APPENDIX 3A: Duration and Immunization
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Credit Spread Arbitrage in Emerging Eurobond Markets
Credit Spread Arbitrage in Emerging Eurobond Markets Caio Ibsen Rodrigues de Almeida *,a ** Antonio Marcos Duarte, Jr. *** Cristiano Augusto Coelho Fernandes Abstract Simulating the movements of term structures of interest rates plays an important role when optimally allocating portfolios in fixed income markets. These movements allow the generation of scenarios that provide the assets’ sensitivity to the fluctuation of interest rates. The problem becomes even more interesting when the portfolio is international. In this case, there is a need to synchronize the different scenarios for the movements of the interest rate curves in each country. An important factor to consider, in this context, is credit risk. For instance, in the corporate Emerging Eurobond fixed income market there are two main sources of credit risk: sovereign risk and the relative credit among the companies issuers of the eurobonds. This article presents a model to estimate, in a one step procedure, both the term structure of interest rates and the credit spread function of a diversified international portfolio of eurobonds, with different credit ratings. The estimated term structures can be used to analyze credit spread arbitrage opportunities in Eurobond markets. Numerical examples taken from the Argentinean, Brazilian and Mexican Eurobond markets are presented to illustrate the practical use of the methodology. Please address all correspondence to: Antonio Marcos Duarte, Jr., Director Risk Management Unibanco S.A. Av. Eusébio Matoso, 891 / 5 andar 05423-901 São Paulo, SP, Brazil Phone: 55-11-30971668 Fax: 55-11-30974276 a The first author acknowledges the financial support granted by FAPERJ * Pontifícia Universidade Católica do Rio de Janeiro, Brazil. -
An Introduction to Debt Securities
Clifford Chance LLP An introduction to 10 Upper Bank Street, London, E14 5JJ Switchboard: +44 (0)20 7006 1000 Fax: +44 (0)20 7006 5555 n debt securities o www.cliffordchance.com i n a p m o C s ’ r e r u s a e r A debt security is any instrument which is, or may be Types of debt security T traded more or less freely among investors in the market. Securities are either expressed to be payable to the I Commercial paper g n bearer or state that entitlement is determined by reference Commercial paper is normally created pursuant to a i d to a register of holders. Bearer securities will usually be programme and, when issued in the Euromarket, is n u f “negotiable instruments”. Broadly speaking, this means that commonly called “Euro-commercial paper” (ECP). An ECP d title to the security can be transferred by mere delivery and programme will provide for the issue of ECP notes (usually n a that the transferee is unaffected by any third party claim for a period of one or three months, but can be up to 12 s t against the transferor. In practice, bearer securities are months) from time to time at short notice to one or more e k usually lodged with a depository or custodian for safe- dealers on a non-committed basis at a price agreed at the r a keeping, because of the risk of loss or theft, and are traded time. ECP is usually non-interest bearing and is, therefore, m l through clearing systems such as Euroclear and Clearstream, issued at a discount to face value. -
Doubleline Asset Allocation Webcast Recap
DoubleLine Asset Allocation Webcast Recap About this Webcast Recap On May 5, 2020, Deputy Chief Investment Officer Jeffrey Sherman, CFA held a webcast discussing the DoubleLine Core Fixed Income (DBLFX/DLFNX), DoubleLine Flexible Income (DFLEX/DLINX) and DoubleLine Low Duration Bond (DBLSX/DLSNX) Funds. This recap is not intended to represent a complete transcript of the webcast. It is not intended as solicitation to buy or sell securities. If you are interested in hearing more of Mr. Sherman’s views, please listen to the full version of this webcast on www.doublelinefunds.com on the “Webcasts” tab under “Latest Webcast”. You can use the “Jump To” feature to navigate to each slide. DoubleLine Core Fixed Income Fund Performance Annualized Quarter-End Returns Since Inception March 31, 2020 1Q2020 Year-to-Date 1 Year 3 Years 5 Years (6-1-10 to 3-31-20) I-share (DBLFX) -3.29% -3.29% 1.42% 2.54% 2.35% 4.67% N-share (DLFNX) -3.45% -3.45% 1.17% 2.29% 2.07% 4.41% Bloomberg Barclays U.S. Aggregate Index 3.15% 3.15% 8.93% 4.82% 3.36% 3.75% Gross Expense Ratio: I-share 0.48%; N-share 0.73% DoubleLine Flexible Income Fund Performance Annualized Quarter-End Returns Since Inception March 31, 2020 1Q2020 Year-to-Date 1 Year 3 Years 5 Years (4-7-14 to 3-31-20) I-share (DFLEX) -12.56% -12.56% -9.06% -0.90% 0.63% 1.16% N-share (DLINX) -12.63% -12.63% -9.30% -1.19% 0.36% 0.90% ICE BAML 1-3 Year Eurodollar Index -0.40% -0.40% 2.96% 2.46% 2.02% 1.89% LIBOR USD 3 Month 0.43% 0.43% 2.14% 2.03% 1.46% 1.27% Gross Expense Ratio: I-share 0.76%; N-share 1.01% DoubleLine Low Duration Bond Fund Performance Annualized Since Inception Quarter-End Returns (9-30-11 to 3-31- March 31, 2020 1Q2020 Year-to-Date 1 Year 3 Years 5 Years 20) I-share (DBLSX) -4.40% -4.40% -1.59% 1.10% 1.45% 1.87% N-share (DLSNX) -4.47% -4.47% -1.84% 0.85% 1.20% 1.61% ICE BAML 1-3 Year U.S. -
The Eurobond Market-Its Use and Misuse
FRBSF WEEKLY LETTER June 10, 1988 The Eurobond Market-Its Use and Misuse This Letter discusses the growth, structure, and subject to the same registration requirements and attributes of the Eurobond market. An aspect of other regulations as domestic bonds, Eurobonds this market that has attracted relatively little can be issued on very short notice. An entire is attention is the attractiveness of Eurobonds aris sue may be underwritten by a single commercial ing from motives related to tax evasion. or investment bank, and the secondary market is well developed. What's a Eurobond? A Eurobond is a bond issued by a corporation or Issuers of Eurobonds almost exclusively have public agency outside the national jurisdiction of been large highly-rated corporations and govern any country, and generally not registered in or mental agencies. In most cases these issuers also subject to regulation by any government. It may are active borrowers in their own domestic mar or may not be denominated in the same currency kets. Even though "Euro" and domestic bond as that of the issuer's home country. The Euro markets often handle issues by the same firms in bond market sprang up in the mid-1970s, and the same currencies, there is evidence that the grew rapidly in scope until recently, particu- Euro and domestic markets nevertheless are seg larly between 1981 and 1986. In 1987, issuance mented. Researchers have demonstrated that tapered off somewhat, leading to speculation instruments in the two markets are imperfect about the demise of the market. However, like substitutes. Considerable spreads between rates Mark Twain, reports of its demise are premature. -
The Birth of African Eurobond Markets. Its Causes and Possible Implications for Domestic Financial Markets
The birth of African Eurobond markets. Its causes and possible implications for domestic financial markets Anne Löscher1 Abstract As the recent international financial crisis unfolded in 2007/08 leading to asset prices and interest rates to slump, financial capital around the globe started to search for new investment opportunities. This flight of international capital allowed several African countries to issue US-Dollar denominated sovereign debt on a large scale, as African Eurobonds combined high yields with the relative safety of government bonds in times of an uncertain investment environment. There are two main research questions addressed by the paper: (1) What were the causes for this recent development; and: (2) What are its resulting effects? To answer question (1) the concepts of the international currency hierarchy and the original sin are chosen as starting point to analyse the phenomenon of recent sovereign Eurobond issuance in African economies. The currency hierarchy is the underlying cause for foreign currency dependency of developing and emerging markets for imports, debt service and the conduct of monetary policies, which in turn results in export dependency and debt denominated in hard currencies. Governments in many African countries managed – often with the help of de-risking policies – to attract international financial capital to go into newly issued bonds temporarily filling in this gap. Question (2) includes the inquiry on what effects this surge in public external debt denominated in foreign exchange might have on domestic financial markets and overall development prospects. The paper finds that the nascent sovereign bond issuance by many African governments is fully in line with literature on the deleterious effects of the international currency hierarchy and international financialisation. -
Reaching a New Investor Base Via the ICSD Model
EUROBOND OPPORTUNITIES FOR APAC ISSUERS Reaching a New Investor Base via the ICSD Model EUROBOND OPPORTUNITIES FOR APAC ISSUERS Reaching a New Investor Base via the ICSD Model The international bond market, commonly known as the Eurobond market, encompasses a diversified range of fixed income debt securities products, ranging from short-term to extremely long-term (or even perpetual) debt, and from plain vanilla bonds to structured instruments. At the end of the second quarter of 2020, Clearstream/Euroclear figures show that the market hosted €10.7 trillion in outstanding issuance from thousands of financial and nonfinancial companies, with bonds in scores of currencies (although issuance in dollars, euros, yen, and The increasing role of Asia sterling predominates). -Pacific, and in particular “Despite their name, Eurobonds can be issued in any currency, including China, in the global the issuer’s home currency, and do not have to be issued and/or placed economy means that in Europe,” says Rosa Scappatura, Head of ICSDs Relationships at international investors’ BNY Mellon Corporate Trust. “Instead, the common features of these allocations to bonds from products are that they are issued internationally (typically outside the market where the borrower resides) and through the International the region are growing as Central Securities Depositories (ICSDs) (Clearstream and Euroclear).” they add exposure. The Eurobond name is a legacy of the first issuances in the 1960s denominated in U.S. dollars and placed with European investors. From the start of the market, and especially today, the market has always been global in nature. Asia-Pacific borrowers have accessed the Eurobond market for decades, but issuance has grown strongly in the past decade. -
The “Eurobond” Proposal: a Challenging Path Towards Integration
MUTUALIZATION The “eurobond” proposal: A challenging path towards integration Discussions over the creation of a eurobond date back prior to the creation of the single currency itself. No matter how strong political opposition may be, as long as cross- border capital markets are still inefficient at assessing sovereign risk and averting moral hazard, eurobonds will be necessary and the debate will persist. Erik Jones Abstract: Despite being a recurrent theme advantages and risks. On the positive side, in discussions over euro area reform, the such an instrument would provide increased eurobond proposal seems to be gaining little legal clarity in the event of a restructuring, as traction as regards its conversion into actual well as create a large class of relatively risk- policy. Various concepts of the eurobond date free assets. However, risks related to legal back prior to even the creation of the euro itself. certainty, political control, financial liability The most recent proposals for a mutualized and finally, moral hazard make it politically sovereign debt instrument contain both difficult to sell to an already sceptical public. 3 In this context, the European alternative is to Minister and Eurogroup President with real push for greater national responsibility and powers to promote structural reform at the to support that with limited forms of Member State level; he suggested that this conditional lending. The question is whether new Economics and Finance Minister have or not such an alternative will be sufficient. access to a euro-area budget line within the Cross-border capital markets are still Commission’s financial framework; and, he inefficient at assessing sovereign risk and insisted that every EU Member State accept averting moral hazard – particularly, but its obligation to join the euro. -
Immunization of Fixed-Income Portfolios Using an Exponential Parametric Model*
Immunization of Fixed-Income Portfolios Using an Exponential Parametric Model* Bruno Lund** Caio Almeida*** Abstract Litterman and Scheinkman (1991) showed that even a duration immunized fixed-income portfolio (neutral) can bear great losses and, therefore, propose hedging the portfolio using a principal component's analysis. The problem is that this approach is only pos- sible when the interest rates are observable. Therefore, when the interest rates are not observable, as is the case of most international and domestic debt markets in many emerging market economies, it is not possible to apply this method directly. The present study proposes an alternative approach: hedging based on factors of a parametric term structure model. The immunization done using this approach is not only simple and efficient but also equivalent to the immunization procedure proposed by Litterman and Scheinkman when the rates are observable. Examples of the method for hedging and leveraging operations in the Brazilian inflation-indexed public debt securities market are presented. This study also describes how to construct and to price portfolios that repli- cate the model risk factors, which makes possible to extract some information on the expectations of agents in regards to future behavior of the interest rate curve. Keywords: Fixed Income, Term Structure, Asset Pricing, Inflation Expectation, Immu- nization, Hedge, Emerging Markets, Debt, Derivatives. JEL Codes: E43, G12, G13. *Submitted in ??. Revised in ??. **Securities, Commodities and Futures Exchange { BM&FBovespa, Brazil. E-mail: [email protected] ***Funda¸c~aoGetulio Vargas, EPGE/FGV, Brazil. Caio Almeida thanks CNPq for the research productivity grant. E-mail: [email protected] Brazilian Review of Econometrics v. -
Immunization Strategies for Funding Multiple Inflation-Linked Retirement
risks Article Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits Cláudia Simões 1,2,*, Luís Oliveira 3 and Jorge M. Bravo 4,5 1 Risk Management Department, Banco de Portugal, 1100-150 Lisboa, Portugal 2 Alumni, Lisbon University Institute (ISCTE-IUL), 1649-026 Lisboa, Portugal 3 Department of Finance, Lisbon University Institute (ISCTE-IUL) and Business Research Unit (BRU-IUL), 1649-026 Lisboa, Portugal; [email protected] 4 NOVA IMS—Information Management School, New University of Lisbon, 1070-312 Lisboa, Portugal; [email protected] 5 Department of Economics, Université Paris-Dauphine PSL, 75775 Paris, France * Correspondence: [email protected] Abstract: Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation- linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization Citation: Simões, Cláudia, Luís performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond Oliveira, and Jorge M. -
33:390:490 COURSE TITLE: Fixed Income
Department of Finance and Economics COURSE NUMBER: 33:390:490 COURSE TITLE: Fixed Income COURSE DESCRIPTION The course is intended to give students an in-depth treatment of fixed income analytics. A solid understanding of the bond pricing and yield curve material from the Investments course is necessary. There are three sections to the semester. A.) The first part of the course will cover bond valuation and various measures of bond risk. We will study: bootstrapping and the creation of a theoretical spot curve; valuing bonds with embedded options; many kinds of duration; and convexity. B.) The second part of the course will cover the securitization process. We will study the general securitization process and the specific attributes of various mortgage-backed securities. We will use Monte Carlo simulations to value asset-backed securities. C.) The third part of the course will deal with measures of portfolio risk and how factors such as spread risk and convexity affect the value of a bond portfolio when interest rates change. We will also look at return and risk attribution for the individual bonds in a portfolio that I will supply. COURSE MATERIALS Required Texts. 1.) Fixed Income Analysis, 2nd edition, by Frank Fabozzi, John Wiley Publisher, 2007. 2.) Fixed Income Analysis Workbook, 2nd edition, by Frank Fabozzi, John Wiley Publisher, 2007. (Recommended). The text is comprehensive and challenging. The text has an accompanying workbook, which is superb. There are as many concept questions as there are quantitative questions, and both types help students learn the material. The workbook provides thorough solutions to all questions Learning Objectives. -
Will COVID-19 Reduce the Resistance to Eurobonds?
ECMI Event Report | 2 April 2020 Will COVID-19 reduce the resistance to eurobonds? Apostolos Thomadakis* With the spread of COVID-19 across Europe, governments and central banks are mobilising resources to avoid a deep recession, growing unemployment and corporate failures. The issuance of joint eurozone debt, or so-called eurobonds, could ensure the necessary fiscal resources to tackle the crisis. Are eurobonds a solution to the current challenges and how should such an instrument be designed? Who would issue the eurobonds and how would they be traded? Where would clearing and settlement take place? This webinar considered the practical aspects (and conveniences) of a common euro bond. Speakers: Vítor Constâncio, Former Vice President of the ECB, and current President at the School Council at ISEG, University of Lisbon Maria Cannata, Chair of MTS Markets and former Director General of the Public Debt Directorate, Italian Treasury Moderated by Karel Lannoo, CEO of CEPS and General Manager of ECMI * Apostolos Thomadakis is Researcher at ECMI. The report is not a transcript of the speakers’ interventions; rather, it should be understood as an interpretation of their views by the author. Will COVID-19 reduce the resistance to eurobonds? Summary While eurobonds have existed since the 1960s,1 interest in them reignited during the sovereign crisis, but as real ‘euro’-bonds. That was an effort to avoid countries losing access to markets, also in the future. The current systemic shock in Europe is a completely different situation.2 The resources mobilised by governments and central banks in recent weeks are unlikely to be sufficient to avoid a deep recession, growing unemployment and corporate failures.3 COVID-19 demands that the response be as big and far-reaching as possible. -
An Overview of the Eurobond Market
NORTH CAROLINA JOURNAL OF INTERNATIONAL LAW Volume 12 Number 3 Article 2 Summer 1987 An Overview of the Eurobond Market Virginia K. Trioa Follow this and additional works at: https://scholarship.law.unc.edu/ncilj Part of the Commercial Law Commons, and the International Law Commons Recommended Citation Virginia K. Trioa, An Overview of the Eurobond Market, 12 N.C. J. INT'L L. 331 (1987). Available at: https://scholarship.law.unc.edu/ncilj/vol12/iss3/2 This Article is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Journal of International Law by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact [email protected]. An Overview of the Eurobond Market Virginia K. Troia* I. Introduction A. Development of the Eurobond Market Throughout the 1950s and early 1960s the U.S. capital market was the primary source of funds for international borrowers. The reasons for the United States' financial leadership at this time in- cluded the fact that the U.S. economy was the only major economy that had survived World War II not only in good condition but in stronger condition than it had been in at the beginning of the war; the U.S. dollar, at the time, was the only major freely convertible currency and the U.S. financial markets were the only financial mar- kets that had the needed financial resources. However, these uncontrolled capital exports from the United States quickly put the United States in an unfavorable balance of pay- ments position.