Swaps Types, Taxonomy Of
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Credit Derivatives Handbook
08 February 2007 Fixed Income Research http://www.credit-suisse.com/researchandanalytics Credit Derivatives Handbook Credit Strategy Contributors Ira Jersey +1 212 325 4674 [email protected] Alex Makedon +1 212 538 8340 [email protected] David Lee +1 212 325 6693 [email protected] This is the second edition of our Credit Derivatives Handbook. With the continuous growth of the derivatives market and new participants entering daily, the Handbook has become one of our most requested publications. Our goal is to make this publication as useful and as user friendly as possible, with information to analyze instruments and unique situations arising from market action. Since we first published the Handbook, new innovations have been developed in the credit derivatives market that have gone hand in hand with its exponential growth. New information included in this edition includes CDS Orphaning, Cash Settlement of Single-Name CDS, Variance Swaps, and more. We have broken the information into several convenient sections entitled "Credit Default Swap Products and Evaluation”, “Credit Default Swaptions and Instruments with Optionality”, “Capital Structure Arbitrage”, and “Structure Products: Baskets and Index Tranches.” We hope this publication is useful for those with various levels of experience ranging from novices to long-time practitioners, and we welcome feedback on any topics of interest. FOR IMPORTANT DISCLOSURE INFORMATION relating to analyst certification, the Firm’s rating system, and potential conflicts -
Global Market Perspective
Vadim Zlotnikov Chief Market Strategist & Co-Head—Multi-Asset Solutions Global Market Perspective An Alternative Framework for Multi-Asset Diversification Diversifying by time horizon and equity beta may allow investors to benefit from high expected returns to contrarian, multi-asset investment opportunities while reducing drawdown risk. How We’re Positioned and Where the Opportunities Are Highlights Fears of slowing economic growth accelerated during September. Long-term n Continued volatility—from declining expectations for inflation and nominal growth collapsed. The decline was most liquidity as well as decelerating pronounced in the US, but also extended to Europe, Japan and Australia. emerging-market growth and tepid earnings growth—should create bigger mispricings. (continued) n These opportunities are necessarily coupled with drawdown risks that can’t be hedged, because illiquidity and Current Positioning unpredictable government response can amplify short-term losses. Position Trend Overweight Underweight/Short Equities – – Japan, EU Canada, US, Australia n Distress and mispricing are often Comments and Recent Activity: Absence of traditional excesses that mark end of cycle; profit margins to sustain. Modest improvements in credit flows improve Europe, Japan outlook. High volatility, valuation drove underweight thematic, but multi-asset diversifica- Sovereign Bonds 0 Flat US, Australia, Canada Japan, Europe tion may reduce common risk Comments: Low real rates; no exposure to Japanese bonds; overweight CAN, US, AUS sovereigns for higher yields exposures. IG Credit 0/+ Flat n HY Credit 0/+ – Contrarian opportunities today Comments: EM more attractive, but selectivity is key; added on improved valuation include energy/commodity equities, Petroleum + Down Long-Dated Futures, emerging-market investment-grade Oil Services Comments: Supply growth decelerates as capex cuts offset gains from technology. -
Inflation Derivatives: Introduction One of the Latest Developments in Derivatives Markets Are Inflation- Linked Derivatives, Or, Simply, Inflation Derivatives
Inflation-indexed Derivatives Inflation derivatives: introduction One of the latest developments in derivatives markets are inflation- linked derivatives, or, simply, inflation derivatives. The first examples were introduced into the market in 2001. They arose out of the desire of investors for real, inflation-linked returns and hedging rather than nominal returns. Although index-linked bonds are available for those wishing to have such returns, as we’ve observed in other asset classes, inflation derivatives can be tailor- made to suit specific requirements. Volume growth has been rapid during 2003, as shown in Figure 9.4 for the European market. 4000 3000 2000 1000 0 Jul 01 Jul 02 Jul 03 Jan 02 Jan 03 Sep 01 Sep 02 Mar 02 Mar 03 Nov 01 Nov 02 May 01 May 02 May 03 Figure 9.4 Inflation derivatives volumes, 2001-2003 Source: ICAP The UK market, which features a well-developed index-linked cash market, has seen the largest volume of business in inflation derivatives. They have been used by market-makers to hedge inflation-indexed bonds, as well as by corporates who wish to match future liabilities. For instance, the retail company Boots plc added to its portfolio of inflation-linked bonds when it wished to better match its future liabilities in employees’ salaries, which were assumed to rise with inflation. Hence, it entered into a series of 1 Inflation-indexed Derivatives inflation derivatives with Barclays Capital, in which it received a floating-rate, inflation-linked interest rate and paid nominal fixed- rate interest rate. The swaps ranged in maturity from 18 to 28 years, with a total notional amount of £300 million. -
Research Notes in Economics
No: 2018-03 | April 11, 2018 Research Notes in Economics Estimation of Currency Swap Yield Curve İbrahim Ethem Güney Abdullah Kazdal Doruk Küçüksaraç Abstract Currency swap is a financial derivative that allows parties to transform assets or liabilities denominated in one currency into another one. This product has been widely utilized in global financial markets in order to manage foreign exchange liquidity and to conduct carry trade transactions. Besides, central banks and investors follow currency swap market for the purposes of valuing financial derivatives, estimating counterparty risk and inferring about monetary policy stance. Currency swap transactions have substantial amount of volume in Turkey and they are extensively used by the banks. Given its frequent use, it is crucial to interpret the information related to currency swap rates. However, currency swap rates are quoted as par-rate, which is the coupon rate that makes the value of all cash flows equal to the face value, and their interpretation is not straightforward. This note employs one of the most popular parametric methods, Nelson-Siegel model, for currency swap rates to form a zero-coupon currency swap yield curve. In this regard, we provide an approach to convert the quoted currency swap rates to zero-coupon currency rates. The estimation results show that the fitted and quoted currency swap rates are quite close to each other. Additionally, the zero-coupon swap rates are compared with forward implied rates for specific maturities since both products are quite similar in nature. Both rates are observed to move together, which shows the consistency of our estimations. -
Introduction Section 4000.1
Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement. -
High Dimensional American Options
High Dimensional American Options Neil Powell Firth Brasenose College University of Oxford A thesis submitted for the degree of Doctor of Philosophy Trinity Term 2005 I dedicate this thesis to my lovely wife Ruth. Acknowledgements I acknowledge the help of both my supervisors, Dr. Jeff Dewynne and Dr. William Shaw and thank them for their advice during my time in Oxford. Also, Dr. Sam Howison, Prof. Jon Chapman, Dr. Peter Carr, Dr. Ben Hambly, Dr. Peter Howell and Prof. Terry Lyons have spared time for helpful discussions. I especially thank Dr. Gregory Lieb for allowing me leave from Dresdner Kleinwort Wasserstein to complete this research. I would like to thank Dr. Bob Johnson and Prof. Peter Ross for their help, advice, and references over the years. Andy Dickinson provided useful ideas and many cups of tea. The EPSRC and Nomura International plc made this research possible by providing funding. Finally, I would like to thank my parents for their love and encouragement over the years, and my wife, Ruth, for her unfailing and invaluable love and support throughout the course of my research. Abstract Pricing single asset American options is a hard problem in mathematical finance. There are no closed form solutions available (apart from in the case of the perpetual option), so many approximations and numerical techniques have been developed. Pricing multi–asset (high dimensional) American options is still more difficult. We extend the method proposed theoretically by Glasserman and Yu (2004) by employing regression basis functions that are martingales under geometric Brownian motion. This results in more accurate Monte Carlo simulations, and computationally cheap lower and upper bounds to the American option price. -
II. Global Financial Markets Remain Dependent on Central Banks
II. Global financial markets remain dependent on central banks During the period under review, from mid-2014 to end-May 2015, accommodative monetary policies continued to lift prices in global asset markets. Investors’ risk- taking remained strong as expectations of policy rate increases were pushed out further and additional asset purchases undertaken. As a result, bond prices climbed, equity indices repeatedly hit new highs and prices of other risky assets also rose. Moreover, global investors’ exposure to riskier assets continued to increase. As central banks remained in easing mode, bond yields in advanced economies continued to fall throughout much of the period under review. In a number of cases, bond markets entered uncharted territory as nominal bond yields fell below zero for maturities even beyond five years. This was mainly due to falling term premia, but also reflected downward revisions of expected future policy rates. Towards the end of the period, bond markets – in particular in Europe – saw sharp yield reversals as investors became increasingly uneasy about stretched valuations. Signs of market fragility were evident more widely too. Bouts of volatility occurred with increasing frequency across markets, and signs of illiquidity in fixed income markets began to appear. As market-makers have scaled back their activities after the Great Financial Crisis, asset managers have become more important as sources of liquidity. Such shifts, in combination with increased official demand, may have reduced liquidity and reinforced liquidity illusion in certain bond markets. Expectations of increasingly divergent monetary policies in the United States and the euro area resulted in widening interest rate differentials, and, as a result, the dollar soared and the euro plummeted. -
1. BGC Derivative Markets, L.P. Contract Specifications
1. BGC Derivative Markets, L.P. Contract Specifications . 2 1.1 Product Descriptions . 2 1.1.1 Mandatorily Cleared CEA 2(h)(1) Products as of 2nd October 2013 . 2 1.1.2 Made Available to Trade CEA 2(h)(8) Products . 5 1.1.3 Interest Rate Swaps . 7 1.1.4 Commodities . 27 1.1.5 Credit Derivatives . 30 1.1.6 Equity Derivatives . 37 1.1.6.1 Equity Index Swaps . 37 1.1.6.2 Option on Variance Swaps . 38 1.1.6.3 Variance & Volatility Swaps . 40 1.1.7 Non Deliverable Forwards . 43 1.1.8 Currency Options . 46 1.2 Appendices . 52 1.2.1 Appendix A - Business Day (Date) Conventions) Conventions . 52 1.2.2 Appendix B - Currencies and Holiday Centers . 52 1.2.3 Appendix C - Conventions Used . 56 1.2.4 Appendix D - General Definitions . 57 1.2.5 Appendix E - Market Fixing Indices . 57 1.2.6 Appendix F - Interest Rate Swap & Option Tenors (Super-Major Currencies) . 60 BGC Derivative Markets, L.P. Contract Specifications Product Descriptions Mandatorily Cleared CEA 2(h)(1) Products as of 2nd October 2013 BGC Derivative Markets, L.P. Contract Specifications Product Descriptions Mandatorily Cleared Products The following list of Products required to be cleared under Commodity Futures Trading Commission rules is included here for the convenience of the reader. Mandatorily Cleared Spot starting, Forward Starting and IMM dated Interest Rate Swaps by Clearing Organization, including LCH.Clearnet Ltd., LCH.Clearnet LLC, and CME, Inc., having the following characteristics: Specification Fixed-to-Floating Swap Class 1. -
Counterparty Credit Risk for Other Titles in the Wiley Finance Series Please See Counterparty Credit Risk
Thispageintentionallyleftblank Counterparty Credit Risk For other titles in the Wiley Finance series please see www.wiley.com/finance Counterparty Credit Risk The New Challenge for Global Financial Markets Jon Gregory A John Wiley and Sons, Ltd, Publication This edition first published in 2010 Copyright# 2010 John Wiley & Sons Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. 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 or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trade- marks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. -
Tax Consequences of Interest Rate Swaps : Characterization by Function, Not Prejudice
Tax Consequences of Interest Rate Swaps : Characterization by Function, Not Prejudice by Patricia Brownt INTRODUCTION An interest rate swap is a transaction in which two parties, known as counterparties, t contract to make periodic payments to each other during the contract period. Most often, these streams of payments are meant to coincide with and cover obligations, usually interest payments, that the parties owe to creditors that are not parties to the swap. 2 A swap is a means by which a borrower can change the terms of existing debt by "swapping" those terms with another borrower 3 that has procured debt on terms more attractive to the first borrower.4 Although a swap is often described as a financing tech- nique, it is not, in itself, a new source of funds for a corporation seeking to raise more capital. The parties to the swap must look to the regular capital markets to obtain the loans whose terms they swap.5 t B.S.F.S. Georgetown University, 1984; J.D. Boalt Hall School of Law, 1987, University of California, Berkeley. Associate, Cleary, Gottlieb, Steen & Hamilton, New York. 1. In this article, the term "counterparty" refers to the party to the swap whose activity or treatment is not being discussed at that point. Therefore, the identity of the counterparty will change when the discussion shifts to the effect on the other party to the swap. 2. The "asset-based" swap has also emerged as a means of matching a corporation's liabil- ities to the income from its assets. Walmsley, Understanding Interest Rate Swaps, BANKER'S MAG., July-Aug. -
Pricing and Dynamic Hedging of Two Oil-Linked Structured Products
Pricing and Dynamic Hedging of two Oil-Linked Structured Products Master Thesis Chantal Bernet 1 University of St.Gallen Master of Arts in Banking and Finance Referee: Prof. Dr. Karl Frauendorfer Wallisellen, 14th of November 2009 1Email: [email protected] Pricing and Dynamic Hedging of two Oil-Linked Structured Products Chantal Bernet Abstract Several objectives are pursued along this thesis. Firstly, to give a ge- neral understanding about structured products and their main building blocks. Therefore, the pricing and hedging of vanilla options, digital options and barrier options will be briefly described. Secondly, the characteristics of oil prices and existing spot price models and forward price models on oil will be dicussed. Finally, in the practical implementation, two structured products: a bar- rier reverse convertible and a win-win (a capital protected certificate with knock-out) will be priced and delta hedged from the issuer's point of view. Therefore two implied volatility "worlds"will be used: on one hand, a flat volatility world where the simple Black model is used and on the other hand, a term structure of implied volatilities where Clew- low's and Strickland's two-factor model is applied. As the issuer, we are interested not only in risk managing these products (delta hedging) but also in observing the hedge performance through the final profit and loss distribution. keywords: Risk, Risk Management, the Greeks, Option Pricing, Hedging, Hedge Performance, Profit and Loss Distribution, Stochastic Modelling, Oil, Barrier Reverse Convertible, WinWin, Black, Gabillon, Schwartz, Clewlow and Strickland . Acknowledgment I would like to thank Prof. -
Product Notes
MORGAN STANLEY DEAN WITTER Derivative Products Group Product Notes January 1998 Product Management/Frequent User Group Justin Simpson, Principal (212) 761-2560 Marc Getman, Vice President (212) 761-2516 Martin Mann, Vice President (212) 761-2518 Peter Flink (212) 761-2670 Greg Glickman (212) 761-2606 Udai Puramsetti (212) 761-2614 Dev Sahai (212) 761-1705 Monique Couppas (212) 761-1724 Introduction to Interest Rate Swaps This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities or instruments or to participate in any particular trading strategy mentioned. Please refer to the notes at the end of this report. Additional information on recommended securities is available on request. 11/10/97CMSDOCS\150034\/#150034 V1 - INTEREST RATE SWAP MORGAN STANLEY DEAN WITTER Contents Introduction........................................................................................................................................................................ 1 Interest Rate Swaps............................................................................................................................................................ 1 Currency Swaps ................................................................................................................................................................. 2 Derivative Swap Products.................................................................................................................................................