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


 Hilary Griffith
 2 years ago
 Views:
Transcription
1 Modeling VaR of Swaps Dr Nitin Singh IIM Indore (India)
2 Modeling VaR of application Palisade Corporation
3 Overview of Presentation Swaps Interest Rate Swap Structure and Uses The Swap Curve Valuation of IR Swap Bond Viewpoint & as PV of Forward Rate VaR Simulation to find VaR for swaps Implications
4 Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules
5 Interest Rate Swap An agreement between two parties to exchange a series of interest payments, one for another. Typically: One floating rate (LIBOR, TBill, Federal Funds) Other fixed rate (Based on LT rates: TBond)
6 Interest Rate Swap Notional Principal Size of Payment Example 8% on 10m quarterly Amortization = (1/4) m = 200k Parties in Swap: Fixedrate Payer FloatingRate Payer
7 Interest Rate Swap Why Swaps Work? People have opposite positions
8 Interest rate swap swapping fixed for floating or vice versa Interest rate floating fixed days
9 Interest Rate Swap Swaps can be used for: Hedging against interest rates Major players: Citigroup, JP Morgan, bankers Trust, First Chicago etc.
10 Interest Rate Swap Why Swaps Work? Market access Cheap to eliminate risk Arose from: S&L exposure in late 1970s Lent fixed rate Took ST variable rates
11 Interest Rate Swap example An agreement by Intel to receive 6month LIBOR & pay a fixed rate of 5% per annum every 6 months for two years on a notional principal of $10 million
12 Cash Flows to Intel LIBOR FLOATING FIXED Net Date Rate Cash Flow Cash Flow Cash Flow Sept 2, % March 2, % Sept 2, % March 2, % Sept 2, %
13 Cash Flow Diagram of Swap + Pay Fixed at 5%  t 0 t 1 t 2 t 3 t 4 Receive Floating at LIBOR Payment at t i, fixed at t i1 + Net Cash exchanged 
14 Typical Uses of an Interest Rate Swap Converting a liability from fixed rate to floating rate floating rate to fixed rate Sixmonth LIBOR is a shortterm AA borrowing rate Converting an investment from fixed rate to floating rate floating rate to fixed rate
15 Swap Curve March 01, 2007
16 The Comparative Advantage of Swaps Ability of Counterparties to take advantage of their comparative advantage in the Debt Markets Borrowers with different credit quality will have comparative advantage in fixed or floating Markets As a result a company may Borrow Fixed when it wants Floating Borrow Floating when it wants Fixed..It can Adjust the result through the Swap Market
17 Valuation of swaps in terms of Bonds Notional, yields, floating and fixed payments are known Procedure. Effective swaps to be computed
18 discounting to present values Dp = r 6 p 0 At date t = 6, the floating leg will pay r6% which is discounted back to t = 0 by using the sixmonth zero price at t = 0, which is p0.
19 Volatility in yield
20 forward rates f 0 (6,12) 2 f + 0(0,12) 1 2 = 2 1 f (0,6) At date t = 0, f 0 (0,12) six month forward rate that will prevail from t = 6 to t = 12
21 present value at t = 0 of receiving at t = 12 PV = 12 f 0 6,12) * ( P 12 As floating leg will reset to at t = 6 the counter party will actually pay this amount at t = 12.
22 Set PV of fixed equal to PV of floating x T PVt, t+ 1 o = T t PV x = effective swap rate PV t = present value of all floating payments t= time period (maturity) PV t,t+1 = present value of fixed leg payments t
23 @Risk model file
24 Case illustration Maturity Yield Zero Prices Forward Rates
25 Valuation of Swaps t = 6 t = 12 t = 18 t = 24 Sum Floating payments 5.50% 5.90% 6.30% 7.10% Zero prices PV (float) Total: Swap rate: ( )/ = %
26 Value at Risk Measuring risk in swaps
27 Value at Risk Quantifies risk which captures the odds of losing money What is the probability that an investor will lose money in a worst case scenario? How much (amount) can be lost in a worst case scenario?
28 VaR Monte Carlo Simulation it has a confidence level through which the analyst can estimate VaR with a certain degree of confidence An investor in a swap transaction has a potential to lose money on his transaction but what is the most that investor can (with a given confidence level) expect to lose over the next time period? VaR = 1.645σ + ( p µ ) Based on the fact that the 5% quantile of a normal distribution always occurs standard deviations below its mean
29 Simulation to find VaR Simulation used to generate multiple interest rate scenarios and compute the value that could be potentially lost..defined by three basic elements confidence level, time period and the value that could be potentially lost
30 Simulation Simulation model developed for future bond yields multiple trials though the model Simulation length was kept to 100 Replicated the simulation 50 times
31 VaR at 7.56 % of notional amount
32 @Risk output
33 Conclusions A spreadsheet model to value interest rates VaR at 7.56% of notional amount indicates that the investor is likely (5% chances) to lose this % of its invested amount An easy to use model which can be modified to do similar analysis including credit and currency risk
34 Questions..
Chapter 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 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 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 informationFloating rate Payments 6m Libor. Fixed rate payments 1 300000 33750037500 2 300000 33750037500 3 300000 33750037500 4 300000 32500025000
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 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 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 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 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 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 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 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 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 informationCurrency and Interest Rate Swaps
TTh 3:154:30 Gates B01 Final Exam MS&E 247S Friday Aug 14 2009 12:15PM3:15PM Gates B01 (alternate arrangement???) Or Saturday Aug 15 2009 7PM10PM Gates B01 (official date and time???) Remote SCPD participants
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 informationClass Note on Valuing Swaps
Corporate Finance Professor Gordon Bodnar Class Note on Valuing Swaps A swap is a financial instrument that exchanges one set of cash flows for another set of cash flows of equal expected value. Swaps
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 informationInterest Rate Swap. Product Disclosure Statement
Interest Rate Swap Product Disclosure Statement A Product Disclosure Statement is an informative document. The purpose of a Product Disclosure Statement is to provide you with enough information to allow
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 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 informationMargin Calculation Methodology and Derivatives and Repo Valuation Methodology
Margin Calculation Methodology and Derivatives and Repo Valuation Methodology 1 Overview This document presents the valuation formulas for interest rate derivatives and repo transactions implemented in
More informationLandmark Investment. Bank. Definition. Company. Why is KIBOR decreasing. Interest Rate Swap. 5 Jan 2013
5 Jan 2013 Definition Interest rate swap (IRS) is an exchange of two streams of cash flow. A floating interest rate is one which keeps changing i.e. KIBOR, LIBOR etc. A fixed interest rate is one that
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 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 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 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 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 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 informationAnswers to EndofChapter Questions
Answers to EndofChapter Questions 1. Because for any given price at expiration, a lower strike price means a higher profit for a call option and a lower profit for a put option. A lower strike price
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 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 informationFixedIncome Securities. Assignment
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
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 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 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 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 informationTenor 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 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 informationChapter 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 informationPearson 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 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 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 informationShould 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 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 informationDERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants
More informationDerivatives. 1. Definition of Derivatives
Derivatives 1. Definition of Derivatives Here is Warren Buffet s Definition: Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or
More informationCHAPTER 13 CURRENCY AND INTEREST RATE SWAPS
CHAPTER 13 CURRENCY AND INTEREST RATE SWAPS Chapter Overview This chapter is about currency and interest rate swaps. It begins by describing the origins of the swap market and the role played by capital
More informationUnderstanding and Managing Interest Rate Risk
Understanding and Managing Interest Rate Risk Finance & Treasury April 2008 CPA Australia Ltd ( CPA Australia ) is the sixth largest professional accounting body in the world with more than 117,000 members
More informationANALYSIS OF FIXED INCOME SECURITIES
ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its
More informationCase Study. Implementing IAS 39 with Fairmat
Case Study Implementing IAS 39 with Fairmat Revision #3 In this tutorial we will show how international accounting standard 39 principles, which regulate how financial instruments must be accounted for
More informationNote 29: Fair Value of Financial Instruments
Note 29: Fair Value of Financial Instruments We record trading assets and liabilities, derivatives, availableforsale securities and securities sold but not yet purchased at fair, and other nontrading
More informationCondensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board
Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board September 30, 2015 Condensed Interim Consolidated Balance Sheet As at September 30, 2015 As at September 30,
More informationCreating ForwardStarting Swaps with DSFs
INTEREST RATES Creating Starting Swaps with s JULY 23, 2013 John W. Labuszewski Managing Director Research & Product Development 3124667469 jlab@cmegroup.com CME Group introduced its Deliverable Swap
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 informationFinance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation
Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation Lecture 5: Interest Rates and Bond Valuation Know the important bond features and bond types Understand bond values and why
More informationLIBOR 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 informationCallable 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 preagreed value prior to the final original maturity
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 informationIntroduction to Fixed Income & Credit. Asset Management
Introduction to Fixed Income & Credit Asset Management Fixed Income explanation The Basis of Fixed Income is the need to purchase today with not enough cash available: ie. Mortgage or consumer loan You
More informationYield Measures, Spot Rates & Forward Rates
Fixed Income Yield Measures, Spot Rates & Forward Rates Reading  57 www.proschoolonline.com/ 1 Sources of Return Coupon interest payment: Periodic coupon interest is paid on the par value of the bond
More informationFinancial Risk Management
176 Financial Risk Management For the year ended 31 December 2014 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES s major financial instruments include cash and bank balances, time deposits, principalprotected
More informationInternational Master Economics and Finance
International Master Economics and Finance Mario Bellia bellia@unive.it Pricing Derivatives using Bloomberg Professional Service 03/2013 IRS Summary FRA Plain vanilla swap Amortizing swap Cap, Floor, Digital
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 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 informationAMF Instruction DOC Calculation of global exposure for authorised UCITS and AIFs
AMF Instruction DOC201115 Calculation of global exposure for authorised UCITS and AIFs Reference texts : Articles 41172 to 41181 and 42251 to 42260 1 of the AMF General Regulation 1. General provisions...
More informationDerivatives, Measurement and Hedge Accounting
Derivatives, Measurement and Hedge Accounting IAS 39 11 June 2008 Contents Derivatives and embedded derivatives Definition Sample of products Accounting treatment Measurement Active market VS Inactive
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 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 informationShorts and Derivatives in Portfolio Statistics
Shorts and Derivatives in Portfolio Statistics Morningstar Methodology Paper December 31, 2009 2009 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar,
More informationRegulations for Calculating the Fund s Global Exposure and Risk Exposure to a Counterparty
K U N G U I E L Ā 1 LV 1 0 5 0 R Ī G Ā T Ā L R U N I S + 3 7 1 6 7 7 7 4 8 0 0 F A K S S + 3 7 1 6 7 2 2 5 7 5 5 (Unofficial translation) Riga, 11 November 2011 Regulations No. 242 (Minutes No. 43 of
More informationAnalysis of Deterministic Cash Flows and the Term Structure of Interest Rates
Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment
More informationCondensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board
Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board December 31, 2015 Condensed Interim Consolidated Balance Sheet As at December 31, 2015 (CAD millions) As at December
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 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 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 informationSwaps: basis swaps. Strictly speaking, a basis swap or a floating/floating cross currency basis
Swaps: basis swaps INTRODUCTION Strictly speaking, a basis swap or a floating/floating cross currency basis swap is a swap in which two streams of money market floating rates of two different currencies
More informationHot Topics in Financial Markets Lecture 1: The Libor Scandal
Hot Topics in Financial Markets Lecture 1: The Libor Scandal Spot and Forward Interest Rates Libor LiborDependent Financial Instruments The Scandal 2 Spot Interest Rates Bond Market The yield on a bond
More informationJournal of Financial and Strategic Decisions Volume 11 Number 2 Fall 1998 A COMPREHENSIVE QUANTITATIVE MODEL FOR ANALYZING BOND REFUNDING DECISIONS
Journal of Financial and Strategic Decisions Volume Number 2 Fall 998 A COMPREHENSIVE QUANTITATIVE MODEL FOR ANALYZING BOND REFUNDING DECISIONS Lawrence S. Tai * and Zbigniew H. Przasnyski * Abstract When
More informationDavid Bob Case Scenario
David Bob Case Scenario David Bob, CFA, is a derivatives analyst at Capital Inc. Capital Inc. deals mainly in arbitrage positions along with leveraged positions. David is following the options prices and
More informationVALUATION OF FIXED INCOME SECURITIES. Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting
VALUATION OF FIXED INCOME SECURITIES Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting OUTLINE Introduction Valuation Principles Day Count Conventions Duration Covexity Exercises
More informationMassachusetts Bay Transportation Authority Fiscal and Management Control Board
Massachusetts Bay Transportation Authority 99 Summer Street Suite 1020 Boston, MA 02110 May 2, 2016 Overview of the Engagement PFM has been engaged to undertake four tasks: 1. Analyze Current Outstanding
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 information(1.1) (7.3) $250m 6.05% US$ Guaranteed notes 2014 (164.5) Bank and other loans. (0.9) (1.2) Interest accrual
17 Financial assets Available for sale financial assets include 111.1m (2013: 83.0m) UK government bonds. This investment forms part of the deficitfunding plan agreed with the trustee of one of the principal
More informationINSTITUTE AND FACULTY OF ACTUARIES EXAMINATION
INSTITUTE AND FACULTY OF ACTUARIES EXAMINATION 14 April 2016 (pm) Subject ST6 Finance and Investment Specialist Technical B Time allowed: Three hours 1. Enter all the candidate and examination details
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 informationPricing 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 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 informationFINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS. Risk management
167 Risk management Group risk management Group Risk Management supports the Board of Directors, the Executive Committee and the management teams of the Group companies in their strategic decisions. Group
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 informationFINANCIAL AND INVESTMENT INSTRUMENTS. Lecture 6: Bonds and Debt Instruments: Valuation and Risk Management
AIMS FINANCIAL AND INVESTMENT INSTRUMENTS Lecture 6: Bonds and Debt Instruments: Valuation and Risk Management After this session you should Know how to value a bond Know the difference between the term
More informationInterest 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 informationValuation Report on Prudential Annuities Limited as at 31 December 2003. The investigation relates to 31 December 2003.
PRUDENTIAL ANNUITIES LIMITED Returns for the year ended 31 December 2003 SCHEDULE 4 Valuation Report on Prudential Annuities Limited as at 31 December 2003 1. Date of investigation The investigation relates
More informationChapter Eight Interest Rate Risk I
Chapter Eight Interest Rate Risk I Solutions for EndofChapter Questions and Problems. Problems through #20 refer to the repricing model. 1. How do monetary policy actions made by the Federal Reserve
More informationCertification Program on Corporate Treasury Management
Certification Program on Corporate Treasury Management Introduction to corporate treasury management Introduction to corporate treasury management: relevance, scope, approach and issues Understanding treasury
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 informationRISK MANAGEMENT. FACT SHEET: Wallstreet Suite
Wallstreet Suite The comprehensive reserve, debt, cash and asset management solution for central banks and government agencies www.wallstreetsystems.com FACT SHEET: Wallstreet Suite RISK MANAGEMENT Business
More informationSYLLABUS CertITM. updated
SYLLABUS CertITM updated 02.09.13 OVERVIEW The Certificate in International Treasury Management covers the fundamentals of international treasury, risk and corporate finance and builds upon it in a practical,
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 informationNUMBER: 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 longterm strategic plan to establish institutional priorities
More informationUsing 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