LIBOR Fallback and Quantitative Finance
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Forward Contracts and Futures a Forward Is an Agreement Between Two Parties to Buy Or Sell an Asset at a Pre-Determined Future Time for a Certain Price
Forward contracts and futures A forward is an agreement between two parties to buy or sell an asset at a pre-determined future time for a certain price. Goal To hedge against the price fluctuation of commodity. • Intension of purchase decided earlier, actual transaction done later. • The forward contract needs to specify the delivery price, amount, quality, delivery date, means of delivery, etc. Potential default of either party: writer or holder. Terminal payoff from forward contract payoff payoff K − ST ST − K K ST ST K long position short position K = delivery price, ST = asset price at maturity Zero-sum game between the writer (short position) and owner (long position). Since it costs nothing to enter into a forward contract, the terminal payoff is the investor’s total gain or loss from the contract. Forward price for a forward contract is defined as the delivery price which make the value of the contract at initiation be zero. Question Does it relate to the expected value of the commodity on the delivery date? Forward price = spot price + cost of fund + storage cost cost of carry Example • Spot price of one ton of wood is $10,000 • 6-month interest income from $10,000 is $400 • storage cost of one ton of wood is $300 6-month forward price of one ton of wood = $10,000 + 400 + $300 = $10,700. Explanation Suppose the forward price deviates too much from $10,700, the construction firm would prefer to buy the wood now and store that for 6 months (though the cost of storage may be higher). -
Half-Yearly Financial Report at 30 June 2019
Half-Yearly Financial Report at 30 June 2019 Contents Composition of the Corporate Bodies 3 The first half of 2019 in brief Economic figures and performance indicators 4 Equity figures and performance indicators 5 Accounting statements Balance Sheet 7 Income Statement 9 Statement of comprehensive income 10 Statements of Changes in Shareholders' Equity 11 Statement of Cash Flows 13 Report on Operations Macroeconomic situation 16 Economic results 18 Financial aggregates 22 Business 31 Operating structure 37 Significant events after the end of the half and business outlook 39 Other information 39 Notes to the Financial Statements Part A – Accounting policies 41 Part B – Information on the balance sheet 78 Part C – Information on the income statement 121 Part D – Comprehensive Income 140 Part E – Information on risks and relative hedging policies 143 Part F – Information on capital 155 Part H – Transactions with related parties 166 Part L – Segment reporting 173 Certification of the condensed Half-Yearly Financial Statements pursuant to Article 81-ter of 175 CONSOB Regulation 11971 of 14 May 1999, as amended Composition of the Corporate Bodies Board of Directors Chairperson Massimiliano Cesare Chief Executive Officer Bernardo Mattarella Director Pasquale Ambrogio Director Leonarda Sansone Director Gabriella Forte Board of Statutory Auditors Chairperson Paolo Palombelli Regular Auditor Carlo Ferocino Regular Auditor Marcella Galvani Alternate Auditor Roberto Micolitti Alternate Auditor Sofia Paternostro * * * Auditing Firm PricewaterhouseCoopers -
Derivative Valuation Methodologies for Real Estate Investments
Derivative valuation methodologies for real estate investments Revised September 2016 Proprietary and confidential Executive summary Chatham Financial is the largest independent interest rate and foreign exchange risk management consulting company, serving clients in the areas of interest rate risk, foreign currency exposure, accounting compliance, and debt valuations. As part of its service offering, Chatham provides daily valuations for tens of thousands of interest rate, foreign currency, and commodity derivatives. The interest rate derivatives valued include swaps, cross currency swaps, basis swaps, swaptions, cancellable swaps, caps, floors, collars, corridors, and interest rate options in over 50 market standard indices. The foreign exchange derivatives valued nightly include FX forwards, FX options, and FX collars in all of the major currency pairs and many emerging market currency pairs. The commodity derivatives valued include commodity swaps and commodity options. We currently support all major commodity types traded on the CME, CBOT, ICE, and the LME. Summary of process and controls – FX and IR instruments Each day at 4:00 p.m. Eastern time, our systems take a “snapshot” of the market to obtain close of business rates. Our systems pull over 9,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. After the data is pulled into the system, it goes through the rates control process. In this process, each rate is compared to its historical values. Any rate that has changed more than the mean and related standard deviation would indicate as normal is considered an outlier and is flagged for further investigation by the Analytics team. -
Buy-Side Participation in OTC Derivatives Markets
Buy-side Participation in OTC Derivatives Markets July 2017 SOLUM FINANCIAL LIMITED www.solum-financial.com Glossary CCP Central Counterparty CTD Cheapest-to-deliver CSA Credit Support Annex EMIR European Market Infrastructure Regulation FRS Financial Reporting Standards IFRS International Financial Reporting Standards ISDA International Swaps and Derivatives Association, Inc. LDI Liability-driven Investment LIBOR London Interbank Offered Rate MiFID Markets in Financial Instruments Directive MiFIR Markets in Financial Instruments Regulation MMFs Money Market Funds MVA Margin Value Adjustment OIS Overnight Indexed Swap OTC Over-the-counter SONIA Sterling Overnight Index Average SIMM Standard Initial Margin Model TRS Total Return Swaps UMR Uncleared Margin Rules xVA Derivatives Valuation Adjustment (includes all of CVA/DVA/FCA/FBA/KVA/MVA etc.) Solum Disclaimer This paper is provided for your information only and does not constitute legal, tax, accountancy or regulatory advice or advice in relation to the purpose of buying or selling securities or other financial instruments. No representation, warranty, responsibility or liability, express or implied, is made to or accepted by us or any of our principals, officers, contractors or agents in relation to the accuracy, appropriateness or completeness of this paper. All information and opinions contained in this paper are subject to change without notice, and we have no responsibility to update this paper after the date hereof. This report may not be reproduced or circulated without our prior written authority. 2 1 Introduction Buy-side institutions have very different business models to their dealing counterparties on the sell-side, and operate under a separate regulatory framework. Whilst banks will usually seek to run a balanced book of derivatives, buy-side institutions are often running highly directional portfolios as they seek to hedge the liabilities of pension fund clients or express macro-economic views. -
Modelling and Forecasting Macroeconomic
Temi di discussione (Working Papers) Modeling and forecasting macroeconomic downside risk by Davide Delle Monache, Andrea De Polis and Ivan Petrella March 2021 March Number 1324 Temi di discussione (Working Papers) Modeling and forecasting macroeconomic downside risk by Davide Delle Monache, Andrea De Polis and Ivan Petrella Number 1324 - March 2021 The papers published in the Temi di discussione series describe preliminary results and are made available to the public to encourage discussion and elicit comments. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank. Editorial Board: Federico Cingano, Marianna Riggi, Monica Andini, Audinga Baltrunaite, Marco Bottone, Davide Delle Monache, Sara Formai, Francesco Franceschi, Adriana Grasso, Salvatore Lo Bello, Juho Taneli Makinen, Luca Metelli, Marco Savegnago. Editorial Assistants: Alessandra Giammarco, Roberto Marano. ISSN 1594-7939 (print) ISSN 2281-3950 (online) Printed by the Printing and Publishing Division of the Bank of Italy MODELING AND FORECASTING MACROECONOMIC DOWNSIDE RISK by Davide Delle Monache*, Andrea De Polis** and Ivan Petrella** Abstract We document a substantial increase in downside risk to US economic growth over the last 30 years. By modelling secular trends and cyclical changes of the predictive density of GDP growth, we find an accelerating decline in the skewness of the conditional distributions, with significant, procyclical variations. Decreasing trend-skewness, which turned negative in the aftermath of the Great Recession, is associated with the long-run growth slowdown started in the early 2000s. Short-run skewness fluctuations imply negatively skewed predictive densities ahead of and during recessions, often anticipated by deteriorating financial conditions, while positively skewed distributions characterize expansions. -
My Company Has an Existing Loan That References SOR and Matures After End 2021
PUBLIC FRENQUENTLY ASKED QUESTIONS FAQs FOR CORPORATES LOANS – EXISTING/LEGACY Q1: My company has an existing loan that references SOR and matures after end 2021. What should I do about this? There is no immediate impact on your loan at this juncture, and your bank will be reaching out to you in due course to assist with the transition. However, to prepare for the upcoming transition, you are encouraged to review the terms and conditions of your loan contract to understand the implications and the actions required. Q2. Can my bank just replace my SOR loan pricing to SIBOR (or enhanced SIBOR)? Your bank will be writing to you at the appropriate time to consider different options. You will have the ability to choose the right loan package that best meets your needs. You will also need to consider if replacing a SOR loan with other benchmarks impacts your related transactions (e.g. hedges) and the corresponding accounting and tax implications. SORA and SIBOR are different SGD benchmarks that are determined on a different basis. In relation to the usage of SIBOR, ABS Benchmarks Administration Pte Ltd (ABS Co) is conducting a transitional testing for the enhanced SIBOR, and will provide an update after the transitional testing is completed in 2H 2020. The results of the transitional testing will be considered by the Steering Committee for SOR Transition to SORA (SC-STS), which will issue industry guidance in due course. While SORA is not commonly used in the loan market, it is not new and has been published daily by the MAS since 2005. -
D13 02 Pricing a Forward Contract V02 (With Notes)
Derivatives Pricing a Forward / Futures Contract Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Valuing forward contracts: Key ideas • Two different ways to own a unit of the underlying asset at maturity: – 1.Buy spot (SPOT PRICE: S0) and borrow => Interest and inventory costs – 2. Buy forward (AT FORWARD PRICE F0) • VALUATION PRINCIPLE: NO ARBITRAGE • In perfect markets, no free lunch: the 2 methods should cost the same. You can think of a derivative as a mixture of its constituent underliers, much as a cake is a mixture of eggs, flour and milk in carefully specified proportions. The derivative’s model provide a recipe for the mixture, one whose ingredients’ quantity vary with time. Emanuel Derman, Market and models, Risk July 2001 Derivatives 01 Introduction |2 Discount factors and interest rates • Review: Present value of Ct • PV(Ct) = Ct × Discount factor • With annual compounding: • Discount factor = 1 / (1+r)t • With continuous compounding: • Discount factor = 1 / ert = e-rt Derivatives 01 Introduction |3 Forward contract valuation : No income on underlying asset • Example: Gold (provides no income + no storage cost) • Current spot price S0 = $1,340/oz • Interest rate (with continuous compounding) r = 3% • Time until delivery (maturity of forward contract) T = 1 • Forward price F0 ? t = 0 t = 1 Strategy 1: buy forward 0 ST –F0 Strategy 2: buy spot and borrow Should be Buy spot -1,340 + ST equal Borrow +1,340 -1,381 0 ST -1,381 Derivatives 01 Introduction |4 Forward price and value of forward contract rT • Forward price: F0 = S0e • Remember: the forward price is the delivery price which sets the value of a forward contract equal to zero. -
Eurodollar Futures, and Forwards
5 Eurodollar Futures, and Forwards In this chapter we will learn about • Eurodollar Deposits • Eurodollar Futures Contracts, • Hedging strategies using ED Futures, • Forward Rate Agreements, • Pricing FRAs. • Hedging FRAs using ED Futures, • Constructing the Libor Zero Curve from ED deposit rates and ED Fu- tures. 5.1 EURODOLLAR DEPOSITS As discussed in chapter 2, Eurodollar (ED) deposits are dollar deposits main- tained outside the USA. They are exempt from Federal Reserve regulations that apply to domestic deposit markets. The interest rate that applies to ED deposits in interbank transactions is the LIBOR rate. The LIBOR spot market has maturities from a few days to 10 years but liquidity is the greatest 69 70 CHAPTER 5: EURODOLLAR FUTURES AND FORWARDS Table 5.1 LIBOR spot rates Dates 7day 1mth. 3mth 6mth 9mth 1yr LIBOR 1.000 1.100 1.160 1.165 1.205 1.337 within one year. Table 5.1 shows LIBOR spot rates over a year as of January 14th 2004. In the ED deposit market, deposits are traded between banks for ranges of maturities. If one million dollars is borrowed for 45 days at a LIBOR rate of 5.25%, the interest is 45 Interest = 1m × 0.0525 = $6562.50 360 The rate quoted assumes settlement will occur two days after the trade. Banks are willing to lend money to firms at the Libor rate provided their credit is comparable to these strong banks. If their credit is weaker, then the lending bank may quote a rate as a spread over the Libor rate. 5.2 THE TED SPREAD Banks that offer LIBOR deposits have the potential to default. -
Liquidity Effects in Options Markets: Premium Or Discount?
Liquidity Effects in Options Markets: Premium or Discount? PRACHI DEUSKAR1 2 ANURAG GUPTA MARTI G. SUBRAHMANYAM3 March 2007 ABSTRACT This paper examines the effects of liquidity on interest rate option prices. Using daily bid and ask prices of euro (€) interest rate caps and floors, we find that illiquid options trade at higher prices relative to liquid options, controlling for other effects, implying a liquidity discount. This effect is opposite to that found in all studies on other assets such as equities and bonds, but is consistent with the structure of this over-the-counter market and the nature of the demand and supply forces. We also identify a systematic factor that drives changes in the liquidity across option maturities and strike rates. This common liquidity factor is associated with lagged changes in investor perceptions of uncertainty in the equity and fixed income markets. JEL Classification: G10, G12, G13, G15 Keywords: Liquidity, interest rate options, euro interest rate markets, Euribor market, volatility smiles. 1 Department of Finance, College of Business, University of Illinois at Urbana-Champaign, 304C David Kinley Hall, 1407 West Gregory Drive, Urbana, IL 61801. Ph: (217) 244-0604, Fax: (217) 244-9867, E-mail: [email protected]. 2 Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, Ohio 44106-7235. Ph: (216) 368-2938, Fax: (216) 368-6249, E-mail: [email protected]. 3 Department of Finance, Leonard N. Stern School of Business, New York University, 44 West Fourth Street #9-15, New York, NY 10012-1126. Ph: (212) 998-0348, Fax: (212) 995-4233, E- mail: [email protected]. -
Trends in Credit Basis Spreads Nina Boyarchenko, Pooja Gupta, Nick Steele, and Jacqueline Yen
Trends in Credit Basis Spreads Nina Boyarchenko, Pooja Gupta, Nick Steele, and Jacqueline Yen OVERVIEW orporate bonds represent an important source of funding for public corporations in the United States. When these • The second half of 2015 and C the first quarter of 2016 saw a bonds cannot be easily traded in secondary markets or when large, prolonged widening of investors cannot easily hedge their bond positions in derivatives spreads in credit market basis markets, corporate issuance costs increase, leading to higher trades—between the cash bond overall funding costs. In this article, we examine two credit and CDS markets and between market basis trades: the cash bond-credit default swap segments of the CDS market. (CDS) basis and the single-name CDS-index CDS (CDX) basis, • This article examines evaluating potential explanations proposed for the widening in three potential sources of both bases that occurred in the second half of 2015 and first the persistent dislocation: (1) increased idiosyncratic quarter of 2016. risk, (2) strategic positioning in The prolonged dislocation between the cash bond and CDS CDS products by institutional markets, and between segments of the CDS market, surprised investors, and (3) post-crisis market participants. In the past, participants executed basis trades regulatory changes. anticipating that the spreads between the cash and derivative • The authors argue that, markets would retrace to more normal levels. This type of trading though post-crisis regulatory activity serves to link valuations in the two markets and helps changes themselves are not correct price differences associated with transient or technical the cause of credit basis widening, increased funding factors. -
Impact of the Financial Crisis on Derivative Valuation
University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Supervised Undergraduate Student Research Chancellor’s Honors Program Projects and Creative Work 5-2014 Impact of the Financial Crisis on Derivative Valuation Samuel M. Berklacich [email protected] Follow this and additional works at: https://trace.tennessee.edu/utk_chanhonoproj Part of the Finance and Financial Management Commons, and the Portfolio and Security Analysis Commons Recommended Citation Berklacich, Samuel M., "Impact of the Financial Crisis on Derivative Valuation" (2014). Chancellor’s Honors Program Projects. https://trace.tennessee.edu/utk_chanhonoproj/1704 This Dissertation/Thesis is brought to you for free and open access by the Supervised Undergraduate Student Research and Creative Work at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chancellor’s Honors Program Projects by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. Impact of the Financial Crisis on Derivative Valuation Sam Berklacich INTRO The financial crisis of 2007 highlighted some tremendous flaws within the financial industry. In a little over a year, close to $8 trillion was wiped out from the U.S. economy with significant ripples sent through out the global economy. The world’s largest economy had fallen victim to one of the most exotic and complex of financial instruments in the global economy: derivatives. With a present day market valued over 5x the domestic GDP, financial derivatives still play a major role within the industry. Furthermore, a very significant portion of the derivatives market is traded “over-the-counter” with much less regulation. -
Frequently Asked Questions on the Basel III Standardised Approach for Measuring Counterparty Credit Risk Exposures, March 2018
This standard has been integrated into the consolidated Basel Framework: https://www.bis.org/basel_framework/ Basel Committee on Banking Supervision Frequently asked questions on the Basel III standardised approach for measuring counterparty credit risk exposures March 2018 (update of FAQs published in August 2015) This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2018. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-149-6 (online) Contents The standardised approach for measuring counterparty credit risk exposures: Frequently asked questions ............................................................................................................................................................................ 1 Introduction ......................................................................................................................................................................................... 1 1. General formula ............................................................................................................................................................... 1 1.1 Capping of margined EAD at otherwise unmargined EAD ................................................................... 1 1.2 Collateral taken outside of netting sets ........................................................................................................ 1 2. PFE add-on .......................................................................................................................................................................