YCM 2001 - Interest Rate Derivatives

YCM 2001 - Interest Rate Derivatives - 1 Interest Rate...

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Unformatted text preview: 1 Interest Rate Derivatives Copyright 1999-2006 Investment Analytics opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 2 Interest Rate Derivatives Swap futures & forwards Caps/Floors/Collars Swaptions Callable & putable bonds Floating rate notes Inverse floaters Range floaters Inverse floaters Step-up MTNs opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 3 Futures on Swaps Obligation to deliver a swap with known swap rate Traded on CBOT Competes with IMM Euro$ futures Similar uses: lock in future borrowing cost Not useful for hedging swaps - standardization does not work in this context! opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 4 Forward Swaps Swap will start at a later date Swap rate fixed now Application: Anticipating financing E.g. need swap in 6 months. opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 5 Pricing of Forward Start Swaps Pricing Similar vanilla swap Except that swap coupon set so that swap is expected to be fairly priced at the start date Maturity Start Date Today opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 6 Lab: Pricing a Forward Swap Currently 1-Mar-91 Price a forward interest rate swap Start 8-Feb-94 Tenor 2 years Quarterly resets $100MM notional principal Excel Workbook: Yield Curve Modeling.xls Labs: Forward swap opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 7 Solution: Pricing a Forward Swap T w o Year Q -Q Sw ap Starting on 8 Feb. 94 Principal: 100,000,000 Swap C oupon: 8.009% 8.043% Dates Days Lin D.F Fixed C F PV Fixed C F C S Disc PV 8-Feb-94 1075 0.8309 0.00 0.00 0.00 0.8310 0.00 8-M ay-94 1164 0.8154 1,979,939.84 1,614,359.95 1,988,342.34 0.8152 1,620,948.27 8-Aug-94 1256 0.7992 2,046,679.39 1,635,734.58 2,055,365.12 0.7989 1,642,061.88 8-N ov-94 1348 0.7831 2,046,679.39 1,602,692.58 2,055,365.12 0.7827 1,608,810.14 8-Feb-95 1440 0.7669 2,046,679.39 1,569,650.58 2,055,365.12 0.7668 1,576,100.19 8-M ay-95 1529 0.7521 1,979,939.84 1,489,096.49 1,988,342.34 0.7518 1,494,805.61 8-Aug-95 1621 0.7370 2,046,679.39 1,508,419.83 2,055,365.12 0.7366 1,513,937.29 8-N ov-95 1713 0.7219 102,046,679.39 73,670,043.59 102,055,365.12 0.7216 73,644,210.01 Fixed C F NPV: 83,089,997.59 83,100,873.39 FR N NPV 83,089,997.59 83,100,873.39 Swap NPV 0.00 0.00 opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 8 Caps, Floors & Collars Very popular instruments Great demand for caps due to increased interest rate volatility Market very liquid Used to calculate markets view of interest rate volatility opyright 1999-2006 Investment Analytics Interest rate Derivatives Slide: 9 Caps, Floors & Collars Caps: Limits Upside Risk / Gain Series of interest rate call options Caps interest rate, or equity index return Floor: Limits Downside Risk / Gain...
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YCM 2001 - Interest Rate Derivatives - 1 Interest Rate...

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