Interest Rate Derivatives
By Todd James
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.
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
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-Forward
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
Spreadlock
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
Collar
Caps and Floors Applied to Floating Rate Assets
Interest Rate Swaption
Callable Bonds
Volatility
Volatility Stripping
Digital Options
Digital Option Applications
Chapter 10. Further Interest Rate Swaps and Options
CMS
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
Introduction
Effective Interest Rate (EIR)
Fair Value vs. Hedge Accounting
Hedge Effectiveness Testing
Effectiveness Testing Methodologies
Hedging Relationship
ISDA Documentation and Derivative Credit
Confirmations
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
Bibliography
Index