Fixed Income Markets E-Book

Moorad Choudhry

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 1352

Veröffentlichungsjahr: 2014

Beschreibung

A comprehensive, in-depth look at global debt capital markets in the post-crisis world Fully updated with comprehensive coverage of the post-crisis debt markets and their impact on key industry issues, Fixed Income Markets: Management, Trading, and Hedging, Second Edition offers insights into derivative pricing, cross-currency hedging, and new liquidity legislation. Written by Choudhry, Moskovic, and Wong, Fixed Income Markets is an indispensable read for anyone working in bond markets, interest-rate markets, and credit derivatives markets looking to better understand today's debt markets. This acclaimed book takes a unique look into the leading practices in bond markets as well as post-credit-crunch impacts on pricing that are rarely captured in textbooks. The new edition provides expanded coverage on a wide range of topics within hedging, derivatives, bonds, rebalancing, and global debt capital markets. New topics include: * Dynamic hedging practices and cross-currency hedging * Collateralized and uncollateralized derivatives, and their impact on valuation * Callable bonds, pricing, trading, and regulatory aspects related to liquidity * Rebalancing as a method for capturing contingencies and other complex imbedded risks As a bonus, the book includes reference information for statistical concepts and fixed income pricing, as well as a full glossary and index. Written in Choudhry's usual accessible style, Fixed Income Markets is a comprehensive and in-depth account of the global debt capital markets in today's post-crisis world.

Leseprobe

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Fixed Income Markets

Management, Trading, HedgingSecond Edition

MOORAD CHOUDHRY

DAVID MOSKOVIC

MAX WONG

With contributions from Suleman Baig, Zhuoshi Liu, Michele Lizzio and Alexandru Voicu

Cover Design: Wiley Cover Image: © iStock.com/Robin_Hoood

Copyright © 2014 by Moorad Choudhry

First edition published by John Wiley & Sons in 2004. Published by John Wiley & Sons Singapore Pte. Ltd. 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628, tel: [phone], fax: [phone], e-mail: [email protected].

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom.

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Library of Congress Cataloging-in-Publication Data

Choudhry, Moorad.     Fixed income markets : management, trading and hedging / Moorad Choudhry, David Moskovic, Max Wong ; with contributions from Zhuoshi Liu and Alexandru Voicu. — Second edition.       pages cm. — (The Wiley finance series)     Includes index.     ISBN 978-1-118-17172-1 (hardback); ISBN 978-1-118-17174-5 (ebk); ISBN 978-1-118-17175-2 (ebk)     1. Fixed-income securities. I. Title.     HG4650.C447 2014     332.63′2044—dc23

2014007537

Author disclaimer:

The views, thoughts and opinions expressed in this book represent those of the authors in their individual private capacity, and should not in any way be attributed to The Royal Bank of Scotland plc or to Royal Bank of Scotland Group, or to Moorad Choudhry, David Moskovic, or Max Wong as representatives, officers, or employees of The Royal Bank of Scotland plc or Royal Bank of Scotland Group.

This book does not constitute investment advice, and its contents should not be construed as such. Any opinion expressed does not constitute a recommendation to any reader. The contents should not be considered as a recommendation to deal, and the authors do not accept liability for actions resulting from a reading of any material in this book.

Whilst every effort has been made to ensure accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this book can be accepted by the authors, publisher, or any named person or corporate entity.

The material in this book is based on information that is considered reliable, but neither the authors nor the publisher warrant that it is accurate or complete, and it should not be relied on as such. Opinions expressed are current opinions only and are subject to change. The authors and publisher are not soliciting any action based upon this material. The authors and any named person or entity may or may not have a position in any capital market instrument described in this book, at the time of writing or subsequently. Any such position is subject to change at any time and for any reason.

For Lindsay . . .

YOU are the best thing that ever happened to me.

—Moorad Choudhry

Contents

Foreword

Preface

Acknowledgments

About the Authors

PART ONE Introduction to Bonds

CHAPTER 1 The Bond Instrument

Bond-Market Basics

Capital Market Participants

Investors

World Bond Markets

Overview of the Main Bond Markets

Time Value of Money

Bond Pricing and Yield: The Traditional Approach

Bond Yield

Selected Bibliography and References

Notes

CHAPTER 2 Bond Instruments and Interest-Rate Risk

Duration, Modified Duration, and Convexity

Appendices

Appendix 2.1 Formal Derivation of Modified-Duration Measure

Appendix 2.2 Measuring Convexity

Appendix 2.3 Taylor Expansion of the Price/Yield Function

Selected Bibliography and References

Notes

CHAPTER 3 Bond Pricing, Spot, and Forward Rates

Basic Concepts

Coupon Bonds

Bond Price in Continuous Time

Forward Rates

Term Structure Hypotheses

Evidence on the Expectations Hypothesis

Appendices

Appendix 3.1 The Integral

Appendix 3.2 The Derivation of the Bond Price Equation in Continuous Time

Notes

Selected Bibliography and References

CHAPTER 4 Interest-Rate Modelling

Background

One-Factor Term-Structure Models

Choosing a Term-Structure Model

Appendix

Appendix 4.1 Geometric Brownian Motion

Notes

Selected Bibliography and References

CHAPTER 5 Fitting the Yield Curve

Yield-Curve Smoothing

Non-parametric Methods

Comparing Curves

Yield Curve Construction: A Practical Guide

Appendices

Appendix 5.1 Linear Regression: Ordinary Least Squares

Appendix 5.2 Regression Splines

Notes

Selected Bibliography and References

PART TWO Selected Market Instruments

CHAPTER 6 The Money Markets

Overview

Securities Quoted on a Yield Basis

The Repo Instrument

Money-Market Derivatives

Short-Term Interest-Rate Futures

Appendices

Appendix 6.1

Notes

Selected Bibliography and References

CHAPTER 7 Hybrid Securities and Structured Securities

Floating-Rate Notes

Indexed Amortising Note

Synthetic Convertible Note

Interest-Differential Notes

Convertible Bonds

Contingent Convertible Securities

References

CHAPTER 8 Bonds with Embedded Options and Option-Adjusted Spread Analysis

Understanding Embedded-Option Elements in a Bond

The Binomial Tree of Short-Term Interest Rates

Price Volatility of Bonds with Embedded Options

Correct Way to Risk-Manage a Callable Note

Appendices

Appendix 8.1 Calculating Interest Rate Paths Using Microsoft Excel

Notes

Selected Bibliography and References

CHAPTER 9 Inflation-Indexed Bonds and Derivatives

Basic Concepts

Index-Linked Bond Yields

Inflation-Indexed Derivatives

Applications

Appendices

Appendix 9.1 Current Issuers of Public-Sector Indexed Securities

Appendix 9.2 U.S. Treasury Inflation-Indexed Securities (TIPS)

Notes

Selected Bibliography and References

CHAPTER 10 Introduction to Securitisation and Asset-Backed Securities

The Concept of Securitisation

The Process of Securitisation

Securitising Mortgages

ABS Structures: A Primer on Performance Metrics and Test Measures

The Securitisation Market Post-2007

Special Purpose Vehicles (SPVs)

Summary and Conclusions

Notes

Selected Bibliography and References

PART THREE Derivative Instruments

Recommended Reading

CHAPTER 11 Forwards and Futures Valuation

Introduction

Forwards

Futures

Forwards and Futures

Cash Flow Differences

Relationship between Forward and Future Price

The Forward-Spot Parity

The Basis and Implied Repo Rate

Notes

Selected Bibliography and References

CHAPTER 12 Bond Futures Contracts

Background

Bond Futures Contracts

Futures Pricing

Hedging Using Futures

The Margin Process

Appendix

Appendix 12.1 The Conversion Factor for the Long Gilt Future

Notes

Selected Bibliography and References

CHAPTER 13 Swaps

Interest-Rate Swaps

Generic Swap Valuation

Asset Swaps

An Overview of Interest-Rate Swap Applications

Bloomberg Screens

Appendix

Appendix 13.1 Calculating Futures Strip Rates and Implied Swap Rates

Notes

Selected Bibliography and References

CHAPTER 14 Credit Derivatives I: Instruments and Applications

Credit Risk

Credit Risk and Credit Derivatives

Applications

Credit Event

Credit Derivative Instruments

Credit-Linked Notes

Sidebar: Uncollateralised CDS

The iTraxx Index Note

Applications for Portfolio Managers

Risks in Credit Default Swaps

Big Bang in CDS

Conclusion

Appendix

Appendix 14.1 Bond Credit Ratings

Notes

Selected Bibliography and References

CHAPTER 15 Credit Derivatives II: Pricing, Valuation, and the Basis

Introduction

Asset Swap Pricing

Pricing Models

Notes

Selected Bibliography and References

CHAPTER 16 Options I

Background

Option Instruments

Option Pricing: Setting the Scene

Option Pricing

The Black-Scholes Option Model

Interest-Rate Options and the Black Model

Comment on the Black-Scholes Model

A Final Word on Option Models

Appendices

Appendix 16.2 Lognormal Distribution of Returns

Appendix 16.3 Black-Scholes Model in Microsoft Excel

Notes

Selected Bibliography and References

CHAPTER 17 Options II

Behaviour of Option Prices

Assessing Time Value

American Options

Measuring Option Risk: The Greeks

Delta

Gamma

Theta

Vega

Rho

Lambda

The Option Smile

Notes

Selected Bibliography and References

PART FOUR Bond Trading and Hedging

CHAPTER 18 Value-at-Risk and Credit VaR

Introducing Value-at-Risk

Explaining Value-at-Risk

Value-at-Risk for Fixed-Income Derivative Instruments

Stress Testing

Value-at-Risk Methodology for Credit Risk

Appendix 18.1 Assumption of Normality

Notes

Selected Bibliography and References

CHAPTER 19 Government Bond Analysis, the Yield Curve, and Relative-Value Trading

The Determinants of Yield

Practical Uses of Redemption Yield and Duration

Implied Spot Rates and Market Zero-Coupon Yields

Yield-Spread Trades

Coupon Spread

Butterfly Trades

Case Study: Spread Trade

Notes

Selected Bibliography and References

CHAPTER 20 Approaches to Trading and Hedging

Futures Trading

Yield Curves and Relative Value

Yield-Spread Trades

Hedging Bond Positions

Bond Analysis Using Spot Rates and Forward Rates in Continuous Time

Bond Prices as a Function of Spot and Forward Rates

Appendices

Appendix 20.1 Summary of Derivation of Optimum Hedge Equation

Appendix 20.2 Forward-Rate Structure in Conventional Yield-Curve Environment

Notes

Selected Bibliography

CHAPTER 21 Derivatives Risk Management: Convexity, Collateral, and Correlation

Abstract

Why Correlation Occurs in the Markets

Correlation and Causation

How Can We Define Correlation?

Measuring Correlation

Correlation Swaps, Pricing, and Their Risks

Quantos, Pricing, and their Risks

Differences between Instantaneous and Terminal Volatilities and Correlations

Hedging a Portfolio of Correlation Swaps and Quantos

Uncollateralised Derivatives and Note Discounting

Explanation of the Risk-Neutral Measure

What Does Discounting Really Represent?

Pricing an Uncollateralised Cash Flow

Graph of PV from Different CSAs

Senior Unsecured Bonds: Equivalence to Uncollateralised Derivatives

Funding a Trading Book

A Diversion: St. Petersburg Paradox and Credit Risk

Making Money for Whom?

Chapter Summary

APPENDIX A Statistical Concepts

Mean and Standard Deviation

APPENDIX B Basic Tools

Summation and Product Operators

Standard Brownian Motion and the Dynamics of the Asset-Price Process

The Integral Calculus

Stochastic Integrals

APPENDIX C Introduction to the Mathematics of Fixed-Income Pricing

Bond Pricing

Yield to Maturity (YTM)

Expectation Hypothesis

Notes

References

APPENDIX D About the Companion Website