Note on Chapter 3: Duration
2012. 9.15
3.2.1 Duration of a Zero Coupon Bond
Duration of a security is the (negative of the) percent
sensitivity of its price to a small parallel shift in the
level of
Convexity Trading
Convexity may have value
Is there a hedging strategy which ensures duration hedging and
arbitrage gain from convexity trading in the case that YTM curves display
parallel shift? To c
Analysis of Example 3.10 in
Veronesi
Dongchul Won
2012.10.2
V0 $1,000,000, T 30
Face value of the T-bond: $1,000,000
Annuity pays $28,768 in six months for 30 years.
Let DC t0 , DA t0 , and DD t0 deno
Chapter6:INTERESTRATE
DERIVATIVES:FUTURES
ANDOPTIONS
6.1INTERESTRATEFUTURES
6.1.1 Standardization
6.1.2 Margins and Mark-to-Market
6.1.3 The Convergence Property of Futures Prices
6.1.4 Futures ve
Chapter5:INTERESTRATE
DERIVATIVES:FORWARDS
ANDSWAPS
5.1FORWARDRATESAND
FORWARDDISCOUNTFACTORS
5.1.1 Forward Rates by No Arbitrage
5.1.2 The Forward Curve
5.1.3 Extracting the Spot Rate Curve from
F
Chapter4:BASIC
REFINEMENTSIN
INTERESTRATERISK
MANAGEMENT
4.1CONVEXITY
4.1.1 The Convexity of Zero Coupon Bonds
4.1.2 The Convexity of a Portfolio of Securities
4.1.3 The Convexity of a Coupon Bond
4.1
Chapter2:BASICSOFFIXED
INCOMESECURITIES
2.1DISCOUNTFACTORS
2.1.1 Discount Factors across Maturities
2.1.2 Discount Factors over Time
2.1DISCOUNTFACTORS
The discount factor between two dates, t and
Basics for Bond Markets
Do not distribute outside the class.
This is the intellectual property of Pro. Won.
Aug 2012
Ajou University, Suwon, Korea
Basic Questions
What is interest rate?
What is the
Long or Short hedge?
The direction of hedging
Suppose an investor plans to purchase a bond at
time in the future. He worries about decline in
interest rates
What is an hedging strategy? Long or shor
Put-Call Parity for European
Options
March 2012
Dongchul Won
Max operator
max cfw_ AT , BT max cfw_ AT BT ,0 + BT
=
= max cfw_BT AT ,0 + AT
where max cfw_ AT BT ,0 is a call payoff with strike price
Lets consider the following story. A manufacturing firm is supposed to receive $100 million from a
client in six months. The firm expects to invest the money in purchasing machinery in one year. Thus,