US Interest Rate Strategy Weekly
Total Page：16
File Type：pdf, Size：1020Kb
Load more
Recommended publications
-
The TIPS-Treasury Bond Puzzle
The TIPS-Treasury Bond Puzzle Matthias Fleckenstein, Francis A. Longstaff and Hanno Lustig The Journal of Finance, October 2014 Presented By: Rafael A. Porsani The TIPS-Treasury Bond Puzzle 1 / 55 Introduction The TIPS-Treasury Bond Puzzle 2 / 55 Introduction (1) Treasury bond and the Treasury Inflation-Protected Securities (TIPS) markets: two of the largest and most actively traded fixed-income markets in the world. Find that there is persistent mispricing on a massive scale across them. Treasury bonds are consistently overpriced relative to TIPS. Price of a Treasury bond can exceed that of an inflation-swapped TIPS issue exactly matching the cash flows of the Treasury bond by more than $20 per $100 notional amount. One of the largest examples of arbitrage ever documented. The TIPS-Treasury Bond Puzzle 3 / 55 Introduction (2) Use TIPS plus inflation swaps to create synthetic Treasury bond. Price differences between the synthetic Treasury bond and the nominal Treasury bond: arbitrage opportunities. Average size of the mispricing: 54.5 basis points, but can exceed 200 basis points for some pairs. I The average size of this mispricing is orders of magnitude larger than transaction costs. The TIPS-Treasury Bond Puzzle 4 / 55 Introduction (3) What drives the mispricing? Slow-moving capital may help explain why mispricing persists. Is TIPS-Treasury mispricing related to changes in capital available to hedge funds? Answer: Yes. Mispricing gets smaller as more capital gets to the hedge fund sector. The TIPS-Treasury Bond Puzzle 5 / 55 Introduction (4) Also find that: Correlation in arbitrage strategies: size of TIPS-Treasury arbitrage is correlated with arbitrage mispricing in other markets. -
Form Dated March 20, 2007 Swaption Template (Full Underlying Confirmation)
Form Dated March 20, 2007 Swaption template (Full Underlying Confirmation) CONFIRMATION DATE: [Date] TO: [Party B] Telephone No.: [number] Facsimile No.: [number] Attention: [name] FROM: [Party A] SUBJECT: Swaption on [CDX.NA.[IG/HY/XO].____] [specify sector, if any] [specify series, if any] [specify version, if any] REF NO: [Reference number] The purpose of this communication (this “Confirmation”) is to set forth the terms and conditions of the Swaption entered into on the Swaption Trade Date specified below (the “Swaption Transaction”) between [Party A] (“Party A”) and [counterparty’s name] (“Party B”). This Confirmation constitutes a “Confirmation” as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 2000 ISDA Definitions (the “2000 Definitions”) and the 2003 ISDA Credit Derivatives Definitions as supplemented by the May 2003 Supplement to the 2003 ISDA Credit Derivatives Definitions (together, the “Credit Derivatives Definitions”), each as published by the International Swaps and Derivatives Association, Inc. are incorporated into this Confirmation. In the event of any inconsistency between the 2000 Definitions or the Credit Derivatives Definitions and this Confirmation, this Confirmation will govern. In the event of any inconsistency between the 2000 Definitions and the Credit Derivatives Definitions, the Credit Derivatives Definitions will govern in the case of the terms of the Underlying Swap Transaction and the 2000 Definitions will govern in other cases. For the purposes of the 2000 Definitions, each reference therein to Buyer and to Seller shall be deemed to refer to “Swaption Buyer” and to “Swaption Seller”, respectively. This Confirmation supplements, forms a part of and is subject to the ISDA Master Agreement dated as of [ ], as amended and supplemented from time to time (the “Agreement”) between Party A and Party B. -
Incentives for Central Clearing and the Evolution of Otc Derivatives
INCENTIVES FOR CENTRAL CLEARING AND THE EVOLUTION OF OTC DERIVATIVES – [email protected] A CCP12 5F No.55 Yuanmingyuan Rd. Huangpu District, Shanghai, China REPORT February 2019 TABLE OF CONTENTS TABLE OF CONTENTS................................................................................................... 2 EXECUTIVE SUMMARY ................................................................................................. 5 1. MARKET OVERVIEW ............................................................................................. 8 1.1 CENTRAL CLEARING RATES OF OUTSTANDING TRADES ..................... 8 1.2 MARKET STRUCTURE – COMPRESSION AND BACKLOADING ............... 9 1.3 CURRENT CLEARING RATES ................................................................... 11 1.4 INITIAL MARGIN HELD AT CCPS .............................................................. 16 1.5 UNCLEARED MARKETS ............................................................................ 17 1.5.1 FX OPTIONS ...................................................................................... 18 1.5.2 SWAPTIONS ...................................................................................... 19 1.5.3 EUROPE ............................................................................................ 21 2. TRADE PROCESSING ......................................................................................... 23 2.1 TRADE PROCESSING OF NON-CLEARED TRADES ............................... 23 2.1.1 CUSTODIAL ARRANGEMENTS ....................................................... -
Section 1256 and Foreign Currency Derivatives
Section 1256 and Foreign Currency Derivatives Viva Hammer1 Mark-to-market taxation was considered “a fundamental departure from the concept of income realization in the U.S. tax law”2 when it was introduced in 1981. Congress was only game to propose the concept because of rampant “straddle” shelters that were undermining the U.S. tax system and commodities derivatives markets. Early in tax history, the Supreme Court articulated the realization principle as a Constitutional limitation on Congress’ taxing power. But in 1981, lawmakers makers felt confident imposing mark-to-market on exchange traded futures contracts because of the exchanges’ system of variation margin. However, when in 1982 non-exchange foreign currency traders asked to come within the ambit of mark-to-market taxation, Congress acceded to their demands even though this market had no equivalent to variation margin. This opportunistic rather than policy-driven history has spawned a great debate amongst tax practitioners as to the scope of the mark-to-market rule governing foreign currency contracts. Several recent cases have added fuel to the debate. The Straddle Shelters of the 1970s Straddle shelters were developed to exploit several structural flaws in the U.S. tax system: (1) the vast gulf between ordinary income tax rate (maximum 70%) and long term capital gain rate (28%), (2) the arbitrary distinction between capital gain and ordinary income, making it relatively easy to convert one to the other, and (3) the non- economic tax treatment of derivative contracts. Straddle shelters were so pervasive that in 1978 it was estimated that more than 75% of the open interest in silver futures were entered into to accommodate tax straddles and demand for U.S. -
The Synthetic Collateralised Debt Obligation: Analysing the Super-Senior Swap Element
The Synthetic Collateralised Debt Obligation: analysing the Super-Senior Swap element Nicoletta Baldini * July 2003 Basic Facts In a typical cash flow securitization a SPV (Special Purpose Vehicle) transfers interest income and principal repayments from a portfolio of risky assets, the so called asset pool, to a prioritized set of tranches. The level of credit exposure of every single tranche depends upon its level of subordination: so, the junior tranche will be the first to bear the effect of a credit deterioration of the asset pool, and senior tranches the last. The asset pool can be made up by either any type of debt instrument, mainly bonds or bank loans, or Credit Default Swaps (CDS) in which the SPV sells protection1. When the asset pool is made up solely of CDS contracts we talk of ‘synthetic’ Collateralized Debt Obligations (CDOs); in the so called ‘semi-synthetic’ CDOs, instead, the asset pool is made up by both debt instruments and CDS contracts. The tranches backed by the asset pool can be funded or not, depending upon the fact that the final investor purchases a true debt instrument (note) or a mere synthetic credit exposure. Generally, when the asset pool is constituted by debt instruments, the SPV issues notes (usually divided in more tranches) which are sold to the final investor; in synthetic CDOs, instead, tranches are represented by basket CDSs with which the final investor sells protection to the SPV. In any case all the tranches can be interpreted as percentile basket credit derivatives and their degree of subordination determines the percentiles of the asset pool loss distribution concerning them It is not unusual to find both funded and unfunded tranches within the same securitisation: this is the case for synthetic CDOs (but the same could occur with semi-synthetic CDOs) in which notes are issued and the raised cash is invested in risk free bonds that serve as collateral. -
5. Caps, Floors, and Swaptions
Options on LIBOR based instruments Valuation of LIBOR options Local volatility models The SABR model Volatility cube Interest Rate and Credit Models 5. Caps, Floors, and Swaptions Andrew Lesniewski Baruch College New York Spring 2019 A. Lesniewski Interest Rate and Credit Models Options on LIBOR based instruments Valuation of LIBOR options Local volatility models The SABR model Volatility cube Outline 1 Options on LIBOR based instruments 2 Valuation of LIBOR options 3 Local volatility models 4 The SABR model 5 Volatility cube A. Lesniewski Interest Rate and Credit Models Options on LIBOR based instruments Valuation of LIBOR options Local volatility models The SABR model Volatility cube Options on LIBOR based instruments Interest rates fluctuate as a consequence of macroeconomic conditions, central bank actions, and supply and demand. The existence of the term structure of rates, i.e. the fact that the level of a rate depends on the maturity of the underlying loan, makes the dynamics of rates is highly complex. While a good analogy to the price dynamics of an equity is a particle moving in a medium exerting random shocks to it, a natural way of thinking about the evolution of rates is that of a string moving in a random environment where the shocks can hit any location along its length. A. Lesniewski Interest Rate and Credit Models Options on LIBOR based instruments Valuation of LIBOR options Local volatility models The SABR model Volatility cube Options on LIBOR based instruments Additional complications arise from the presence of various spreads between rates, as discussed in Lecture Notes #1, which reflect credit quality of the borrowing entity, liquidity of the instrument, or other market conditions. -
Understanding the Z-Spread Moorad Choudhry*
Learning Curve September 2005 Understanding the Z-Spread Moorad Choudhry* © YieldCurve.com 2005 A key measure of relative value of a corporate bond is its swap spread. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk of the bond. In its simplest form, the swap spread can be measured as the difference between the yield-to-maturity of the bond and the interest rate given by a straight-line interpolation of the swap curve. In practice traders use the asset-swap spread and the Z- spread as the main measures of relative value. The government bond spread is also considered. We consider the two main spread measures in this paper. Asset-swap spread An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating-coupon will be a spread over Libor (see Choudhry et al 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk.1 Asset swaps may be transacted at par or at the bond’s market price, usually par. This means that the asset swap value is made up of the difference between the bond’s market price and par, as well as the difference between the bond coupon and the swap fixed rate. -
Interest Rate Modelling and Derivative Pricing
Interest Rate Modelling and Derivative Pricing Sebastian Schlenkrich HU Berlin, Department of Mathematics WS, 2019/20 Part III Vanilla Option Models p. 140 Outline Vanilla Interest Rate Options SABR Model for Vanilla Options Summary Swaption Pricing p. 141 Outline Vanilla Interest Rate Options SABR Model for Vanilla Options Summary Swaption Pricing p. 142 Outline Vanilla Interest Rate Options Call Rights, Options and Forward Starting Swaps European Swaptions Basic Swaption Pricing Models Implied Volatilities and Market Quotations p. 143 Now we have a first look at the cancellation option Interbank swap deal example Bank A may decide to early terminate deal in 10, 11, 12,.. years. p. 144 We represent cancellation as entering an opposite deal L1 Lm ✻ ✻ ✻ ✻ ✻ ✻ ✻ ✻ ✻ ✻ ✻ ✻ T˜0 T˜k 1 T˜m − ✲ T0 TE Tl 1 Tn − ❄ ❄ ❄ ❄ ❄ ❄ K K [cancelled swap] = [full swap] + [opposite forward starting swap] K ✻ ✻ Tl 1 Tn − ✲ TE T˜k 1 T˜m − ❄ ❄ ❄ ❄ Lm p. 145 Option to cancel is equivalent to option to enter opposite forward starting swap K ✻ ✻ Tl 1 Tn − ✲ TE T˜k 1 T˜m − ❄ ❄ ❄ ❄ Lm ◮ At option exercise time TE present value of remaining (opposite) swap is n m Swap δ V (TE ) = K · τi · P(TE , Ti ) − L (TE , T˜j 1, T˜j 1 + δ) · τ˜j · P(TE , T˜j ) . − − i=l j=k X X future fixed leg future float leg | {z } | {z } ◮ Option to enter represents the right but not the obligation to enter swap. ◮ Rational market participant will exercise if swap present value is positive, i.e. Option Swap V (TE ) = max V (TE ), 0 . -
Evidence from SME Bond Markets
Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria September 2020 September Number 1292 Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria Number 1292 - September 2020 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, Salvatore Lo Bello, Juho Taneli Makinen, Luca Metelli, Mario Pietrunti, 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 ASYMMETRIC INFORMATION IN CORPORATE LENDING: EVIDENCE FROM SME BOND MARKETS by Alessandra Iannamorelli†, Stefano Nobili†, Antonio Scalia† and Luana Zaccaria‡ Abstract Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on creditworthiness affect firms’ decisions to issue debt securities. Surprisingly, our evidence supports positive (rather than adverse) selection. Holding public information constant, firms with better private fundamentals are more likely to access bond markets. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. These results are consistent with a model where banks offer more flexibility than markets during financial distress and firms may use market lending to signal credit quality to outside stakeholders. -
Introduction to Black's Model for Interest Rate
INTRODUCTION TO BLACK'S MODEL FOR INTEREST RATE DERIVATIVES GRAEME WEST AND LYDIA WEST, FINANCIAL MODELLING AGENCY© Contents 1. Introduction 2 2. European Bond Options2 2.1. Different volatility measures3 3. Caplets and Floorlets3 4. Caps and Floors4 4.1. A call/put on rates is a put/call on a bond4 4.2. Greeks 5 5. Stripping Black caps into caplets7 6. Swaptions 10 6.1. Valuation 11 6.2. Greeks 12 7. Why Black is useless for exotics 13 8. Exercises 13 Date: July 11, 2011. 1 2 GRAEME WEST AND LYDIA WEST, FINANCIAL MODELLING AGENCY© Bibliography 15 1. Introduction We consider the Black Model for futures/forwards which is the market standard for quoting prices (via implied volatilities). Black[1976] considered the problem of writing options on commodity futures and this was the first \natural" extension of the Black-Scholes model. This model also is used to price options on interest rates and interest rate sensitive instruments such as bonds. Since the Black-Scholes analysis assumes constant (or deterministic) interest rates, and so forward interest rates are realised, it is difficult initially to see how this model applies to interest rate dependent derivatives. However, if f is a forward interest rate, it can be shown that it is consistent to assume that • The discounting process can be taken to be the existing yield curve. • The forward rates are stochastic and log-normally distributed. The forward rates will be log-normally distributed in what is called the T -forward measure, where T is the pay date of the option. -
Understanding Swap Spread.Pdf
Understanding and modelling swap spreads By Fabio Cortes of the Bank’s Foreign Exchange Division. Interest rate swap agreements were developed for the transfer of interest rate risk. Volumes have grown rapidly in recent years and now the swap market not only fulfils this purpose, but is also used to extract information about market expectations and to provide benchmark rates against which to compare returns on fixed-income securities such as corporate and government bonds. This article explains what swaps are; what information might be extracted from them; and what appear to have been the main drivers of swap spreads in recent years. Some quantitative relationships are explored using ten-year swap spreads in the United States and the United Kingdom as examples. Introduction priced efficiently at all times, swap spreads may be altered by perceptions of the economic outlook and A swap is an agreement between two parties to exchange supply and demand imbalances in both the swap and cash flows in the future. The most common type of the government bond markets. interest rate swap is a ‘plain vanilla fixed-for-floating’ interest rate swap(1) where one party wants to receive The volume of swap transactions has increased rapidly floating (variable) interest rate payments over a given in recent years (see Chart 1). Swaps are the largest period, and is prepared to pay the other party a fixed type of traded interest rate derivatives in the OTC rate to receive those floating payments. The floating (over-the-counter)(4) market, accounting for over 75% of rate is agreed in advance with reference to a specific short-term market rate (usually three-month or Chart 1 six-month Libor).(2) The fixed rate is called the swap rate OTC interest rate contracts by instrument in all and should reflect, among other things, the value each currencies Total interest rate swaps outstanding party attributes to the series of floating-rate payments to Total forward-rate agreements outstanding Total option contracts outstanding US$ trillions be made over the life of the contract. -
Corporate Bonds and Debentures
Corporate Bonds and Debentures FCS Vinita Nair Vinod Kothari Company Kolkata: New Delhi: Mumbai: 1006-1009, Krishna A-467, First Floor, 403-406, Shreyas Chambers 224 AJC Bose Road Defence Colony, 175, D N Road, Fort Kolkata – 700 017 New Delhi-110024 Mumbai Phone: 033 2281 3742/7715 Phone: 011 41315340 Phone: 022 2261 4021/ 6237 0959 Email: [email protected] Email: [email protected] Email: [email protected] Website: www.vinodkothari.com 1 Copyright & Disclaimer . This presentation is only for academic purposes; this is not intended to be a professional advice or opinion. Anyone relying on this does so at one’s own discretion. Please do consult your professional consultant for any matter covered by this presentation. The contents of the presentation are intended solely for the use of the client to whom the same is marked by us. No circulation, publication, or unauthorised use of the presentation in any form is allowed, except with our prior written permission. No part of this presentation is intended to be solicitation of professional assignment. 2 About Us Vinod Kothari and Company, company secretaries, is a firm with over 30 years of vintage Based out of Kolkata, New Delhi & Mumbai We are a team of qualified company secretaries, chartered accountants, lawyers and managers. Our Organization’s Credo: Focus on capabilities; opportunities follow 3 Law & Practice relating to Corporate Bonds & Debentures 4 The book can be ordered by clicking here Outline . Introduction to Debentures . State of Indian Bond Market . Comparison of debentures with other forms of borrowings/securities . Types of Debentures . Modes of Issuance & Regulatory Framework .