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 MTN’s 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 market’s 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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This document was uploaded on 11/04/2011 for the course ECON 421 at CUNY York.

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

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