High-Frequency Trading

High-Frequency Trading

Inflation Risks and Products

Inflation Risks and Products

Interest Rate Derivatives

Written in a straightforward, clearly structured manner with extensive use of worked examples, this easy to use book gives you an explanation of both basic and advanced principles for the valuation of interest rate derivatives and their hedging applications.

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Written in a straightforward, clearly structured manner with extensive use of worked examples, this easy to use book gives you an explanation of both basic and advanced principles for the valuation of interest rate derivatives and their hedging applications.

Interest Rate Derivatives describes:

  • Pricing methods,
  • Application, structuring and valuation of:
  • Interest rate and Cross currency Swap and
  • Interest Options
  • Methods of managing interest rate exposure; and
  • Trading and hedging strategies and their application in portfolio management.

Basic interest rate mathematics are explored and built upon to delve into a more complex development of interest rate derivatives in general. This work is accompanied by a CD and gives you a unique stand-alone product which serves as a major reference guide on interest rate derivatives.

The book itself is developed around a user-friendly excel based pricing system helping you to better understand the content by applying the theory to real life pricing. This allows you to use the book as an initial reference or learning tool to see how the maths work and leaves you with a practical calculation tool.

We recommend this book for all financial and corporate treasury staff, MBA students, graduates and anyone looking for a mathematical guide to the practical pricing and modelling of interest rate derivatives

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Todd James

Todd James has over 12 years of experience in derivatives and debt capital markets including trading, marketing and structuring derivative transactions. He holds a BBA in business and economics from WLU, Waterloo, Canada and an MBA in finance from the University of Toronto. Having worked in Toronto and London, Todd is currently based in Hong Kong where he structures and develops structured products. He has also been providing regular workshops and seminars for corporate and financial institutions on derivatives, risk management and structured products. His past experience covers debt capital markets, interest rates, cross currency swaps trading and structuring, and structured products marketing and structuring.

Chapter 1. Financial Mathematics

Time Value of Money

Effective and Nominal Interest Rates

Money Market Yields

Day Count Basis Conventions

Roll Convention

Chapter 2. Short-Term Interest Rates and Futures


Forward Rate Agreements

Short-Term Interest Rate Futures

Convexity with Futures

Calculating Strip Yield

Futures vs. FRAs

Chapter 3. Bonds: Pricing, Risk and Hedging

Bond Price

Bond Yields

Bond Proceeds: Clean vs. Dirty Price

Odd Coupon Bonds

Bond PV01

Bond Portfolio PV01

Bond Duration and Modified Duration

Bond Convexity

Modified Duration and Convexity: Bond Portfolio

Hedging a Bond Portfolio

Basis Risk

Bond Futures

Hedging with Bond Futures

Repurchase and Sale and Buy Backs

Chapter 4. Interest Rate Swaps

What is an Interest Rate Swap?

How Interest Rate Swaps are Quoted

What is a Swap Spread?

Quotation Basis

Interest Rate Swap Applications

Non-Standard Interest Rate Swaps

Case Studies

Chapter 5. Deriving a Zero Coupon Curve

Building a Zero Coupon Curve

The Bootstrapping Algorithm

Generating Generic Discount Factors and FRAs

Building a Zerocurve using Curveßuilder

Bid and Offer Curves

Chapter 6. Asset and Liability Swaps: Cashflows and Pricing

Asset Swaps

Bond Pricing: Given Target Floating Spread

Curveßuilder Asset Swap Calculator

Liability Swaps

Mark To Market (MTM) Interest Rate Swaps

Forward Starting Interest Rate Swap

Amortising Swaps

Short-Term Interest Rate Hedges

Treasury Lock


Chapter 7. Hedging and Trading Interest Rate Swaps

Risk Measurement PV01

Hedging with Eurodollars

Hedging with Government Bonds

Portfolio Risk Management

Chapter 8. Cross-Currency Interest Rate Swaps

What is the Value of a Cross-Currency Basis Swap?

Zero NPV Valuation

Cross-Currency Basis Swaps Quotes and Pricing

Synthetically Create a CC Basis Swap

Basis Point Conversion

Hedging using Basis Swaps

Fixed for Fixed Cross-Currency Swap

Cross-Currency Asset Swaps

Liability Swap

Case Study: Relative Borrowing Costs

Chapter 9. Interest Rate Options

Option Fundamentals

Option Risk Characteristics: The Greeks

Option’s Price Sensitivity to a Change in the Underlying Price: Delta and Gamma

Option’s Price Sensitivity to a Change in the Underlying Volatility: Vega

Caps and Floors

Cap Premium in Swap Form


Caps and Floors Applied to Floating Rate Assets

Interest Rate Swaption

Callable Bonds


Volatility Stripping

Digital Options

Digital Option Applications

Chapter 10. Further Interest Rate Swaps and Options


CMS Applications

In Arrears Applications

Differential Swaps

Differential Swap Pricing

Spread Options

Digital Spread Options

Chapter 11. Financial Accounting: IAS39 Financial Instruments Recognition and Measurement


Effective Interest Rate (EIR)

Fair Value vs. Hedge Accounting

Hedge Effectiveness Testing

Effectiveness Testing Methodologies

Hedging Relationship

ISDA Documentation and Derivative Credit


ISDA Definitions

Credit: Exposure, Collateral and Credit Support

Appendix A: Quotation Basis for Interest Rate Swaps

Appendix B: Interpolation Methods

Appendix C: Convexity Adjustment

Appendix D: Curveßuilder: Installation and Overview