COMMODITIES AS AN INVESTMENT
COMMODITIES AS AN ASSET CLASS
Most financial investors do not hold spot commodities outrightjust consider the inconvenience and
storage costs that would be involvedbut rather gain commodity exposure through futures contracts.
ACTIVE MANAGEMENT OF CREDIT RISK
MANAGING CORPORATE BONDS VS CREDIT RISK
The Default (Credit) risk is the risk that promised cash flow and principal from an asset will not be repaid.
Typically a feature of corporate bonds or EM treasuries (but see GIPSI d
The Strategy Style perspective is especially important for understanding the potential of popular activetrading approaches.
Value: In Fixed income these are mostly leveraged arbitrage strategies: e.g. On-the-run off-the-run
THE CREDIT SPREAD PUZZLE
Spreads on corporate bonds tend to be many times wider than what would be implied by expected
default losses alone. These spreads are the difference between yields on corporate debt subject to
default risk and government bonds fre
3. RELATING SPOT AND FORWARD RATES
A spot rate is the discount rate of a single future cash flow such as a zero-coupon bond (zero). A coupon
bond can be viewed and valued as a bundle of zeros.
A forward rate is the interest rate for a loan between any two
FORWARD AND FUTURES
The forward price of a bond for a particular settlement date, relative to its spot price and its repo rate to
that settlement date can be determined by arbitrage.
Specifically, the following strategies both result in the purchase of a
INTEREST RATE SWAPS
An interest rate swap (IRS) is a liquid financial derivative instrument in which two parties agree to exchange
interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice
Repos are short term contracts that are used to lend money on the security of high grade collateral, to
finance the purchase of bonds, and to borrow bonds to be sold short.
Repo financing, as secured, short-term borrowing, is typically a relative in
CORPORATE BONDS RATING AND CDS
CORPORATE SECUIRITIES & RATING
We can classify corporate securities with some discriminants:
By maturity: in US we have Commercial Paper (less than 1Y, usually shorter) and ZCB. Medium term
notes (OTC/Shelf registration) and
BOND MARKET ILLIQUIDITY PREMIUM
Market liquidity is the ability to trade a bond (or stock) at a low cost and with minimal price impact. Two
dimensions of market liquidity:
1. Trading costs, which relate to:
Market tightness (how wide dealer bid and ask q
THE GREAT FINANCIAL CRISIS AND THE LEVERAGE CYCLE
Improving on traditional models for interest rates. The leverage cycle. We studied fixed income markets.
What about the institutions supporting and regulating these markets?
THE LEVERAGE CYCLE AND THE CRIS
6. CONVEXITY AND THE YIELD CURVE
We describe the impact of convexity on U.S. Treasury market yield curve. Treasuries exhibit positive
convexity. Market participants have long known that positive convexity can enhance bond portfolios