The Advanced Fixed Income and Derivatives Management Guide E-Book

Saied Simozar

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

Seitenzahl: 595

Veröffentlichungsjahr: 2015

Beschreibung

A highly-detailed, practical analysis of fixed income management

The Advanced Fixed Income and Derivatives Management Guide provides a completely novel framework for analysis of fixed income securities and portfolio management, with over 700 useful equations. The most detailed analysis of inflation linked and corporate securities and bond options analysis available;, this book features numerous practical examples that can be used for creating alpha transfer to any fixed income portfolio. With a framework that unifies back office operations, such as risk management and portfolio management in a consistent way, readers will be able to better manage all sectors of fixed income, including bonds, mortgages, credits, and currencies, and their respective derivatives, including bond and interest rate futures and options, callable bonds, credit default swaps, interest rate swaps, swaptions and inflation swaps. Coverage includes never-before-seen detail on topics including recovery value, partial yields, arbitrage, and more, and the companion website features downloadable worksheets that can be used for measuring the risks of securities based on the term structure models.

Many theoretical models of the Term Structure of Interest Rates (TSIR) lack the accuracy to be used by market practitioners, and the most popular models are not mathematically stable. This book helps readers develop stable and accurate TSIR for all fundamental rates, enabling analysis of even the most complex securities or cash flow structure. The components of the TSIR are almost identical to the modes of fluctuations of interest rates and represent the language with which the markets speak.

• Examine unique arbitrage, risk measurement, performance attribution, and replication of bond futures
• Learn to estimate recovery value from market data, and the impact of recovery value on risks
• Gain deeper insight into partial yields, product design, and portfolio construction
• Discover the proof that corporate bonds cannot follow efficient market hypothesis

This useful guide provides a framework for systematic and consistent management of all global fixed income assets based on the term structure of rates. Practitioners seeking a more thorough management system will find solutions in The Advanced Fixed Income and Derivatives Management Guide.

Leseprobe

Table of Contents

Title Page

Copyright

List of Tables

List of Figures

Abbreviations

Notation

SUBSCRIPTS

VARIABLE NAMES

Preface

Acknowledgement

Foreword

About the Author

Introduction

Chapter 1: Review of Market Analytics

1.1 BOND VALUATION

1.2 SIMPLE BOND ANALYTICS

1.3 PORTFOLIO ANALYTICS

1.4 KEY RATE DURATIONS

Chapter 2: Term Structure of Rates

2.1 LINEAR AND NON-LINEAR SPACE

2.2 BASIS FUNCTIONS

2.3 DECAY COEFFICIENT

2.4 FORWARD RATES

2.5 PAR CURVE

2.6 APPLICATION TO THE US YIELD CURVE

2.7 HISTORICAL YIELD CURVE COMPONENTS

2.8 SIGNIFICANCE OF THE TERM STRUCTURE COMPONENTS

2.9 ESTIMATING THE VALUE OF THE DECAY COEFFICIENT

Chapter 3: Comparison of Basis Functions

3.1 POLYNOMIAL BASIS FUNCTIONS

3.2 EXPONENTIAL BASIS FUNCTIONS

3.3 ORTHOGONAL BASIS FUNCTIONS

3.4 KEY BASIS FUNCTIONS

3.5 TRANSFORMATION OF BASIS FUNCTIONS

3.6 COMPARISON WITH THE PRINCIPAL COMPONENTS ANALYSIS

3.7 MEAN REVERSION

3.8 HISTORICAL TABLES OF BASIS FUNCTIONS

Chapter 4: Risk Measurement

4.1 INTEREST RATE RISKS

4.2 ZERO COUPON BONDS EXAMPLES

4.3 EURODOLLAR FUTURES CONTRACTS EXAMPLES

4.4 CONVENTIONAL DURATION OF A PORTFOLIO

4.5 RISKS AND BASIS FUNCTIONS

4.6 APPLICATION TO KEY RATE DURATION

4.7 RISK MEASUREMENT OF A TREASURY INDEX

Chapter 5: Performance Attribution

5.1 CURVE PERFORMANCE

5.2 YIELD PERFORMANCE

5.3 SECURITY PERFORMANCE

5.4 PORTFOLIO PERFORMANCE

5.5 AGGREGATION OF CONTRIBUTION TO PERFORMANCE

Chapter 6: Libor and Swaps

6.1 TERM STRUCTURE OF LIBOR

6.2 ADJUSTMENT TABLE FOR RATES

6.3 RISK MEASUREMENT AND PERFORMANCE ATTRIBUTION OF SWAPS

6.4 FLOATING LIBOR VALUATION AND RISKS

6.5 REPO AND FINANCING RATE

6.6 STRUCTURAL PROBLEM OF SWAPS

Chapter 7: Trading

7.1 LIQUIDITY MANAGEMENT

7.2 FORWARD PRICING

7.3 CURVE TRADING

7.4 SYNTHETIC SECURITIES

7.5 REAL TIME TRADING

Chapter 8: Linear Optimization and Portfolio Replication

8.1 PORTFOLIO OPTIMIZATION EXAMPLE

8.2 CONVERSION TO AND FROM CONVENTIONAL KRD

8.3 KRD AND TERM STRUCTURE HEDGING

Chapter 9: Yield Volatility

9.1 PRICE FUNCTION OF YIELD VOLATILITY

9.2 TERM STRUCTURE OF YIELD VOLATILITY

9.3 VOLATILITY ADJUSTMENT TABLE

9.4 FORWARD AND INSTANTANEOUS VOLATILITY

Chapter 10: Convexity and Long Rates

10.1 THEOREM: LONG RATES CAN NEVER CHANGE

10.2 CONVEXITY ADJUSTED TSIR

10.3 APPLICATION TO CONVEXITY

10.4 CONVEXITY BIAS OF EURODOLLAR FUTURES

Chapter 11: Real Rates and Inflation Expectations

11.1 TERM STRUCTURE OF REAL RATES

11.2 THEOREM: REAL RATES CANNOT HAVE LOG-NORMAL DISTRIBUTION

11.3 INFLATION LINKED BONDS

11.4 SEASONAL ADJUSTMENTS TO INFLATION

11.5 INFLATION SWAPS

Chapter 12: Credit Spreads

12.1 EQUILIBRIUM CREDIT SPREAD

12.2 TERM STRUCTURE OF CREDIT SPREADS

12.3 RISK MEASUREMENT OF CREDIT SECURITIES

12.4 CREDIT RISKS EXAMPLE

12.5 FLOATING RATE CREDIT SECURITIES

12.6 TSCS EXAMPLES

12.7 RELATIVE VALUES OF CREDIT SECURITIES

12.8 PERFORMANCE ATTRIBUTION OF CREDIT SECURITIES

12.9 TERM STRUCTURE OF AGENCIES

12.10 PERFORMANCE CONTRIBUTION

12.11 PARTIAL YIELD

Chapter 13: Default and Recovery

13.1 RECOVERY, GUARANTEE AND DEFAULT PROBABILITY

13.2 RISK MEASUREMENT WITH RECOVERY

13.3 PARTIAL YIELD OF COMPLEX SECURITIES

13.4 FORWARD COUPON

13.5 CREDIT DEFAULT SWAPS

Chapter 14: Deliverable Bond Futures and Options

14.1 SIMPLE OPTIONS MODEL

14.2 CONVERSION FACTOR

14.3 FUTURES PRICE ON DELIVERY DATE

14.4 FUTURES PRICE PRIOR TO DELIVERY DATE

14.5 EARLY VERSUS LATE DELIVERY

14.6 STRIKE PRICES OF THE UNDERLYING OPTIONS

14.7 RISK MEASUREMENT OF BOND FUTURES

14.8 ANALYTICS FOR BOND FUTURES

14.9 AUSTRALIAN BOND FUTURES

14.10 REPLICATION OF BOND FUTURES

14.11 BACKTESTING OF BOND FUTURES

Chapter 15: Bond Options

15.1 EUROPEAN BOND OPTIONS

15.2 EXERCISE BOUNDARY OF AMERICAN OPTIONS

15.3 PRESENT VALUE OF A FUTURE BOND OPTION

15.4 FEEDFORWARD PRICING

15.5 BOND OPTION GREEKS

15.6 RISK MEASUREMENT OF BOND OPTIONS

15.7 TREASURY AND REAL BONDS OPTIONS

15.8 BOND OPTIONS WITH CREDIT RISK

15.9 THEOREM: CREDIT PRICES ARE NOT ARBITRAGE-FREE

15.10 CORRELATION MODEL

15.11 CREDIT BOND OPTIONS EXAMPLES

15.12 RISK MEASUREMENT OF COMPLEX BOND OPTIONS

15.13 REMARKS ON BOND OPTIONS

Chapter 16: Currencies

16.1 CURRENCY FORWARDS

16.2 CURRENCY AS AN ASSET CLASS

16.3 CURRENCY TRADING AND HEDGING

16.4 VALUATION AND RISKS OF CURRENCY POSITIONS

16.5 CURRENCY FUTURES

16.6 CURRENCY OPTIONS

Chapter 17: Prepayment Model

17.1 HOME SALE

17.2 REFINANCING

17.3 ACCELERATED PAYMENTS

17.4 PREPAYMENT FACTOR

Chapter 18: Mortgage Bonds

18.1 MORTGAGE VALUATION

18.2 CURRENT COUPON

18.3 MORTGAGE ANALYTICS

18.4 MORTGAGE RISK MEASUREMENT AND VALUATION

Chapter 19: Product Design and Portfolio Construction

19.1 PRODUCT ANALYZER

19.2 PORTFOLIO ANALYZER

19.3 COMPETITIVE UNIVERSE

19.4 PORTFOLIO CONSTRUCTION

Chapter 20: Calculating Parameters of the TSIR

20.1 OPTIMIZING TSIR

20.2 OPTIMIZING TSCR

20.3 OPTIMIZING TSCR WITH NO CONVEXITY

20.4 ESTIMATING RECOVERY VALUE

20.5 ROBUSTNESS OF THE TERM STRUCTURE COMPONENTS

20.6 CALCULATING THE COMPONENTS OF THE TSYV

Chapter 21: Implementation

21.1 TERM STRUCTURE

21.2 DISCOUNT FUNCTION AND RISK MEASUREMENT

21.3 CASH FLOW ENGINE

21.4 INVOICE PRICE

21.5 ANALYTICS

21.6 TRADE DATE VERSUS SETTLE DATE

21.7 AMERICAN OPTIONS

21.8 LINEAR PROGRAMMING

21.9 MORTGAGE ANALYSIS

References

Index

End User License Agreement

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Guide

Cover

Table of Contents

Preface

Begin Reading

List of Illustrations

Figure 2.1

Figure 2.2

Figure 2.3

Figure 2.4

Figure 2.5

Figure 2.6

Figure 2.7

Figure 2.9

Figure 2.10

Figure 2.11

Figure 2.12

Figure 2.13

Figure 3.1

Figure 3.2

Figure 3.3

Figure 3.4

Figure 4.1

Figure 4.2

Figure 6.1

Figure 6.2

Figure 7.1

Figure 7.2

Figure 7.3

Figure 7.4

Figure 7.5

Figure 8.1

Figure 9.1

Figure 9.2

Figure 10.1

Figure 10.2

Figure 10.3

Figure 10.4

Figure 11.1

Figure 11.2

Figure 11.3

Figure 11.4

Figure 11.5

Figure 11.6

Figure 12.1

Figure 12.2

Figure 12.3

Figure 13.1

Figure 15.1

Figure 15.2

Figure 15.3

Figure 15.4

Figure 15.5

Figure 17.1

Figure 17.2

Figure 18.1

Figure 18.2

Figure 18.3

Figure 20.1

Figure 21.1

List of Tables

Table 1.1

Table 1.2

Table 2.1

Table 2.2

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Table 3.5

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Table 5.6

Table 6.1

Table 6.2

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Table 7.8

Table 7.9

Table 8.1

Table 8.2

Table 8.3

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 11.1

Table 11.2

Table 11.3

Table 11.4

Table 11.5

Table 11.6

Table 11.7

Table 11.8

Table 12.1

Table 12.2

Table 12.3

Table 12.4

Table 12.5

Table 12.6

Table 12.7

Table 12.8

Table 13.1

Table 13.2

Table 14.1

Table 14.2

Table 14.3

Table 14.4

Table 14.5

Table 14.6

Table 15.1

Table 15.2

Table 15.3

Table 15.4

Table 15.5

Table 15.6

Table 15.7

Table 15.8

Table 15.9

Table 16.1

Table 18.1

Table 18.2

Table 18.3

Table 18.4

Table 18.5

Table 19.1

Table 19.2

Table 19.3

Table 19.4

Table 21.1

Table 21.2

Table 21.3

Table 21.4

The Advanced Fixed Income and Derivatives Management Guide

SAIED SIMOZAR

This edition first published 2015

© 2015 Saied Simozar

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

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Library of Congress Cataloging-in-Publication Data

ISBN 978-1-119-01414-0 (hardback); ISBN 978-1-119-01416-4 (ebk);

ISBN 978-1-119-01417-1 (ebk)

Cover Design: Wiley

Top Image: ©Shutterstock.com/bluebay

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List of Tables

1.1

Yield and duration of a portfolio

1.2

Key rate duration of a portfolio

2.1

US historical term structure components

2.2

US historical volatility of term structure components

3.1

Weights of principal components, 1992–2012

3.2

Historical half-life (mean reversion) of US treasury term structure components

3.3

t

-test of half-life of US treasury term structure components

3.4

Average value of US treasury term structure components

3.5

Annualized absolute volatility of US treasury term structure components

4.1

Duration components of zero coupon bonds

4.2

Curve exposure of portfolios of zero coupon bonds

4.3

Curve exposure of eurodollar futures contracts

4.4

Conventional yield and duration of portfolios of securities

4.5

Duration components of key rate securities

4.6

Transposed and scaled duration components of key rate securities

4.7

Duration components and yield of an equal weighted treasury index

4.8

Average duration components of an equal weighted treasury index

4.9

Duration components of global treasuries, January 3, 2013

5.1

Index performance attribution using coupon bonds for the TSIR

5.2

Index performance attribution using coupon Strips

5.3

Decay coefficient and contribution to performance, 1992–2012

5.4

Decay coefficient and volatility of performance, 1992–2012

5.5

Comparison of aggregated daily performance by basis function, 1992–2012

5.6

Comparison of annualized volatility by basis function

6.1

Selected term structure of swaps, July 30, 2012

6.2

Selected adjustment table for TSLR, July 30, 2012

6.3

Swap valuation table, July 30, 2012

7.1

Selected treasury bonds, 2012

7.2

Analysis of EUR term structure components

7.3

EUR swap trade, April 22, 2008

7.4

USD swap trade data, November 26, 2007

7.5

USD swap trade performance, November 26, 2007

7.6

USD swap trade data, June 28, 2004

7.7

USD swap trade performance, November 26, 2007

7.8

Durations of streams of cash flows

7.9

Summary of trade result, December 18, 2012

8.1

Performance of index replicating portfolio using five components, 1992–2012

8.2

Performance of index replicating portfolio using three components, 1992–2012

8.3

Performance of hedging methods, 1998–2012

9.1

Correlations of historical components of TSLV, 2000–2012

9.2

Principal components of historical components of TSLV, 2008–2012

9.3

Adjustment table for US swap volatility, June 30, 2012

9.4

Market, fair, and model volatilities, June 30, 2012

10.1

Components of the TSIR

10.2

Return attribution of coupon Strips 2/15/2027, 1997–2012

10.3

Eurodollar futures contracts, July 30, 2012

10.4

Euribor futures contracts, July 30, 2012

11.1

Timeline for cash flow analysis of inflation linked bonds

11.2

Price and spreads for selected IL bonds, July 30, 2012

11.3

Yield and interest rate durations for selected IL bonds, July 30, 2012

11.4

Real and credit durations for selected IL bonds, July 30, 2012

11.5

Sample US headline inflation index

11.6

Seasonal factors for US CPI

11.7

Yield of short maturity Tips, July 31, 2012

11.8

Risks of selected inflation swaps, July 31, 2012

12.1

Comparison of duration components of credit securities, July 30, 2012

12.2

Term structure of Brazil, May 25, 2012

12.3

Term structure of European credit spreads, May 25, 2012

12.4

Analytics for selected credit securities, July 31, 2012

12.5

Emerging markets portfolio report

12.6

Performance contribution example

12.7

Performance contribution example

12.8

Partial yields of selected securities, July 31, 2012

13.1

Selected analytics with recovery or guarantee, July 31, 2012

13.2

Partial yield and TSCS, July 31, 2012

14.1

Futures options analytics, July 31, 2012

14.2

Futures valuations analytics, July 31, 2012

14.3

Futures risk analytics, July 31, 2012

14.4

Replicating futures risks, July 31, 2012

14.5

Bond futures backtest results, July 31, 2012

14.6

Bond futures backtest underperformers, July 31, 2012

15.1

Bond option premiums, July 8, 2011

15.2

Early exercise of American call option, July 8, 2011

15.3

Bond option Greeks, July 8, 2011

15.4

Bond option durations, July 8, 2011

15.5

Bond option TSLV sensitivities, July 8, 2011

15.6

Bond option beta sensitivities, July 8, 2011

15.7

Call values of credit bonds, July 8, 2011

15.8

Option values for varying correlation parameters, July 8, 2011

15.9

Call risks of credit bonds, July 8, 2011

16.1

Long/short currency trades

18.1

Valuation of mortgage bonds, settlement August 3, 2012

18.2

Risk measures of mortgage bonds, July 31, 2012

18.3

Principal components of mortgage volatility, July 31, 2012

18.4

Principal components of swaption volatility, July 31, 2012

18.5

Hedging volatility of a mortgage

19.1

Sample portfolio analyzer output

19.2

Sample linear optimization constraints

19.3

Sample linear optimization trades, July 31, 2012

19.4

Sample portfolio preview

21.1

Practical discount yields

21.2

Practical floating discount benchmarks

21.3

Types of cash flow

21.4

Matrix of methods of risk calculation

List of Figures

2.1

Chebyshev term structure components in

τ

space

2.2

Chebyshev term structure components in time space

2.3

Forward rate components in

τ

space

2.4

Forward rate components in time space

2.5

US term structure of interest rates for September 30, 2010

2.6

Components of US yield curve for September 30, 2010

2.7

Level of yield curve shifted by 50 bps.

2.8

Slope of yield curve shifted by 50 bps.

2.9

Bend of yield curve shifted by 50 bps.

2.10

Yield curve on December 11, 2008

2.11

Comparison of ISM manufacturing index and bend of the TSIR

2.12

Implied historical decay coefficient

2.13

Implied historical decay coefficient from treasury market

3.1

Orthogonal term structure components in

τ

space

3.2

Orthogonal term structure and principal components in

τ

space, 1992–2012

3.3

Term structure and volatility adjusted principal components in

τ

space, 1992–2012

3.4

Historical bend of the Chebyshev basis function

4.1

Eurodollar futures contracts VBP

4.2

Key rate contribution to duration, time space

6.1

Term structure of swap curve, May 25, 2012

6.2

Spread of repo and Libor over treasury bills

7.1

Historical term structures of euro swaps

7.2

Historical term structures of USD swaps

7.3

AUD and NZD swap curves, May 24, 2012

7.4

AUD and NZD instantaneous forward swap curves, May, 24, 2012

7.5

AUD and NZD swap curves, December, 18, 2012

8.1

Portfolio optimization example

9.1

Selected cross-sections of relative Libor volatility, June 30, 2012

9.2

Selected cross-sections of absolute Libor volatility, June 30, 2012

10.1

Convexity adjusted yield curve, May 28, 1999

10.2

Yield curve without convexity adjustment, May 28, 1999

10.3

Convexity adjusted long zero curves

10.4

Treasury and swap curves for calculations of EDFC, July 30, 2012

11.1

Spot real (Rts) and nominal (Tsy) rates, July 30, 2012

11.2

Term structure of inflation expectations, July 30, 2012

11.3

Average monthly inflation rates

11.4

Standard deviation of monthly inflation in the US

11.5

Cumulative seasonal inflation adjustment for US

11.6

Implied and market inflation rates, July 31, 2012

12.1

Credit spread of Brazil, May 25, 2012

12.2

Term structures of rates in France and Germany, July 31, 2012

12.3

Contribution to partial yield

13.1

TSCS and TSDP for Ford Motor Co., July 31, 2012

15.1

European at-the-money call swaption, July 8, 2011

15.2

Log-normal probability distribution

15.3

American at-the-money call swaption, July 8, 2011

15.4

American at-the-money put swaption, July 8, 2011

15.5

Correlation functions

17.1

Fraction of homes sold per year

17.2

Natural log of mortgage factor due to incentive

18.1

Conventional 30-year mortgage rates

18.2

Calculation error for 30-year conventional mortgages

18.3

Conventional 15-year mortgage rates

20.1

Newton's optimization method

21.1

Propagation from bucket

j

to bucket

k

Abbreviations

CBF

Chebyshev basis function

CDS

Credit default swap

CFE

Cash flow engine

CSIA

Cumulative seasonal inflation adjustment

CTD

Cheapest to deliver

DUND

Drifted unit normal distribution

DV01

Dollar value of a basis point

EBF

Exponential basis function

EDFC

Eurodollar futures contract

EDTF

Exponentially decaying time function

IL

Inflation (indexed) linked

IRS

Interest rate swaps

ISDA

International Swaps and Derivatives Association

ISO

International Organization for Standardization

KBF

Key basis function

KRD

Key rate duration

KRS

Key rate security

LIBOR

London Inter-Bank Offered Rate

LP

Linear programming

MVBRR

Market value based recovery rate

OAS

Option adjusted spread

OBF

Orthogonal basis function

PBF

Polynomial basis function

PCA

Principal components analysis

PIK

Pay in kind

PSA

Prepayment speed assumption

RI

Refinancing incentive

STRIPS

Separate trading of registered interest and principal of securities

TIPS

Treasury inflation protected securities

TSD

Term structure duration

TSCR

Term structure of credit rates

TSCS

Term structure of credit spreads

TSDP

Term structure of default probability

TSIE

Term structure of inflation expectations

TSIR

Term structure of interest rates

TSKRD

Term structure based key rate duration

TSLR

Term structure of Libor rates

TSLV

Term structure of Libor volatility

TSRC

Term Structure of Real Credit

TSRR

Term structure of real rates

TSYV

Term structure of yield volatility

UND

Unit normal distribution

VBP

Value of a basis point

WAC

Weighted average coupon

WAM

Weighted average maturity

Notation

For notational convenience most variable names have been limited to a single character. Subscripts have been used to differentiate related variables. Subscripts i, j, and k have been used exclusively as running integers and are interchangeable. Other subscript letters are used to differentiate closely related names. For example, pm and pc are used for the market price and calculated price of a security, respectively. When these subscripts are mixed with running subscripts, a comma is inserted between them (e.g. pm,i or pc,k).

SUBSCRIPTS

b

Bond specific – e.g.,

is the yield of a bond

c

Constant – e.g., a constant or a fixed coupon rateCredit – e.g.,

is the credit yield calculated from the term structure of credit rates

e

Effective – e.g.,

is the effective yield

f

Forward – e.g.,

is the forward yieldFloating – e.g.,

is the floating coupon

g

Government or risk-free rate or simply interest rate

i

Usually, index of cash flows, e.g.,

is the time to the

i

th cash flow of a bond

j

Usually, index number of a bond, e.g.,

is the term calculated price of bond