Interest Rate Derivatives

A Practical Guide to Applications, Pricing and Modelling

Publication Date	June 2006
Publisher	Risk Books
Product Type	Book
Pages	354
ISBN Number	1904339948
Product Code	RIS00350

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Summary

Interest Rate Derivatives describes:

Pricing methods,
Application, structuring and valuation of:
- Interest rate and Cross currency Swap and
- Interest Options
Methods of managing interest rate exposure; and
Trading and hedging strategies and their application in portfolio management.

Basic interest rate mathematics are explored and built upon to delve into a more complex development of interest rate derivatives in general. This work is accompanied by a CD and gives you a unique stand-alone product which serves as a major reference guide on interest rate derivatives.

The book itself is developed around a user-friendly excel based pricing system helping you to better understand the content by applying the theory to real life pricing. This allows you to use the book as an initial reference or learning tool to see how the maths work and leaves you with a practical calculation tool.

We recommend this book for all financial and corporate treasury staff, MBA students, graduates and anyone looking for a mathematical guide to the practical pricing and modelling of interest rate derivatives

Content

Chapter 1. Financial Mathematics
- Time Value of Money
- Effective and Nominal Interest Rates
- Money Market Yields
- Day Count Basis Conventions
- Roll Convention
Chapter 2. Short-Term Interest Rates and Futures
- Forward-Forward
- Forward Rate Agreements
- Short-Term Interest Rate Futures
- Convexity with Futures
- Calculating Strip Yield
- Futures vs. FRAs
Chapter 3. Bonds: Pricing, Risk and Hedging
- Bond Price
- Bond Yields
- Bond Proceeds: Clean vs. Dirty Price
- Odd Coupon Bonds
- Bond PV01
- Bond Portfolio PV01
- Bond Duration and Modified Duration
- Bond Convexity
- Modified Duration and Convexity: Bond Portfolio
- Hedging a Bond Portfolio
- Basis Risk
- Bond Futures
- Hedging with Bond Futures
- Repurchase and Sale and Buy Backs
Chapter 4. Interest Rate Swaps
- What is an Interest Rate Swap?
- How Interest Rate Swaps are Quoted
- What is a Swap Spread?
- Quotation Basis
- Interest Rate Swap Applications
- Non-Standard Interest Rate Swaps
- Case Studies
Chapter 5. Deriving a Zero Coupon Curve
- Building a Zero Coupon Curve
- The Bootstrapping Algorithm
- Generating Generic Discount Factors and FRAs
- Building a Zerocurve using Curveuilder
- Bid and Offer Curves
Chapter 6. Asset and Liability Swaps: Cashflows and Pricing
- Asset Swaps
- Bond Pricing: Given Target Floating Spread
- Curveuilder Asset Swap Calculator
- Liability Swaps
- Mark to Market (MTM) Interest Rate Swaps
- Forward Starting Interest Rate Swap
- Amortising Swaps
- Short-Term Interest Rate Hedges
- Treasury Lock
- Spreadlock
Chapter 7. Hedging and Trading Interest Rate Swaps
- Risk Measurement PV01
- Hedging with Eurodollars
- Hedging with Government Bonds
- Portfolio Risk Management
Chapter 8. Cross-Currency Interest Rate Swaps
- What is the Value of a Cross-Currency Basis Swap?
- Zero NPV Valuation
- Cross-Currency Basis Swaps Quotes and Pricing
- Synthetically Create a CC Basis Swap
- Basis Point Conversion
- Hedging using Basis Swaps
- Fixed for Fixed Cross-Currency Swap
- Cross-Currency Asset Swaps
- Liability Swap
- Case Study: Relative Borrowing Costs
Chapter 9. Interest Rate Options
- Option Fundamentals
- Option Risk Characteristics: The Greeks
- Option's Price Sensitivity to a Change in the Underlying Price: Delta and Gamma
- Option's Price Sensitivity to a Change in the Underlying Volatility: Vega
- Caps and Floors
- Cap Premium in Swap Form
- Collar
- Caps and Floors Applied to Floating Rate Assets
- Interest Rate Swaption
- Callable Bonds
- Volatility
- Volatility Stripping
- Digital Options
- Digital Option Applications
Chapter 10. Further Interest Rate Swaps and Options
- CMS
- CMS Applications
- in Arrears Applications
- Differential Swaps
- Differential Swap Pricing
- Spread Options
- Digital Spread Options
Chapter 11. Financial Accounting: IAS39 Financial Instruments Recognition and Measurement
- Introduction
- Effective Interest Rate (EIR)
- Fair Value vs. Hedge Accounting
- Hedge Effectiveness Testing
- Effectiveness Testing Methodologies
- Hedging Relationship
- ISDA Documentation and Derivative Credit
- Confirmations
- ISDA Definitions
- Credit: Exposure, Collateral and Credit Support
Appendix A: Quotation Basis for Interest Rate Swaps
- Appendix B: Interpolation Methods
- Appendix C: Convexity Adjustment
- Appendix D: Curveuilder: Installation and Overview
Bibliography
Index