11 tayangan

Diunggah oleh Anonymous 4OZPjyyC1

tyea

- ALI Final Prospectus 4.5 Bonds Due 2022
- BArclays RMBS Complaint
- Euro Market
- Interest Rate Instruments and Market Conventions Guide[1]
- Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity
- Download Brochure
- Presentation slides for the IFFC Conference in Kuala Lumpur - Oct 2008
- An efficient lattice algorithm for the Libor Market Model
- Canadian Housing Market July 2013
- Frank Scofield, Collector of Internal Revenue for the First Collection District of Texas v. D. E. Blackburn and Zola Blackburn, 217 F.2d 557, 1st Cir. (1954)
- AGNC Morgan Stanley Conference 061213 Final
- TBA_FRBNY
- The Glass Steagall of the North: Why Canada must re-apply the Four Pillars
- PDF 5511
- Finding PSAs
- Financial Strategy Magazine 2nd Edition
- pred-lending-faq.pdf
- Bond Market Perspectives March 1 2016
- Too Big to Bail Part I
- 180515000002

Anda di halaman 1dari 8

premium, whatever Z is, will determine what the implied volatility of

the option is which is what the market thinks the volatility is. All of

these factors go into the black schole model.

Options are quoted in terms of implied volatility. The price of an option

depends most directly on the price of its underlying asset. So if the

implied volatility is high, the option price will increase leading implied

volatility to lower.

Early exercise models (binomial) for American options, Black Scholes

for European (Black Scholes doesnt handle early exercise very well).

Summary of other central banks interest rates

central bank interest rate

region

United States

BACEN interest rate

percentage

date

0.250 %

12-16-2008

Australia

2.500 %

08-06-2013

Brazil

11.000 %

04-02-2014

Great Britain

0.500 %

03-05-2009

Canada

1.000 %

09-08-2010

China

6.000 %

07-06-2012

Europe

0.150 %

06-05-2014

Japan

0.100 %

10-05-2010

Russia

8.000 %

07-25-2014

South Africa

5.750 %

07-17-2014

Risk free rate the higher the rate, the more that country is trying to

control inflation (due to too much growth).

For European options, the higher the interest rate, the higher the call

price (and the lower the put price), and the higher the dividend rate,

the higher the put price (and the lower the call price).

With 0 interest rate and 0 dividend, both call and put are the same for

in-the-money option.

The longer the time period, the higher the option value given high

volatility.

Tbills 1 year or less maturity 0 coupon

Treasury notes 2 to 10 years maturity 10 yr note most important

Currenty 10-yr rate is 2.49%. Back in 1996, the 10-yr was at 6.65%

and the 3 month was at 5.25%. Now 3-month tbill is at .03%.

In 2008 the 1-month Tbill went from 3.09 to .11 within 1 year.

Treasury bond 20-30 years. 30yr bond most common

adjusted to CPI (consumer price index). If CPI goes up, principal is

adjusted upwards. Coupon is constant but generates different amount

of interest depending on the inflation adjusted principal. Offered on 5yr, 10 yr and 30 yr mat.

You can buy treasuries online at treasurydirect. Incredible.

Recovery swap: looks like CDS but is called RDS (recovery default

swap). So usually two parties are betting on the recovery rate for

distressed debt of a company that is no longer liquid. The reference

price is set to fixed recovery rate rather than 100. If the reference

entity does not default, RDS is worth 0 and expires at 0. The main

market in RDS involves bonds high risk of default. You can either be

paying or receiving fixed recovery.

AIG selling massive amts of CDS during 2008 so exposed them to

potential losses.

Difference between CDS and insurance is insurance people actually

lose in event whereas cds can be used to speculate.

The premium that the buyer of protection pays to the seller is called

the spread. Premium is quoted in basis points per year of the

contracts notional amount. The payment is made quarterly.

If spread is 976 basis points for 1,000,000, then protection costs

97,600 per year or 24,400 per quarter. (Spread is usually 100 or 500

which translates into 1% or 5%). CDS spreads do not predict risk but

do show you perceived risk.

Credit Spread 01 (CS01) change in MV of CDS in response to 1bp

change in the spread.

Credit curve 6month to 10Y. If near term spread is smaller than long

term spread, it means probability of default is less near term than long

term.

On Bloomberg, you can figure out implied default probability if spread

is 550 at 1-year, then the implied default probability is near 10% of

default.

Duration increases a lot depending on number of years to maturity a

CDS has. So if you have 5 years to maturity, divide 100/5 and you get

how many basis points of spread represents 1 point of price

movement. (20 bps).

option, then you buy the underlier in the quantity where you are

hedging out the negative delta from selling the call option.

Binomial options pricing used to value American and Bermudan

options. Bermudan options are those with multiple dates where you

can exercise. Binomial tree = binomial lattice.

Current price * Up factor or Down factor, these are calculated as a

function of underlying volatility and time duration. Down factor = 1/Up

factor.

The higher the coupon rate, the lower the convexity or market risk of a

bond because if the coupon rate is high, market rates would have to

increase greatly to surpass coupon on the bond.

The larger the convexity, the larger the price change due to a given

change in yield. Zero coupon bonds have the highest convexity.

Callable bonds have negative convexity at certain price-yield combos,

because if the yield goes below a certain point, while in normal

circumstances price will go up, for callable bonds there is high chance

issuer will call back the bond, so that means the price will not go up

nearly as much.

MBS are prepayable, so they pay down early when rates fall and later

when rates rise.

A Delta of 0.40 also means that given a $1 move in the underlying stock, the option will likely gain

or lose about the same amount of money as 40 shares of the stock.

Delta grows the more closer you get to the strike price, at the strike

price is .5 (at the money). Then whether you get out of the money or

in the money, the delta of the option will get smaller and flatten out to

either 0 or 1.

VaR on a 1 day time horizon, VaR will say that 1 day out of 20 (at

95% confidence level), you will lose whatever the VAR is due to market

movement.

Identify the risk factors that affect securitys value. 10 year treasury

bond, the risk factors would be points on the discount curve (or yield

curve). The link between risk factors and securities allow us to

compute the value of a security in any scenario.

Equity option risk factors: underlying equity price, discount curve, and

implied volatility.

Tails are usually fatter than a standard normal distribution (based off

the log function).

For VaR calculation, if volatility is an explicit input, then decay factor

will change resulting value for historical var.

Parametric VaR: This model estimates VaR directly from the standard

deviation of portfolio returns.

Lognormally distributions on any random variable only have positive

values.

Parametric calculations are faster than simulation and historical,

because they only need the correlation and volatility matrices. Not

good for long horizons, portfolios with many options, or for assets with

skewed distributions.

Parametric VaR = market price * volatility. For any given confidence

level, that multiple (z-score) will be used to multiply to standard

deviation. So .95 confidence level means 1.65* standard deviation.

(The higher the confidence level, the higher the Z-score, which means

the higher the VaR). .99 confidence level volatility would be 2.33*

standard deviation.

If calculating parametric var for 2 securities, you add the squares of

both of their vars, then add 2*correlation*var1*var2 and you squareroot all of that. (Kind of like the probabilities of portfolio building). So

if correlation is .55, then you use that.

Remember that covariance = correlation * var1*var2. Which = beta.

For monte carlo pricing, every position is repriced, so this is best for

portfolios with derivatives that have embedded options. For equities,

the risk factor is the time series of closing prices transformed into daily

returns.

If you use a weekly frequency, return horizon is 5 business days

monthly frequency, return horizon is 22 days?

Each return is simulated by 100 random numbers based off of the past

100 time series dates. So each days return is randomly paired with a

random number, and that gets you 1 iteration. Then you add up all

100 iterations to get 1 return.

use the historical distribution directly. Sometimes historical vars have

higher chance of capturing fat tails.

Higher than normal implied volatility is good for option sellers because

it means the premiums are worth more, and volatility eventually goes

back to mean. Compare historical volatility to implied volatility.

Over a 3 month period, decay happens faster than 6 months.

MBS are a function of two interest rate factors the level and slope of

the term structure. Then comes into play moneyness of the

prepayment option, expected level of prepayments, and average life of

MBS cash flows. Term structure slope controls for the average rate.

Freddie Mac and Fannie Mae both sell MBS people buy these, and then

in term these two corporations can buy mortgage loans from the

secondary market (from primary lenders). When the government buys

MBS again, brings down interest rates.

Ginnie Mae (FHA) FHA = federal housing administration. They do

bonds that have the backing of the federal government. Ginnie Mae

insures a bond that is backed by the mortgages (mbs?) and if the

borrower defaults, bank can collect from Federal housing

administration. Accounts for 10% of the MBS market.

If interest rates fall, many homeowners will refinance their homes,

investors will get back their principal sooner than expected. So

basically, MBS investors are implicitly selling a call option on a fixed

rate bond homeowners who choose to exercise this call option (when

the interest rate goes down), will end up prepaying and causing

investors to get their money back sooner than later. Then when

investor gets their money back, the immediate investment alternative

is now at a lower coupon rate. Hence there is negative convexity

between price of MBS and price of default-free bonds. (concavity).

To hedge out interest rate risk, buy a 3 month and 10 yr interest rate

future.

For a 10% ginnie mae mbs, if the 10-yr rate is at 5.5%, then price of

GNMA mbs is at 110, but if 10-yr tnote rate is at 9.5%, then mbs price

is at 98$. If the tnote rate is 9.5% above an 8% GNMA mbs, then the

price will be 85 (because of the high chance of prepayment).

Interest rate caps basically series of call options on interest rates,

pays difference between reference rate and cap rate (once reference

rate goes above cap rate, you profit from interest rate cap). Interest

rate floor is opposite once reference rate goes below floor rate, then

you profit, receiving floor rate reference rate profit.

Caplet = single payment on a cap.

Interest rate collar = long position in a cap plus a short position in the

floor so this puts upper and lower bounds on floating interest rate

payments.

Swaptions are basically options on bonds you have a claim to swap at

whatever rate. You only need to value the fixed rate side because

floating side trades at par.

Swaption pricing model using black scholes, were using the forward

starting swap rate, the strike rate, the number of payments per year,

the time between payments, the maturity of swaption in periods, the

maturity of swaption in years, annualized volatility, and a normal

distribution function.

Swap curve interest rates paid on interest rate swaps. Spreads

between swap rates and Treasury bonds. Swaps = replacement for

treasury bonds as a financial benchmark. The notional for IRS never

gets exchange, only net interest payments between the two swap

counterparties.

Underlying instrument in Eurodollar futures is the Eurodollar time

deposit principal value of 1m with 3 month maturity. Futures prices

are expressed as 100 minus the 3-month LIBOR. So if the price is 95,

this means LIBOR is 5%. 1bp change equals 25$ per contract gain. So

if you need to hedge against increase in interest rates, you can short

sell a Eurodollar future contract, because when the value of the

Eurodollar future goes down, you gain. Of course, interest rate will go

up which means you will be paying more LIBOR, but at least you gain

from short selling Eurodollar future. LIBOR is a Eurodollar rate.

Arbitrage between short term US CD rates and 3-month LIBOR means

they stay almost the same. Overnight libor = overnight federal funds

interest rates.

Swaps are basically derivatives on the LIBOR rate. LIBOR is actually

calculated for a bunch of securities, but usually refers to the US Dollar

rate. LIBOR maturities are 1 week, 1, 2, 3, 6, 9, and 12 months. More

swaps are done on LIBOR than on US treasury rate, perhaps why this is

now a benchmark.

Quanto swaps are where you pay the fixed rate in dollars but get the

floating rate in another currency like JPY or EUR.

The swap rate is the fixed rate that receiver demands in exchange for

the uncertainty for having to pay the LIBOR rate over time. Swaps are

either quoted at this fixed rate, or the swap spread which is the

difference between the swap rate (the fixed rate) and the US Treasury

bond yield.

Pricing fx option: spot price, volatility, strike, and time to expiry. Strike

and its proximity to spot is one of the major influences of option

premium price. At the money forward or at the money spot have

different strike prices.

Volatility surface drawn from large # of contributor banks.

(Bloomberg)

Implied volatility surface plotted with implied volatility points for a

given delta and days to maturity set. Apparently implied volatility is

highest for options with high delta and few days to maturity.

Shortcoming of black scholes assumes that underlying volatility is

constant over life ot eh derivative and unaffected by changes in the

price level of undl security. So volatility surface shows us how price is

affected by changes in delta and time to maturity.

SABR volatility model stochastic volatility model, captures the

volatility smile in derivatives markets. Stands for Stochastic alpha,

beta, rho. Used in interest rate derivatives markets.

Risk-neutral measure: implies that in a complete market a derivatives

price is the discounted value of future payoffs.

Covariance is basically just the return of the asset minus the average

return of asset multiplied by the same difference in asset 2. So (xavgx)*(y-avgy)

Correlation is equal to covariance /stdA*stdB so covariance =

correlation * stdA*stdB

CML equation = expected return of complete portfolio = risk free rate

+ std complete * (expected return of portfolio) risk free divided by

std portfolio

The steeper the CML, the more utility (the higher the sharpe ratio).

commodity options such as Gulf Coast jet fuel prices. If you are trying

to hedge against gulf coast jet fuel prices going up, and you buy a

commodity future option call on NYMEX heating oil future, you need a

commodity basis swap between gulf coast jet fuel and NYMEX heating

oil to hedge out the basis risk.

Basis risk is basically the difference in price difference between a

futures market and a cash spot market.

So if we are locking in a basis of a swap, something like .05 per gallon,

means you are locking in the difference between the jet fuel and the

heating oil futures. No matter what happens to the basis (i.e. the basis

goes to .1, you will receive a return of .05 because you locked in the

swap).

For using commodity futures to hedge, sellers of energy will sell the

gas future so that in case the price of commodity goes down, they will

make less money selling the energy but at least they will gain money

on the difference between the current price and future price.

Meanwhile, buyers of energy will buy futures and so if the price goes

up, they will pay more but they will alsy make money from the price

differential between the futures price and the current price.

Energy consumers use swaps to lock in energy costs while producers

use swaps to lock in revenues/cash flows.

Buy purchasing call options, an energy consumer can hedge against

rising costs while suffering little downside cost (the premium of the

option).

- ALI Final Prospectus 4.5 Bonds Due 2022Diunggah olehMarius Angara
- BArclays RMBS ComplaintDiunggah olehjodiebritt
- Euro MarketDiunggah olehPari Gangan
- Interest Rate Instruments and Market Conventions Guide[1]Diunggah olehklausfuchs
- Return Predictability in the Treasury Market: Real Rates, Inflation, and LiquidityDiunggah olehmirando93
- Download BrochureDiunggah olehPhogat Ashish
- Presentation slides for the IFFC Conference in Kuala Lumpur - Oct 2008Diunggah olehMeor Amri
- An efficient lattice algorithm for the Libor Market ModelDiunggah olehTim Xiao
- Canadian Housing Market July 2013Diunggah olehStrada
- Frank Scofield, Collector of Internal Revenue for the First Collection District of Texas v. D. E. Blackburn and Zola Blackburn, 217 F.2d 557, 1st Cir. (1954)Diunggah olehScribd Government Docs
- AGNC Morgan Stanley Conference 061213 FinalDiunggah olehLucas Brown
- TBA_FRBNYDiunggah olehdhyaksha
- The Glass Steagall of the North: Why Canada must re-apply the Four PillarsDiunggah olehCommittee for the Republic of Canada
- PDF 5511Diunggah olehjoe
- Finding PSAsDiunggah olehDonna Steenkamp
- Financial Strategy Magazine 2nd EditionDiunggah olehKirill
- pred-lending-faq.pdfDiunggah olehdratty
- Bond Market Perspectives March 1 2016Diunggah olehdpbasic
- Too Big to Bail Part IDiunggah olehalan_s1
- 180515000002Diunggah olehShyamsunder Singh
- Financial Instruments and Their RisksDiunggah olehKeano M Batiao
- 2) September 13Diunggah olehAngelica Mojica Laroya
- Bonds - July 20 2018Diunggah olehTiso Blackstar Group
- Eval Prod StructDiunggah olehMihaela Matei
- Business FinanceDiunggah olehHaji Saif Ullah
- Anatomy Of A CrisisDiunggah olehAnubhav Amitendra
- 10.1.1.11Diunggah olehChetan Singh Jawla
- Funds Presentation in AccountingDiunggah olehवैभव शिरोडे
- Fool the Market sDiunggah olehNicoleta Arhirii
- 36Diunggah olehlajefa lajefa

- absmbsDiunggah olehBoi Hutagalung
- Diamond Rush SummaryDiunggah olehAnonymous 4OZPjyyC1
- [Federal Reserve Bank of Cleveland, Haubrich] Swaps and the Swaps Yield CurveDiunggah olehchibondking
- Deleted Videos Youtube DescriptionsDiunggah olehAnonymous 4OZPjyyC1
- A Battle of Wills Chap 5Diunggah olehAnonymous 4OZPjyyC1
- Angels Light NotesDiunggah olehAnonymous 4OZPjyyC1
- Basic HacksDiunggah olehJeremy Hutchinson
- StirFry_Seminars_9HealthyWays.pdfDiunggah olehAnonymous 4OZPjyyC1

- Amicus Brief - Mcdonnell (as Filed)Diunggah olehDinSFLA
- Second Semiannual ReportDiunggah olehForeclosure Fraud
- Federal Criminal Lawyer Douglas McNabb of McNabb Associates - News On Current Federal Criminal CasesDiunggah olehDouglas McNabb
- CVR and USPAP Compliance April 2011Diunggah olehBill Cobb
- 1001160663Diunggah olehgalliard1976
- FHFA v UBSDiunggah olehny1david
- Gov.uscourts.gand.161917.35.0Diunggah olehFrank Jean
- Property Preservation Matrix(1) 0Diunggah olehForeclosure Fraud
- Is the FHA Distressed Asset Stabilization Program Meeting Its Goals?Diunggah olehCenter for American Progress
- Chapter+14+The+Mortgage+MarketsDiunggah olehMira Abdrakhmanova
- VP Director Foreclosure Bankruptcy in Tampa St Petersburg FL Resume Harry KinkeadDiunggah olehHarryKinkead
- SENATE HEARING, 110TH CONGRESS - EVOLUTION OF AN ECONOMIC CRISIS?: THE SUBPRIME LENDING DISASTER AND THE THREAT TO THE BROADER ECONOMYDiunggah olehScribd Government Docs
- David Einhorn Sohn Investment Conference Speech 2010Diunggah olehmkim10
- California Mortgage Lenders and Mortgage BrokersDiunggah olehcircumvention
- Chapter 02 PQDiunggah olehJim Carey
- The Great Depression_assignment # 1Diunggah olehSyed Ovais
- Faye_CADiunggah olehJamaica Ramos
- CFP Chapter08Diunggah olehakmohideen
- SENATE HEARING, 112TH CONGRESS - HOUSING FINANCE REFORM: SHOULD THERE BE A GOVERNMENT GUARANTEE?Diunggah olehScribd Government Docs
- m1_instDiunggah olehdpoole99
- Twenty Years of Housing Policy_Housing Policy DebateDiunggah olehJH_Carr
- KMPG Mpotion Re-AccountingDiunggah olehny1david
- Final Double Pledge ReportDiunggah olehDinSFLA
- fabozzi_BMAS9_IM_14.docxDiunggah olehasdasd
- Gold and Silver Breakout as Fascist Business Model Crumbles[1]Diunggah olehkostolany
- SubsidiesDiunggah olehlulughosh
- SIGTARP July 25, 2012 report to CongressDiunggah olehJennifer Peebles
- Real Estate Financing & Investment_PDF1_FTCDiunggah olehbzit11
- Internal Audit Report Re the CMH Asset Weaknesses.pdf (1)Diunggah olehmikekvolpe
- 2015-12-15 GF&Co- GSE Reform Presentation - Something Old, Something NewDiunggah olehjoshrosner