Lecture 7:
Futures:
Second largest group of interest rate derivatives in terms of notional value at 28.9% of the
market
Swaps are the largest at 49.5%.
Rapid growth of derivatives use has been controversial
Orange County, California (1994)
Bankers Tr

Lecture 1
Review: Term structure
(appendix)
What to discount by?
Two components of a discount rate.
Risk premium
Type of issuer: Govt, firm?
Credit worthiness of issuer
Term or maturity
Options: callability, convertibility, retractability
Risk free

Lecture 4:
Leverage also affects ability to eliminate interest rate risk using maturity model
Example:
Assets: $100 million in one-year 10-percent bonds, funded with $90 million in one-year
10-percent deposits (and equity)
Maturity gap is zero but expos

Lecture 3:
Future Borrowing
In 1st January 2007, Smart builders inc. has won a construction project that lasts until 2010 (4
years). At the beginning of 2010 (fourth year), the project manager need to finance a $20 million
of raw materials. By the end of

Lecture 2:
Self Study in class textbook chapter 2
Market expectations (pure expectations) hypothesis
This hypothesis assumes that the various maturities are and suggests that the shape of the yield
curve depends on market participants' expectations of fut

Lecture 5:
Options:
Long position in an option is synonymous with: Holder, buyer, purchaser, the long
Holder of an option has the right, but not the obligation to exercise the option
Short position in an option is synonymous with: Writer, seller, the s

Lecture 6:
Options Part 2:
Example:
CIBC wrote a call option on a bond portfolio, that matures after 3 months.
B = the bond portfolio price
r = implied interest rate on a 3 month discount Treasury Bills
At maturity two things to notice:
When r increases

Lecture 10 + 11:
When Brazil. fitted in the mid-1970s, the Z score model did quite a good job of
predicting default even two or three years prior to bankruptcy (Altman, Baidya, and Dias
[1979]).
More recently, even with low inflation and greater economi

Lecture 9: Credit Risk management
1. Structural increase in bankruptcies higher than Normal recession
2. Disintermediation has lowered the average quality of bank loans
3. More competitive margin loans level rates v. margins
4. Declining values of real as

Lecture 8:
Estimate Hedge:
The hedge ratio may be estimated using ordinary least squares regression:
DSt = a + bDft + ut
The hedge ratio, h will be equal to the coefficient b. The R2 from the regression reveals
the effectiveness of the hedge.
Thus far