risk Management
Review of asset liability management University of Oulu  Department of Finance Spring 2016 Balance sheet of a bank ASSETS e Risk factor Unfavorable scenario Cash and Receivables Cash 60 No risk USD receivables
More informationMoney Market and Debt Instruments
Prof. Alex Shapiro Lecture Notes 3 Money Market and Debt Instruments I. Readings and Suggested Practice Problems II. Bid and Ask III. Money Market IV. Long Term Credit Markets V. Additional Readings Buzz
More informationModeling VaR of Swaps. Dr Nitin Singh IIM Indore (India)
Modeling VaR of Swaps Dr Nitin Singh IIM Indore (India) nsingh@iimidr.ac.in Modeling VaR of Swaps @Risk application Palisade Corporation Overview of Presentation Swaps Interest Rate Swap Structure and
More informationReadings and Learning Outcome Statements Study Session 16 Derivative Investments: Forwards and Futures... 9
Book 5 Derivatives and Portfolio Management Readings and Learning Outcome Statements... 3 Study Session 16 Derivative Investments: Forwards and Futures... 9 Study Session 17 Derivative Investments: Options,
More informationFixed Income: Practice Problems with Solutions
Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semiannual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.
More informationReview for Exam 1. Instructions: Please read carefully
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More information1.2 Structured notes
1.2 Structured notes Structured notes are financial products that appear to be fixed income instruments, but contain embedded options and do not necessarily reflect the risk of the issuing credit. Used
More informationForward Contracts and Forward Rates
Forward Contracts and Forward Rates Outline and Readings Outline Forward Contracts Forward Prices Forward Rates Information in Forward Rates Reading Veronesi, Chapters 5 and 7 Tuckman, Chapters 2 and 16
More informationTotal return swaps (TRS)
Total return swaps (TRS) DEFINITION Total return swap is the generic name for a bilateral financial contract where one party, the total return payer, agrees to make floating payment equal to the total
More informationACCOUNTING OF INTEREST RATE DERIVATIVES
7 FORWARD RATE AGREEMENT (FRA), INTEREST RATE SWAP (IRS) Ing. Eleonóra Vajdová Forward Rate Agreement (FRA) A Forward Rate Agreement is a trade where the counterparties agree on an interest rate, the trade
More informationIn this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities,
2 Treasury Securities In this chapter we will learn about Treasury Bills, Treasury Notes and Bonds, Strips, Treasury Inflation Protected Securities, and a few other products including Eurodollar deposits.
More informationWhite Paper. Whitepaper. Currency Forwards in Fixed Income Portfolio Analysis. Copyright 2016 FactSet Research Systems Inc. All rights reserved.
White Paper Whitepaper Forwards in Fixed Income Portfolio Analysis Copyright 2016 FactSet Research Systems Inc. All rights reserved. Forwards in Fixed Income Portfolio Analysis Contents Introduction...
More informationFIXEDINCOME SECURITIES. Chapter 11. Forwards and Futures
FIXEDINCOME SECURITIES Chapter 11 Forwards and Futures Outline Futures and Forwards Types of Contracts Trading Mechanics Trading Strategies Futures Pricing Uses of Futures Futures and Forwards Forward
More informationIntroduction to Bond Valuation. Types of Bonds
Introduction to Bond Valuation (Text reference: Chapter 5 (Sections 5.15.3, Appendix)) Topics types of bonds valuation of bonds yield to maturity term structure of interest rates more about forward rates
More informationNotes for Lecture 3 (February 14)
INTEREST RATES: The analysis of interest rates over time is complicated because rates are different for different maturities. Interest rate for borrowing money for the next 5 years is ambiguous, because
More informationYields, Swaps, &CorporateFinance
&CorporateFinance Financing Tactics Teaching with Bloomberg Exelon Center Finance Labs Conference University of Delaware August 2013 Gratitude Thanks, Rich, for our Conference. Thanks to all of you for
More informationTreasury Bond Futures
Treasury Bond Futures Concepts and Buzzwords Basic Futures Contract Futures vs. Forward Delivery Options Reading Veronesi, Chapters 6 and 11 Tuckman, Chapter 14 Underlying asset, markingtomarket, convergence
More informationCHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS
INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS 1. What is an interest rate swap? What is the difference between a basis swap and a coupon
More informationNOTES ON THE BANK OF ENGLAND UK YIELD CURVES
NOTES ON THE BANK OF ENGLAND UK YIELD CURVES The MacroFinancial Analysis Division of the Bank of England estimates yield curves for the United Kingdom on a daily basis. They are of three kinds. One set
More informationLearning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002
Learning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002 Aaron Nematnejad works in the fixed income analytics team at Bloomberg L.P. in London. He graduated
More informationAnalytical Research Series
EUROPEAN FIXED INCOME RESEARCH Analytical Research Series INTRODUCTION TO ASSET SWAPS Dominic O Kane January 2000 Lehman Brothers International (Europe) Pub Code 403 Summary An asset swap is a synthetic
More informationCoupon Bonds and Zeroes
Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zerocoupon bonds Bond replication Noarbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semiannual compounding
More informationCurrency and Interest Rate Swaps
MWF 3:154:30 Gates B01 Final Exam MS&E 247S Fri Aug 15 2008 12:15PM3:15PM Gates B01 Or Saturday Aug 16 2008 12:15PM3:15PM Gates B01 Remote SCPD participants will also take the exam on Friday, 8/15 Please
More informationPractice set #4 and solutions
FIN465 Derivatives (3 credits) Professor Michel Robe Practice set #4 and solutions To help students with the material, seven practice sets with solutions will be handed out. They will not be graded: the
More information2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13
Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.
More informationThe new ACI Diploma. Unit 2 Fixed Income & Money Markets. Effective October 2014
The new ACI Diploma Unit 2 Fixed Income & Money Markets Effective October 2014 8 Rue du Mail, 75002 Paris  France T: +33 1 42975115  F: +33 1 42975116  www.aciforex.org The new ACI Diploma Objective
More informationCFA Level 2 Derivatives  I
CFA Level 2 Derivatives  I EduPristine www.edupristine.com Agenda Forwards Markets and Contracts Future Markets and Contracts Option Markets and Contracts 1 Forwards Markets and Contracts 2 Pricing and
More informationCHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock s beta and a bond s duration are used similarly to determine the expected percentage gain or loss
More informationManaging Interest Rate Exposure
Managing Interest Rate Exposure Global Markets Contents Products to manage Interest Rate Exposure...1 Interest Rate Swap Product Overview...2 Interest Rate Cap Product Overview...8 Interest Rate Collar
More informationFIN 684 FixedIncome Analysis Approximating Price Changes: From Duration to Convexity Professor Robert B.H. Hauswald Kogod School of Business, AU
FIN 684 FiedIncome Analysis Approimating Price Changes: From Duration to Conveity Professor Robert B.H. Hauswald Kogod School of Business, AU From Yields to Their Analysis Review: discrete and continuous
More information8. Eurodollars: Parallel Settlement
8. Eurodollars: Parallel Settlement Eurodollars are dollar balances held by banks or bank branches outside the country, which banks hold no reserves at the Fed and consequently have no direct access to
More informationInternational Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions
International Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions This Annex supplements and should be read in conjunction with the General Disclosure Statement. NOTHING
More informationCHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on longterm bonds are geometric averages of present and expected future short rates. An upward sloping curve is
More informationInstructions and Guide for Basis Swaps To Assess Borrowing Opportunities Lab
Instructions and Guide for Basis Swaps To Assess Borrowing Opportunities Lab FINC413 Lab c 2014 Paul Laux and Huiming Zhang 1 Introduction 1.1 Overview In last lab, you explored basics of swaps, focusing
More informationFNCE 301, Financial Management H Guy Williams, 2006
REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including
More informationChapter 16: Financial Risk Management
Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits
More informationUntangling F9 terminology
Untangling F9 terminology Welcome! This is not a textbook and we are certainly not trying to replace yours! However, we do know that some students find some of the terminology used in F9 difficult to understand.
More informationApplication of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma
Institute of Actuaries of India Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma 21 st IFS Seminar Indian Actuarial Profession Serving the
More information