OIS Discounting: Changing the Way Interest Rate Swaps are Valued By: Bryan Kern, February 2012

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "OIS Discounting: Changing the Way Interest Rate Swaps are Valued By: Bryan Kern, February 2012"

Transcription

1 OIS Discounting: Changing the Way Interest Rate Swaps are Valued By: Bryan Kern, February 2012 What is OIS? T Figure 1 plots the Federal Funds curve against a curve that is much more familiar to many participants in the interest rate derivatives markets: the 3 Month LIBOR curve. As seen in the graph, the anticipated forward rates for Fed Funds are currently lower than those for 3 Month LIBOR. While this difference may seem rather small, it could have significant meaning for some end users of interest rate derivatives. he acronym OIS stands for Overnight Index Swap and represents a term interest rate swap against an overnight index. In the United States, the OIS curve represents in its most simplistic sense the Federal Funds curve. 3.50% 3M LIBOR Fed Funds Feb-14 Feb-16 Feb-18 Feb-20 Feb-22 Feb-24 Feb-26 Feb-28 Feb-30 Feb-32 Feb-34 Feb-36 Feb-38 Feb-40 Feb-42 Figure 1: 3 Month LIBOR forward rates versus Fed Funds forward rates 3.50% Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Min 0.06% Avg 0.46% Max 3.64% Current 0.38% 3M LIBOR - 3M OIS Spread Aug-10 Feb-11 Aug-11 Figure 2: 3 Month LIBOR versus 3 Month OIS over the past 5 years. Not only does OIS currently trade at a discount to 3 Month LIBOR, but it has consistently done so throughout modern history. Figure 2 shows that the difference between 3 Month LIBOR and 3 Month OIS has averaged approximately 46 basis points (0.46%) over the past 5 years and is currently only 8 basis points (0.08%) below this average. Page 1

2 What Changes Are Occurring and Why? Swap dealers across the industry are changing the way they discount cashflows for interest rate derivatives. For decades, dealers used the 3 Month LIBOR curve as the standard for discounting. Following the credit crisis that began in 2007, dealers felt that the value of interest rate swaps should be calculated using the same discounting methodology used to determine earnings on collateral posted against those swaps. In other words, if a dealer is posting cash as collateral for a swap and that cash is earning Fed Funds, shouldn t the value of the swap be determined by discounting with Fed Funds? Throughout 2012, we expect the majority of all swaps dealers to begin discounting along a term curve OIS curve that has historically traded at a discount to the 3 Month LIBOR curve. By using a lower discount rate, anticipated net cashflows on interest rate swaps will be valued closer to their par values and end users may be significantly impacted. How Will OIS Discounting Impact End Users? Dealers move to OIS discounting will have varying effect for end users depending upon: 1. The shape of the then-current yield curve 2. The absolute level of interest rates 3. The LIBOR-OIS spread for the tenor of the associated derivative 4. The particular derivative the end user has in place or is considering executing. Focusing on today s interest rate environment, the most noticeable impact to end users will be for those users that currently have swaps in place. In particular, long-term swaps that are deeply under water can be significantly affected. Once a swap has been entered into, the value of that swap will be impacted by the market s anticipation for the future path of the variable rate index(es) to which that swap is subject (i.e. the forward curve). For the most common type of interest rate derivative implemented by end users a swap under which the borrower pays a fixed rate and receives a variable rate the value of the swap becomes an increasing liability as term rates decrease. Based on the current level of interest rates, many end users swaps have reached their highest liability since inception. When dealers convert to OIS discounting, these liabilities will grow even larger. Figure 3 below outlines cashflows for a $100 million, non-amortizing swap against 1 Month LIBOR. We have assumed that this particular end user entered into a thirty year swap in February 2007 paying 5.25% and has twenty five years remaining. The projected net cashflows represent the difference between the 5.25% coupon and the currently anticipated 1 Month LIBOR forward rates. For brevity, we have aggregated cashflows and discount factors by year. Page 2

3 Based on the current market, converting the discount curve from 3 Month LIBOR to OIS increases the value of the swap by over $1 million to the detriment of the fixed rate payer. This change is equivalent to increasing the fixed rate on this particular swap by over 5.5 basis points (in derivatives vernacular: 5.5 fixed 01s ). If the swap remains in place until maturity, and the end user is appropriately applying hedge accounting, the impact of this change is largely irrelevant. However, for those end users not applying hedging accounting or who anticipate terminating the swap prior to maturity, the impact of this change is quite real. In general, the magnitude of the impact of this change in discounting is positively correlated with both the tenor of the swap and the amount by which the swap is in or out of the money. Year Projected Net OIS Discounting Aggregate Discount Factor Present Value of Net LIBOR Discounting Aggregate Discount Factor Present Value of Net Difference ,619, ,616, ,610,163 6, ,816, ,805, ,780,402 24, ,560, ,534, ,492,748 41, ,894, ,842, ,792,800 49, ,317, ,225, ,173,952 51, ,754, ,624, ,575,250 49, ,385, ,216, ,168,050 48, ,183, ,971, ,924,032 47, ,062, ,804, ,759,585 45, ,897, ,607, ,565,570 41, ,817, ,488, ,447,768 40, ,732, ,372, ,332,335 39, ,704, ,305, ,264,419 41, ,734, ,284, ,240,863 43, ,778, ,273, ,227,506 46, ,854, ,283, ,235,632 48, ,917, ,284, ,235,000 49, ,975, ,279, ,229,954 49, ,010, ,259, ,211,376 48, ,041, ,236, ,189,827 46, ,041, ,195, ,151,322 44, ,031, ,150, ,108,778 41, ,033, ,114, ,074,185 39, ,042, ,081, ,044,012 37, ,063, ,056, ,020,568 36, , , ,469 5,736 Total 50,084,070 49,019,566 1,064,503 Figure 3: Cashflows for a hypothetical swap under which end user pays a fixed rate of 5.25% and receives 1 Month LIBOR over the next 25 years on $100 million (non-amortizing). Fixed and variable cashflows are based on an Act/360 daycount. Monthly discount factors have been aggregated for brevity. Data source: Bloomberg Page 3

4 For new swaps, the impact may not be as evident. In a perfectly flat yield curve environment where the fixed rate is equal to the anticipated forwards along the entire term curve, there would be no impact of changing the discount rate (there are no anticipated net cashflows to discount). However, swap dealers require compensation to cover credit exposure, hedging costs, and profit. As the swap rate is altered the swap immediately becomes a liability for the end user and larger so using OIS discounting. So even with a flat yield curve, the value of the swap is impacted (albeit moderately so). In today s market where the yield curve is upward sloping, the impact is more noticeable. Figure 4 shows 1M LIBOR forwards versus the mid-market 10 year LIBOR swap rate. We can see that because of the steepness of the current yield curve, the positive cashflows for the fixed rate receiver are expected to occur within the first 4.5 years while the negative cashflows for the fixed rate receiver occur between year 4.5 and year 10 (i.e. the negative cashflows are being discounted for a much longer period). By using the lower OIS discount rate, the positive cashflows are only slightly more positive while the negative cashflows are much more negative than if 3.50% we had used a discount rate based on the 3 Month LIBOR curve. To offset this discrepancy, the fixed rate on the swap must be increased so that the present value of the positive cashflows offsets the present value of the negative 1M LIBOR Fwd Curve cashflows. In short, OIS discounting will increase fixed swap rates in today s market. In the case of a ten year swap, the fixed rate must be increased by approximately 1 basis point (0.01%). Feb-13 The impact of higher fixed swap rates will also have a direct impact on option strategies including caps, floors, and swaptions. Not only will the at-the-money forward rate be higher in today s environment, but the premium generated by options will be discounted at a lower interest rate. Feb-14 Feb-15 Feb-16 Feb-17 Fixed Rate (1.98%) Feb-18 Feb-19 Feb-20 Feb-21 Figure 4: 1 Month LIBOR forwards versus current 10 year fixed swap rate. The swap rate assumes a floating index of 1 Month LIBOR, paid monthly, Act/360 daycount. Feb-22 Page 4

5 What Can End Users Do? End users should discuss swap dealers discounting methodology prior to entering into any new swap transactions. This should include a discussion as to how they re currently discounting swap cashflows as well as how they anticipate doing so in the event the swap is terminated in the future. For those that have existing swaps in place that will be adversely affected by OIS discounting, the jury is still out. It has been our experience that a few end users desiring to terminate swaps in the near future are trying to get their swaps grandfathered under the prior discounting methodology if they terminate in the very near future. Depending upon an end user s cash reserves and rate view, terminating could be an option. For our end user above with their $100 million 25 year swap, terminating today using 3 Month LIBOR discounting versus terminating tomorrow using OIS discounting would save them over $1 million. For those end users that anticipate carrying swaps to maturity and are applying hedge accounting, there may be no cause for alarm to begin with. Regardless of the outcome, we feel that this unilateral change to a decades-old methodology is sure to be a topic of debate in the near future. Bryan Kern is Principal and Senior Advisor at KPM Financial, a debt and derivatives advisory firm serving the municipal, non-profit, corporate and real-estate markets. He can be reached at Page 5

Prepayment Comparison: Fixed Rate Loans Vs. Interest Rate Swaps

Prepayment Comparison: Fixed Rate Loans Vs. Interest Rate Swaps Prepayment Comparison: Fixed Rate Loans Vs. Interest Rate Swaps By: Bryan Kern, August 2012 Market Overview Fixed Rate Loan Prepayment Penalties F rom August, 15 2007 to August 15, 2012 the ten year Treasury

More information

Rolldown and Carry: Low Yields Do Not Mean Unattractive Returns. For Institutional Investors

Rolldown and Carry: Low Yields Do Not Mean Unattractive Returns. For Institutional Investors Rolldown and Carry: Low Yields Do Not Mean Unattractive Returns For Institutional Investors Contents Introduction 3 The Importance of Carry 4 Considerations for LDI 6 What Now? 7 About the Authors 8 Further

More information

Interest 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. 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 information

Fixed Income Securities

Fixed Income Securities 3st lecture IES, UK October 7, 2015 Outline Bond Characteristics 1 Bond Characteristics 2 Bond Characteristics Government bond listing Rate Maturity mo/yr Bid Asked Chg Ask yld 3.000 July 12 108:22 108:23-20

More information

Interest Rate Hedging. November 2007

Interest Rate Hedging. November 2007 November 2007 ASSET = LEASE Deal Example LIABILITY = DEBT Airbus A320 cost $40m 85% floating rate debt : $34m Aircraft placed on lease for 7 years at fixed rental of $350k per month, priced at 5% Libor

More information

YIELD CURVE GENERATION

YIELD 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 information

Libor Rates and the Credit Crunch

Libor Rates and the Credit Crunch Libor Rates and the Credit Crunch Libor Rates in the pre Credit Crunch world Quick Recap Libor: an interest rate at which banks are willing to lend/borrow money without receiving/posting any kind of collateral

More information

Using interest rate swaps to increase commercial loans and fee Income By Chad McKeithen

Using interest rate swaps to increase commercial loans and fee Income By Chad McKeithen Using interest rate swaps to increase commercial loans and fee Income By Chad McKeithen Changing landscape There is a growing dilemma between banks nationwide. Some banks are increasing their commercial

More information

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull

Chapter 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 information

IFRS 9 CHAPTER 6 HEDGE ACCOUNTING

IFRS 9 CHAPTER 6 HEDGE ACCOUNTING IFRS 9 CHAPTER 6 HEDGE ACCOUNTING Implementation Guidance 1 IFRS Foundation DRAFT IMPLEMENTATION GUIDANCE GUIDANCE ON IMPLEMENTING IFRS 9 FINANCIAL INSTRUMENTS Illustrative examples Questions and answers

More information

Treasury Floating Rate Notes

Treasury Floating Rate Notes Global Banking and Markets Treasury Floating Rate Notes DATE: April 2012 Recommendation summary The USD 7trn money market should support significant FRN issuance from the Treasury. This would diversify

More information

Note 8: Derivative Instruments

Note 8: Derivative Instruments Note 8: Derivative Instruments Derivative instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other financial or commodity prices

More information

Interest Rate Swaps and Fixed Income Portfolio Analysis

Interest 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 information

International Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions

International 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 information

Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull

Chapter 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 information

Hedging Interest-Rate Risk: A Primer in Instruments. & Accounting. September 29, 2015. Presented by: Ruth Hardie

Hedging Interest-Rate Risk: A Primer in Instruments. & Accounting. September 29, 2015. Presented by: Ruth Hardie Hedging Interest-Rate Risk: A Primer in Instruments September 29, 2015 & Accounting Presented by: Ruth Hardie Hedge Trackers, LLC Integrated Derivative Management Interest Rate, Foreign Currency and Commodities

More information

1Q 2014 Stockholder Supplement. May 7, 2014

1Q 2014 Stockholder Supplement. May 7, 2014 1Q 2014 Stockholder Supplement May 7, 2014 Safe Harbor Notice This presentation, other written or oral communications and our public documents to which we refer contain or incorporate by reference certain

More information

Note 10: Derivative Instruments

Note 10: Derivative Instruments Note 10: Derivative Instruments Derivative instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other financial or commodity

More information

Simplified hedge accounting approach

Simplified hedge accounting approach No. 2014-06 April 3, 2014 What s inside: Overview... 1 Background... 1 Key provisions... 2 Applicability of simplified hedge accounting approach... 2 Recognition... 3 Hedge documentation requirements...

More information

1.2 Structured notes

1.2 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 information

RAMAPO COLLEGE OF NEW JERSEY 479. DEBT MANAGEMENT POLICY Procedures

RAMAPO COLLEGE OF NEW JERSEY 479. DEBT MANAGEMENT POLICY Procedures Debt Capacity Procedures It is the objective of the College to maintain no less than a single A category underlying rating for all debt at the time of issue. Core financial ratios that are strongly correlated

More information

ASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006

ASSET 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 information

Interest Rates and Commercial Real Estate By Robert Hand

Interest Rates and Commercial Real Estate By Robert Hand Interest Rates and Commercial Real Estate By Robert Hand When you hear on TV that the Fed moved rates lower today, the anchorperson is attempting to share news that will help you, but actually the news

More information

Callable Bonds - Structure

Callable Bonds - Structure 1.1 Callable bonds A callable bond is a fixed rate bond where the issuer has the right but not the obligation to repay the face value of the security at a pre-agreed value prior to the final original maturity

More information

Total return swaps (TRS)

Total 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 information

Floating rate Payments 6m Libor. Fixed rate payments 1 300000 337500-37500 2 300000 337500-37500 3 300000 337500-37500 4 300000 325000-25000

Floating rate Payments 6m Libor. Fixed rate payments 1 300000 337500-37500 2 300000 337500-37500 3 300000 337500-37500 4 300000 325000-25000 Introduction: Interest rate swaps are used to hedge interest rate risks as well as to take on interest rate risks. If a treasurer is of the view that interest rates will be falling in the future, he may

More information

Analytical Research Series

Analytical 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 information

Common Mistakes in Managing Your Municipality's Investment Portfolio

Common Mistakes in Managing Your Municipality's Investment Portfolio Common Mistakes in Managing Your Municipality's Investment Portfolio Presented by David Schiffman Senior Financial Strategist The Investment Policy Why it s important to have a written investment policy?

More information

Chapter Eight Interest Rate Risk I

Chapter Eight Interest Rate Risk I Chapter Eight Interest Rate Risk I Solutions for End-of-Chapter Questions and Problems. Problems through #20 refer to the re-pricing model. 1. How do monetary policy actions made by the Federal Reserve

More information

Risk and Investment Conference 2013. Brighton, 17 19 June

Risk and Investment Conference 2013. Brighton, 17 19 June Risk and Investment Conference 03 Brighton, 7 9 June 0 June 03 Acquiring fixed income assets on a forward basis Dick Rae, HSBC and Neil Snyman, Aviva Investors 8 June 0 Structure of Presentation Introduction

More information

Managing Interest Rate Exposure

Managing 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 information

Deloitte Valuation Conference

Deloitte Valuation Conference Deloitte Valuation Conference Valuation challenges in credit institutions and investment firms June 2015 January 2015 2015 Deloitte Tax & Consulting 1 Agenda 1. Introduction Valuation challenges in credit

More information

Bank of America AAA 10.00% T-Bill +.30% Hypothetical Resources BBB 11.90% T-Bill +.80% Basis point difference 190 50

Bank of America AAA 10.00% T-Bill +.30% Hypothetical Resources BBB 11.90% T-Bill +.80% Basis point difference 190 50 Swap Agreements INTEREST RATE SWAP AGREEMENTS An interest rate swap is an agreement to exchange interest rate payments on a notional principal amount over a specific period of time. Generally a swap exchanges

More information

Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma

Application 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

Investing in Bond Funds:

Investing in Bond Funds: : What s in YOUR bond fund? By: Bruce A. Hyde and Steven Saunders Summary Investors who rely primarily on duration in choosing a bond fund may inadvertently introduce extension risk to their bond portfolio.

More information

What are Swaps? Spring 2014. Stephen Sapp

What 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 information

Dataline A look at current financial reporting issues

Dataline A look at current financial reporting issues Dataline A look at current financial reporting issues No. 2013-25 December 10, 2013 What s inside: Overview...1 Background... 2 OIS discounting an illustration... 3 Implications for market participants...

More information

Introduction to swaps

Introduction 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 (Texas-Austin) and Donald

More information

Introduction to Eris Exchange Interest Rate Swap Futures

Introduction 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 plain-vanilla,

More information

LOCKING IN TREASURY RATES WITH TREASURY LOCKS

LOCKING IN TREASURY RATES WITH TREASURY LOCKS LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interest-rate sensitive financial decisions often involve a waiting period before they can be implemen-ted. This delay exposes institutions to the risk that

More information

FINA 5331 Exam #1. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

FINA 5331 Exam #1. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FINA 5331 Exam #1 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) During business cycle expansions when income and wealth are rising, the

More information

Should My Credit Union Use Derivatives to Manage Interest Rate Risk?

Should My Credit Union Use Derivatives to Manage Interest Rate Risk? Should My Credit Union Use Derivatives to Manage Interest Rate Risk? On January 23, 2014, the NCUA Board adopted a final rule that allows federal credit unions to mitigate interest rate risk with permissible

More information

Accounting for Interest Rate Derivatives. Frank Wilary and Douglas Winn

Accounting for Interest Rate Derivatives. Frank Wilary and Douglas Winn Accounting for Interest Rate Derivatives FAS ASC 815 Presented by Frank Wilary and Douglas Winn May 1, 2014 1 Describe hedge accounting and provide examples Address hedge effectiveness testingti Define

More information

Understanding Cross Currency Swaps. A Guide for Microfinance Practitioners

Understanding 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 information

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed 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 information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Pricing and Strategy for Muni BMA Swaps

Pricing and Strategy for Muni BMA Swaps J.P. Morgan Management Municipal Strategy Note BMA Basis Swaps: Can be used to trade the relative value of Libor against short maturity tax exempt bonds. Imply future tax rates and can be used to take

More information

Modeling VaR of Swaps. Dr Nitin Singh IIM Indore (India)

Modeling 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 information

January 1, Year 1 Equipment... 100,000 Note Payable... 100,000

January 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 information

DEBT MARKETS SPRING 2014 10.45 TO 12.15 331 URIS HALL (MONDAYS AND WEDNESDAYS)

DEBT MARKETS SPRING 2014 10.45 TO 12.15 331 URIS HALL (MONDAYS AND WEDNESDAYS) DEBT MARKETS SPRING 2014 10.45 TO 12.15 331 URIS HALL (MONDAYS AND WEDNESDAYS) INSTRUCTOR: Suresh Sundaresan Office Location: 401 Uris Hall Office Phone: 212-854- 4423 Fax: 212-316- 9180 E- mail: ms122@columbia.edu

More information

Tenor Adjustments for a Basis Swap

Tenor Adjustments for a Basis Swap Tenor Adjustments for a Basis Swap by Chandrakant Maheshwari Praveen Maheshwari Table of Contents 1. Introduction 3 2. Tenor Adjustment Methodology for a Basis Swap 3 3. Why this Tenor Spread so important

More information

Swaps: complex structures

Swaps: complex structures Swaps: complex structures Complex swap structures refer to non-standard swaps whose coupons, notional, accrual and calendar used for coupon determination and payments are tailored made to serve client

More information

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Pearson Education Limited 2014

More information

A Teaching Note on Pricing and Valuing Interest Rate Swaps Using LIBOR and OIS Discounting

A Teaching Note on Pricing and Valuing Interest Rate Swaps Using LIBOR and OIS Discounting A Teaching Note on Pricing and Valuing Interest Rate Swaps Using LIBOR and OIS Discounting June 202 Donald J. Smith Associate Professor of Finance Boston University School of Management 595 Commonwealth

More information

NEW YORK LONDON SINGAPORE TOKYO

NEW YORK LONDON SINGAPORE TOKYO ISDA International Swaps and Derivatives Association, Inc. One New Change London, EC4M 9QQ Telephone: 44 (20) 7330 3550 Facsimile: 44 (20) 7330 3555 email: isda@isda-eur.org website: www.isda.org Sir David

More information

Interest Rate Swaps. Application to Tax-Exempt Financing. craig underwood eric h. chu thomas b. fox jon a. mcmahon

Interest Rate Swaps. Application to Tax-Exempt Financing. craig underwood eric h. chu thomas b. fox jon a. mcmahon Interest Rate Swaps Application to Tax-Exempt Financing craig underwood eric h. chu thomas b. fox jon a. mcmahon roger l. davis stephen a. spitz albert simons iii george g. wolf DISCLAIMER: Nothing in

More information

CHAPTER 6. Different Types of Swaps 1

CHAPTER 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 information

A Best Practice Oversight Approach for Securities Lending

A Best Practice Oversight Approach for Securities Lending A Best Practice Oversight Approach for Securities Lending At its core, securities lending is an investment overlay strategy. It s an investment product that complements existing investment strategies allowing

More information

Interest Rate and Currency Swaps

Interest Rate and Currency Swaps Interest Rate and Currency Swaps Eiteman et al., Chapter 14 Winter 2004 Bond Basics Consider the following: Zero-Coupon Zero-Coupon One-Year Implied Maturity Bond Yield Bond Price Forward Rate t r 0 (0,t)

More information

TAXABLE MUNICIPAL BONDS - BUILD AMERICA BONDS February 2010

TAXABLE MUNICIPAL BONDS - BUILD AMERICA BONDS February 2010 Overview of Taxable Municipal Bonds Taxable municipal bonds first entered the market as an outgrowth of the Tax Reform Act of 1986, which established restrictions on the issuance of traditional tax-exempt

More information

Practice Set and Solutions #2

Practice Set and Solutions #2 723G26/2012-10-10 Practice Set and Solutions #2 What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These

More information

NOTES ON THE BANK OF ENGLAND UK YIELD CURVES

NOTES ON THE BANK OF ENGLAND UK YIELD CURVES NOTES ON THE BANK OF ENGLAND UK YIELD CURVES The Macro-Financial 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 information

Introduction to Derivative Instruments Part 1

Introduction to Derivative Instruments Part 1 Link n Learn Introduction to Derivative Instruments Part 1 Leading Business Advisors Contacts Elaine Canty - Manager Financial Advisory Ireland Email: ecanty@deloitte.ie Tel: 00 353 417 2991 2991 Guillaume

More information

BMO Fixed Income Yield Plus ETF Portfolio (the Fund )

BMO Fixed Income Yield Plus ETF Portfolio (the Fund ) (the Fund ) (formerly BMO Target Yield ETF Portfolio ) For the six-month period ended March 31, 2015 (the period ) Manager: BMO Investments Inc. (the Manager or BMOII ) Portfolio manager: BMO Asset Management

More information

COST OF LONG-TERM DEBT

COST OF LONG-TERM DEBT Filed: 0-- EB-0-0 Exhibit B Tab Schedule Page of COST OF LONG-TERM DEBT.0 HYDRO ONE DISTRIBUTION LONG-TERM DEBT The debt portfolio for Hydro One Distribution, as set out in Exhibit B, Tab, Schedule, is

More information

Equity-index-linked swaps

Equity-index-linked swaps Equity-index-linked 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. 3-month LIBOR) and the

More information

LIBOR vs. OIS: The Derivatives Discounting Dilemma

LIBOR vs. OIS: The Derivatives Discounting Dilemma LIBOR vs. OIS: The Derivatives Discounting Dilemma John Hull PRMIA May 2012 1 Agenda OIS and LIBOR CVA and DVA The Main Result Potential Sources of Confusion FVA and DVA See John Hull and Alan White: LIBOR

More information

PART 204 ACCOUNTING AND REPORTING FOR PUBLIC AUTHORITIES THAT ISSUE STATE-SUPPORTED DEBT

PART 204 ACCOUNTING AND REPORTING FOR PUBLIC AUTHORITIES THAT ISSUE STATE-SUPPORTED DEBT PART 204 ACCOUNTING AND REPORTING FOR PUBLIC AUTHORITIES THAT ISSUE STATE-SUPPORTED DEBT (Statutory authority: Constitution, article X, 5; State Finance Law, 8[9], [14]) Sec. 204.1 Purpose 204.2 Applicability

More information

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics Trading the Yield Curve Copyright 1999-2006 Investment Analytics 1 Trading the Yield Curve Repos Riding the Curve Yield Spread Trades Coupon Rolls Yield Curve Steepeners & Flatteners Butterfly Trading

More information

Chapter Nine Selected Solutions

Chapter Nine Selected Solutions Chapter Nine Selected Solutions 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the

More information

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the difference between a swap broker and a swap dealer. Answer:

More information

Advanced forms of currency swaps

Advanced 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 information

7. Bonds and Interest rates

7. Bonds and Interest rates 7. Bonds and Interest rates 1 2 Yields and rates I m thinking of buying a bond that has a face value of $1000, pays semiannual coupons of $40 and has 7 years to maturity. The market price is $943. Fixed

More information

ETN Ticker: AMJL. October 10, Credit Suisse AG

ETN Ticker: AMJL. October 10, Credit Suisse AG October 10, 2016 X-Links Monthly Pay 2xLeveraged Alerian MLP Index ETN ETN Ticker: AMJL Key Features Monthly compounded 2x leveraged exposure to the Alerian MLP Index. Income potential in the form of a

More information

Investor Presentation: Pricing of MRU s Private Student Loan. July 7, 2008 NASDAQ: UNCL

Investor Presentation: Pricing of MRU s Private Student Loan. July 7, 2008 NASDAQ: UNCL Investor Presentation: Pricing of MRU s Private Student Loan Securitization July 7, 2008 NASDAQ: UNCL Disclaimer and Disclosure Statement 1 Except for historical information contained herein, this presentation

More information

Eris Interest Rate Swap Futures: Flex Contract Specifications

Eris Interest Rate Swap Futures: Flex Contract Specifications Eris Interest Rate Swap Futures: Flex Contract Specifications Trading Hours Contract Structure Contract Size Trading Conventions Swap Futures Leg Conventions Effective Date Cash Flow Alignment Date ( CFAD

More information

NOTE 13. Derivative Financial Instruments

NOTE 13. Derivative Financial Instruments Notes to Financial Statements [Abstract] 9 Months Ended Sep. 30, 2009 USD / shares BB&T uses a variety of derivative instruments to manage interest rate and foreign risks. These instruments consist of

More information

Fixed-Income Securities. Assignment

Fixed-Income Securities. Assignment FIN 472 Professor Robert B.H. Hauswald Fixed-Income Securities Kogod School of Business, AU Assignment Please be reminded that you are expected to use contemporary computer software to solve the following

More information

BASICS OF CREDIT VALUE ADJUSTMENTS AND IMPLICATIONS FOR THE ASSESSMENT OF HEDGE EFFECTIVENESS

BASICS OF CREDIT VALUE ADJUSTMENTS AND IMPLICATIONS FOR THE ASSESSMENT OF HEDGE EFFECTIVENESS BASICS OF CREDIT VALUE ADJUSTMENTS AND IMPLICATIONS FOR THE ASSESSMENT OF HEDGE EFFECTIVENESS This is the third paper in an ongoing series that outlines the principles of hedge accounting under current

More information

CURRENT STANDARDS ON FIXED INCOME

CURRENT STANDARDS ON FIXED INCOME CURRENT STANDARDS ON FIXED INCOME PRICING FIXED INCOME SECURITIES AGAINST AN INTEREST SWAP CURVE December 2012 CNO Association régie par la loi du 1 er juillet 1901 8 rue du Mail 75002 Paris http://www.cnofrance.org

More information

Structured Investments

Structured Investments Term Sheet To prospectus dated November 21, 2008, prospectus supplement dated November 21, 2008 and product supplement no. 165-A-III dated October 18, 2010 Term sheet to Product Supplement No. 165-A-III

More information

INVESTING YOUR SUPER. IMPORTANT INFORMATION. 1 July 2015

INVESTING YOUR SUPER. IMPORTANT INFORMATION. 1 July 2015 YOUR INVESTING SUPER. 1 July 2015 IMPORTANT INFORMATION This information should be read in conjunction with the First Super Product Disclosure Statement (PDS) dated 1 July 2015. You should consider this

More information

Understanding Futures on the DTCC GCF Repo Index

Understanding Futures on the DTCC GCF Repo Index Understanding Futures on the DTCC GCF Repo Index White Paper June 2014 This material may not be reproduced or redistributed in whole or in part without the express, prior written consent of Intercontinental

More information

Learning 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 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 information

THRIVING IN A RISING RATE ENVIRONMENT. Reward Checking Is Your Best Weapon Against Interest Rate Risk

THRIVING IN A RISING RATE ENVIRONMENT. Reward Checking Is Your Best Weapon Against Interest Rate Risk THRIVING IN A RISING RATE ENVIRONMENT Reward Checking Is Your Best Weapon Against Interest Rate Risk By Jeremy Foster, CFO, Kasasa Published January 2016 SUMMARY Interest rates have recently become a major

More information

The Effects of Funding Costs and Risk on Banks Lending Rates

The Effects of Funding Costs and Risk on Banks Lending Rates The Effects of Funding Costs and Risk on Banks Lending Rates Daniel Fabbro and Mark Hack* After falling for over a decade, the major banks net interest margins appear to have stabilised in a relatively

More information

Market risk consists of market price risk, currency risk and interest rate risk.

Market risk consists of market price risk, currency risk and interest rate risk. Market Risk Market risk consists of market price risk, currency risk and interest rate risk. Market price risk the risk to incur losses due to the revaluation of balance sheet and off-balance sheet items,

More information

NUMBER: Debt Management Policy. APPROVED: April 6, Overview

NUMBER: Debt Management Policy. APPROVED: April 6, Overview NUMBER: 1640 TITLE: Debt Management Policy APPROVED: April 6, 2007 Overview Old Dominion University (AODU@ or the AUniversity@) utilizes a long-term strategic plan to establish institutional priorities

More information

Investment Analysis. Bond Value Bond Yields Bond Pricing Relationships Duration Convexity Bond Options. Bonds part 2. Financial analysis

Investment Analysis. Bond Value Bond Yields Bond Pricing Relationships Duration Convexity Bond Options. Bonds part 2. Financial analysis Bond Value Bond Yields Bond Pricing Relationships Duration Convexity Bond Options Investment Analysis Bonds part 2 Financial analysis - 2 Duration Duration = the average maturity of the bond s promised

More information

The Case for Senior Loans

The Case for Senior Loans The Case for 1.877.622.5552 www.firsttrust.ca : A Potential Opportunity for Investors With interest rates at historically low levels, these are challenging times to invest for income. At the same time,

More information

Yield Curve September 2004

Yield Curve September 2004 Yield Curve Basics The yield curve, a graph that depicts the relationship between bond yields and maturities, is an important tool in fixed-income investing. Investors use the yield curve as a reference

More information

Why an MBS-Treasury swap is better policy than the Treasury twist

Why an MBS-Treasury swap is better policy than the Treasury twist Why an MBS-Treasury swap is better policy than the Treasury twist Arvind Krishnamurthy and Annette Vissing-Jorgensen July 24, 2012 This note compares the effect of an MBS-Treasury swap (a strategy of purchasing

More information

Answers to End-of-Chapter Questions

Answers to End-of-Chapter Questions Answers to End-of-Chapter Questions 1. The bond with a C rating should have a higher risk premium because it has a higher default risk, which reduces its demand and raises its interest rate relative to

More information

Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

More information

U.S. Treasuries as a Safe Haven in Varying Economic Environments

U.S. Treasuries as a Safe Haven in Varying Economic Environments U.S. Treasuries as a Safe Haven in Varying Economic Environments Author: Neil R. Peplinski Analyst: Forrest Tarsa Good Harbor Financial, LLC neil.peplinski@goodharborfinancial.com ABSTRACT The Good Harbor

More information

Asset Liability Mgmt. Banking Book Risk

Asset Liability Mgmt. Banking Book Risk Asset Liability Mgmt. Banking Book Risk Tom Haczynski SVP SunTrust Bank Market Risk Management July 2015 The views expressed in the following material are the author s and do not necessarily represent

More information

Counterparty Risk. Gabor Fath Morgan Stanley

Counterparty Risk. Gabor Fath Morgan Stanley Counterparty Risk Gabor Fath Morgan Stanley Counterparty credit risk - definition Counterparty credit risk (CP risk) is the risk that the counterparty to a financial contract will default prior to the

More information

Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet)

Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet) Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet) The hypothetical example below is provided for informational purposes

More information

Review for Exam 1. Instructions: Please read carefully

Review 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 information

Bond Basics: Key Factors Affecting Bond Prices. Craig Sullivan, CFA, CAIA Taxable Fixed Income Analyst November 2014

Bond Basics: Key Factors Affecting Bond Prices. Craig Sullivan, CFA, CAIA Taxable Fixed Income Analyst November 2014 Bond Basics: Key Factors Affecting Bond Prices. Craig Sullivan, CFA, CAIA Taxable Fixed Income Analyst November 2014 The bond market has an illustrious history which can be traced back to promises to pay

More information