Interest Rate Swaps and Their Derivatives E-Book

Amir Sadr

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

Seitenzahl: 333

Veröffentlichungsjahr: 2009

Beschreibung

An up-to-date look at the evolution of interest rate swaps and derivatives Interest Rate Swaps and Derivatives bridges the gap between the theory of these instruments and their actual use in day-to-day life. This comprehensive guide covers the main "rates" products, including swaps, options (cap/floors, swaptions), CMS products, and Bermudan callables. It also covers the main valuation techniques for the exotics/structured-notes area, which remains one of the most challenging parts of the market. * Provides a balance of relevant theory and real-world trading instruments for rate swaps and swap derivatives * Uses simple settings and illustrations to reveal key results * Written by an experienced trader who has worked with swaps, options, and exotics With this book, author Amir Sadr shares his valuable insights with practitioners in the field of interest rate derivatives-from traders and marketers to those in operations.

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

″RATES″ MARKET

BACKGROUND

BOOK STRUCTURE

ACKNOWLEDGMENTS

About the Author

List of Symbols and Abbreviations

PART One - Cash, Repo, and Swap Markets

CHAPTER 1 - Bonds: It′s All About Discounting

TIME VALUE OF MONEY: FUTURE VALUE, PRESENT VALUE

PRICE-YIELD FORMULA

PV01, PVBP, CONVEXITY

REPO, REVERSE REPO

FORWARD PRICE/YIELD, CARRY, ROLL-DOWN

CHAPTER 2 - Swaps: It′s Still About Discounting

DISCOUNT FACTOR CURVE, ZERO CURVE

FORWARD RATE CURVE

PAR-SWAP CURVE

CONSTRUCTION OF THE SWAP/LIBOR CURVE

CHAPTER 3 - Interest Rate Swaps in Practice

MARKET INSTRUMENTS

SWAP TRADING—RATES OR SPREADS

SWAP SPREADS

RISK, PV01, GAMMA LADDER

CALENDAR RULES, DATE MINUTIAE

CHAPTER 4 - Separating Forward Curve from Discount Curve

FORWARD CURVES FOR ASSETS

IMPLIED FORWARD RATES

FLOAT/FLOAT SWAPS

LIBOR/LIBOR BASIS SWAPS

OVERNIGHT INDEXED SWAPS (OIS)

PART Two - Interest-Rate Flow Options

CHAPTER 5 - Derivatives Pricing: Risk-Neutral Valuation

EUROPEAN-STYLE CONTINGENT CLAIMS

ONE-STEP BINOMIAL MODEL

FROM ONE TIME-STEP TO TWO

FROM TWO TIME-STEPS TO...

RELATIVE PRICES

RISK-NEUTRAL VALUATION: ALL RELATIVE PRICES MUST BE MARTINGALES

INTEREST-RATE OPTIONS ARE INHERENTLY DIFFICULT TO VALUE

FROM BINOMIAL MODEL TO EQUIVALENT MARTINGALE MEASURES

CHAPTER 6 - Black′s World

A LITTLE BIT OF RANDOMNESS

MODELING ASSET CHANGES

BLACK-SCHOLES-MERTON/BLACK FORMULAE

GREEKS

DIGITALS

CALL IS ALL YOU NEED

CALENDAR/BUSINESS DAYS, EVENT VOLS

CHAPTER 7 - European-Style Interest-Rate Derivatives

MARKET PRACTICE

INTEREST-RATE OPTION TRADES

CAPLETS/FLOORLETS: OPTIONS ON FORWARD RATES

EUROPEAN-STYLE SWAPTIONS

SKEWS, SMILES

CMS PRODUCTS

BOND OPTIONS

PART Three - Interest-Rate Exotics

CHAPTER 8 - Short-Rate Models

A QUICK TOUR

DYNAMICS TO IMPLEMENTATION

LATTICE/TREE IMPLEMENTATION

BDT LATTICE MODEL

HULL-WHITE, BLACK-KARASINSKI MODELS

SIMULATION IMPLEMENTATION

CHAPTER 9 - Bermudan-Style Options

BELLMAN′S EQUATION—BACKWARD INDUCTION

BERMUDAN SWAPTIONS

BERMUDAN CANCELABLE SWAPS, CALLABLE/PUTTABLE BONDS

BERMUDAN-STYLE OPTIONS IN SIMULATION IMPLEMENTATION

CHAPTER 10 - Full Term-Structure Interest-Rate Models

SHIFTING FOCUS FROM SHORT RATE TO FULL CURVE: HO-LEE MODEL

HEATH-JARROW-MORTON (HJM) FULL TERM-STRUCTURE FRAMEWORK

DISCRETE-TIME, DISCRETE-TENOR HJM FRAMEWORK

FORWARD-FORWARD VOLATILITY

MULTIFACTOR MODELS

HJM FRAMEWORK TYPICALLY LEADS TO NONRECOMBINING TREES

CHAPTER 11 - Forward-Measure Lens

NUMERAIRES ARE ARBITRARY

FORWARD MEASURES

BGM/JAMSHIDIAN RESULTS

DIFFERENT MEASURES FOR DIFFERENT RATES

″CLASSIC″ OR ″NEW IMPROVED″: PICK YOUR POISON!

CHAPTER 12 - In Search of ″The″ Model

MIGRATION TO FULL-TERM STRUCTURE MODELS

IMPLEMENTATION ERA

MODEL VERSUS MARKET: LIQUIDITY AND CONCENTRATION RISK

COMPLEXITY RISK

REMAINING CHALLENGES

APPENDIX A - Taylor Series Expansion

APPENDIX B - Mean-Reverting Processes

APPENDIX C - Girsanov′s Theorem and Change of Numeraire

Notes

Index

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Copyright © 2009 by Amir Sadr. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Sadr, Amir, 1963-

Interest rate swaps and their derivatives: a practitioner′s guide / Amir Sadr.

p. cm. - (Wiley finance series)

Includes bibliographical references and index.

eISBN : 978-0-470-52611-8

1. Interest rate swaps. 2. Interest rate futures. 3. Derivative securities. I. Title.

HG6024.5.S32 2009

332.63′ 23-dc22

2009008840

Preface

The market for interest rate swaps and their derivatives has experienced tremendous growth since its beginning in the early 1980s, and swaps are now a key component of capital markets. While trading in swaps and their derivatives was initially the domain of major money-center banks, most investment and commercial banks these days run a swaps and options desk alongside their cash and repo desks.

″RATES″ MARKET

The ″rates″ market consists of swaps, flow options (caps/floors, European swaptions), Bermudan swaptions, some semi-exotics (CMS/CMT products), and exotics (structured notes, . . .). While at some point, Bermudan swaptions were considered exotics, their popularity and volume has made them into an integral part of the interest-rate options market.

While a newcomer to a typical broker-dealer trading floor can find ample background material on the bond and repo markets, he is often overwhelmed by the instruments and the technical requirements to understand swaps and their derivatives. For bonds and repos, a typical analyst can use a Bloomberg terminal or the financial toolkit in Excel, or even an HP-12 calculator to get up and running. However, for swaps and options, he has to typically master the in-house derivatives system with many moving parts and nonstandard terms. The analyst can quickly become discouraged, and think of swaps and options to be the domain of quants and tech-savvy individuals who can handle such seeming complexity. Some of this complexity is merely the terms used in the swaps market: receiving/paying in swap lingo instead of buying/selling cash bonds—economically the same things—while for the options and exotics markets the complexity is real. The goal of this book is to break down some of this complexity.

BACKGROUND

This book came about over the past 15 years as alongside my day time Wall Street job, I periodically taught an evening course on interest-rate swaps and options at NYU′s School of Continuing and Professional Studies. Each semester, I was asked what a good book would be to accompany the course. My answer has always been, ″I have yet to find a book,″ and instead I would use notes gathered from various sources that I would pass out in the class. Moreover, in my last trading job, I was assigned to mentor the entry-level analyst class in their rotation on the fixed income (repo, treasury, swaps, options) desks, and was asked to assemble a required reading list for them. Again, I would have liked to recommend one book that would most directly and expeditiously get the analysts up to speed both in theory and more important the practice—so that we could extract the most work out of them!—but I still could not find such a book or training manual, and would end up recommending various chapters from a selection of books.