This is a presentation given to Bloomberg end users working in front, middle and back offices in Dec. 2010. It highlights the financial crisis and the subsequent shift of financial instruments used to construct a valid interest rate curve. It outlines the methodology to build a reliable curve with Deposits, FRAs, Futures and Swaps and defines the validation principles.
The Future of Digital Lending in Ethiopia
The traction that met Michu and Telebirr early on highlights the massive demand for uncollateralized digital credit in Ethiopia. New entrants such as Kacha Digital Financial services have also announced they’re eying the micro-credit market. The impending entrance of Safaricom’s M-PESA is undoubtedly going to have an impact, but the telecom operator must wait until the National Bank of Ethiopia (NBE) sets rules before it can enter the fray.
Among the most significant recent developments in the digital lending sphere is credit cards. Awash Bank has announced it will start issuing credit cards to its clients in both secured and unsecured loan forms. Clients will be able to access as much as a few hundred thousand Birr in credit from the bank, with limits depending on the loan type.
It is a significant milestone for the Ethiopian financial sector, and the development is likely to be followed up by even more big changes.
Central bank regulators are working on a digital lending framework that will likely see micro-credit providers gain a step up in the financial sector. As it stands, mobile money providers are the only non-traditional financial institutions allowed to engage in micro-credit service but are still required to partner with banks or MFIs to access loanable funds.
The central bank, however, has recently expressed intentions to allow fintechs to loan out funds sourced from entities other than banks or MFIs. Common practice in other countries indicates that these other sources are usually private equity firms, individuals or development institutions. This model is practiced in various countries across the globe.
For instance, In Kenya, Digital Credit Providers (DCPs) were not regulated by the central bank until recently and sourced funds from various sources without having to disclose them to the central bank.
Nonetheless, close to 300 DCPs have applied for licenses from the Kenyan central bank this year after regulators put out a call following a decision that compels lenders to disclose their source of funding. Ten of them have already been licensed. Development Financial Institutions, commercial banks, private equity firms and high-net-worth individuals are some of the popular sources of funding that Kenya-based DCPs use for lending.
The implementation of various models of lending come with their own advantages and disadvantages. Here are the possible opportunities and threat that the Ethiopian market will experience as a result of the upcoming changes:
Opportunities
Encourages the development of new lending models such as peer-to-peer (P2P lending). Countries with advanced digital lending models have progressed to be able to offer a slew of innovative lending products. Diversifying the source of funds would allow creditors to experiment with innovative use cases based on their own risk appetite as they’ll be able to retain the risk on their own.
Provides a more attractive business case for
Interest-rate risk substantially affect the values of the assets and liabilities of most corporations and is often a dominant factor affecting the values of pension funds, banks and many other financial intermediaries.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
The Future of Digital Lending in Ethiopia
The traction that met Michu and Telebirr early on highlights the massive demand for uncollateralized digital credit in Ethiopia. New entrants such as Kacha Digital Financial services have also announced they’re eying the micro-credit market. The impending entrance of Safaricom’s M-PESA is undoubtedly going to have an impact, but the telecom operator must wait until the National Bank of Ethiopia (NBE) sets rules before it can enter the fray.
Among the most significant recent developments in the digital lending sphere is credit cards. Awash Bank has announced it will start issuing credit cards to its clients in both secured and unsecured loan forms. Clients will be able to access as much as a few hundred thousand Birr in credit from the bank, with limits depending on the loan type.
It is a significant milestone for the Ethiopian financial sector, and the development is likely to be followed up by even more big changes.
Central bank regulators are working on a digital lending framework that will likely see micro-credit providers gain a step up in the financial sector. As it stands, mobile money providers are the only non-traditional financial institutions allowed to engage in micro-credit service but are still required to partner with banks or MFIs to access loanable funds.
The central bank, however, has recently expressed intentions to allow fintechs to loan out funds sourced from entities other than banks or MFIs. Common practice in other countries indicates that these other sources are usually private equity firms, individuals or development institutions. This model is practiced in various countries across the globe.
For instance, In Kenya, Digital Credit Providers (DCPs) were not regulated by the central bank until recently and sourced funds from various sources without having to disclose them to the central bank.
Nonetheless, close to 300 DCPs have applied for licenses from the Kenyan central bank this year after regulators put out a call following a decision that compels lenders to disclose their source of funding. Ten of them have already been licensed. Development Financial Institutions, commercial banks, private equity firms and high-net-worth individuals are some of the popular sources of funding that Kenya-based DCPs use for lending.
The implementation of various models of lending come with their own advantages and disadvantages. Here are the possible opportunities and threat that the Ethiopian market will experience as a result of the upcoming changes:
Opportunities
Encourages the development of new lending models such as peer-to-peer (P2P lending). Countries with advanced digital lending models have progressed to be able to offer a slew of innovative lending products. Diversifying the source of funds would allow creditors to experiment with innovative use cases based on their own risk appetite as they’ll be able to retain the risk on their own.
Provides a more attractive business case for
Interest-rate risk substantially affect the values of the assets and liabilities of most corporations and is often a dominant factor affecting the values of pension funds, banks and many other financial intermediaries.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
Have you considered investing in currencies? The currency market is the largest financial market in the world. With low margin requirements and strong regulations, offer a rewarding investment proposition. Refer to the presentation for more information on investing in currencies.
Collateral management has moved to the top of the agenda for many institutions as a tool to help mitigate credit risk and manage liquidity. This approach has mainly been driven by regulatory changes such as Basel III, Solvency II and G20 requirements pertaining to the central clearing of over the counter (OTC) derivatives. Basel III will require banks to hold more capital against their uncollateralised exposures, which will force more banks to increase their collateral requirements with clients. In turn, financial institutions will have to find the most efficient way for managing their collateral to manage liquidity as uncollateralised trades will become more expensive due to the CVA requirements.
The Hedge Fund Academy will explore the impact proposed regulatory changes will have on collateral management and liquidity requirements for the whole South African Market. Implementing a collateral management process can be challenging and implementing an insufficient collateral management system and process may even result in much greater losses.
The presentation covers the areas that needs to be looked into for Agile transitions in the team and the role of product management in the deliverable and releases
This workshop presented to staff in Sales and Analytics is an overview of the eurodollar futures contract. It focuses on the trading mechanics including some arbitrage and hedging samples and an in-depth study case on trading the TED spreads with details on the calculation and presentation of Bloomberg analytics.
Have you considered investing in currencies? The currency market is the largest financial market in the world. With low margin requirements and strong regulations, offer a rewarding investment proposition. Refer to the presentation for more information on investing in currencies.
Collateral management has moved to the top of the agenda for many institutions as a tool to help mitigate credit risk and manage liquidity. This approach has mainly been driven by regulatory changes such as Basel III, Solvency II and G20 requirements pertaining to the central clearing of over the counter (OTC) derivatives. Basel III will require banks to hold more capital against their uncollateralised exposures, which will force more banks to increase their collateral requirements with clients. In turn, financial institutions will have to find the most efficient way for managing their collateral to manage liquidity as uncollateralised trades will become more expensive due to the CVA requirements.
The Hedge Fund Academy will explore the impact proposed regulatory changes will have on collateral management and liquidity requirements for the whole South African Market. Implementing a collateral management process can be challenging and implementing an insufficient collateral management system and process may even result in much greater losses.
The presentation covers the areas that needs to be looked into for Agile transitions in the team and the role of product management in the deliverable and releases
This workshop presented to staff in Sales and Analytics is an overview of the eurodollar futures contract. It focuses on the trading mechanics including some arbitrage and hedging samples and an in-depth study case on trading the TED spreads with details on the calculation and presentation of Bloomberg analytics.
How do you write a GUI app in a functional programming language that prefers immutability? From Visual Basic on we have been taught how to compose interactive UIs using events and mutable properties. Is there any other way? The answer is, yes, indeed there is. Not only can you build UIs using functional concepts, but I will argue that the architecture of such an app is more modular and more robust than the standard architecture resulting from objects sending messages to each other. This talk is an introduction to the fringe world of functional programming using F# and will have information useful to both beginners and practitioners.
Since their introduction in the 1990s short term derivatives instruments have become widely used. Their popularity has increased in the wake of the 2007/2008 financial crisis with trading growing by 33% from 2008 to mid 2009 according to the BIS.
It is due mainly to the fact that LIBOR-based instruments often did not capture movements in policy rates as a result of credit-induced widening in LIBOR rates.
Hedgers increased their usage of short-term instruments in order to protect their cash flows better from unexpected moves in spreads and/or policy rates. Meanwhile, speculators increased their trading of more tailored products such as OIS to express views on policy rates while becoming far more active in the basis markets to take advantage of spread movements.
This tutorial focuses on the Libor OIS basis trade. It starts with the building blocks of the LIBOR and moves on to cover the most common instruments in the front-end and basis markets : FRAs and OIS. The salient features of each instrument and the full trade cycle from idea generation and set up, to valuation and marked to market, are presented and illustrated using Bloomberg pricing and analytics.
Slides on Introduction to Treasury Division in Banking, its Roles, Structure, Products, Equipment, Dealer and Brokers, Dealing Terminology,Dealer Code of Conduct, Money Market, Forex, Swap, Option, IRS, CCS, Derivatives, Types of Financial Markets, Forex Deal example
Diversify into debt funds with ICICI Prudential Floating Interest Fund and aim to generate income by investing in floating rate instruments while maintaining the optimum balance of yield, safety and liquidity.
Leveraged Commentary & Data's complete overview of November's leveraged loan and high yield bond market: volume of deals, pricing, returns, default rates, trends, along with what to look for in the months ahead.
Connect with LCD
Facebook: http://www.lcdcomps.com/facebook
LinkedIn: http://www.lcdcomps.com/linkedin
Twitter: http://www.twitter.com/lcdnews
Web: http://www.lcdcomps.com
Download the slides: http://www.slideshare.net/lcdcomps
Contact LCD Europe: anna_cini@sandp.com
SBI Dynamic Bond Fund: An Income Mutual Fund Scheme - Aug 16SBI Mutual Fund
SBI Dynamic Bond Fund is an income fund investing in G-sec, corporate bond and money market instruments. This mutual fund is best suited for investors seeking regular income for a medium term duration. The risk involved in this mutual fund is of moderate level. To know more about this mutual fund check SBI Mutual Fund page https://www.sbimf.com/Products/DebtSchemes/SBI_Dynamic_Bond_Fund.aspx
Sheet1YearTypeYieldYieldDec-12Floating Note2.50002.50%Dec-13Floating Note3.00003.00%Dec-14Floating Note3.10003.10%Dec-15Floating Note3.45003.45%Dec-1220 Year US Bond3.25003.25%Dec-1320 Year US Bond-13.9100-13.91%Dec-1420 Year US Bond27.350027.35%Dec-1520 Year US Bond-1.6500-1.65%Dec-12Municipal1.80001.80%Dec-13Municipal1.82001.82%Dec-14Municipal1.68001.68%Dec-15Municipal1.69001.69%Dec-12Fannie Mae2.82602.83%Dec-13Fannie Mae4.02354.02%Dec-14Fannie Mae3.45003.45%Dec-15Fannie Mae3.54303.54%Dec-12TIPS-1.0760-1.08%Dec-13TIPS2.60602.61%Dec-14TIPS4.74204.74%Dec-15TIPS-0.6070-0.61%
Sheet2
Sheet3
26 week bond
Yield Graph
Price Graph
Description
52 week bond
Yield Graph
Price Graph
Description
B. Floating rate note
20 year US Bond
Municipal Bond
Fannie Mae
Yield Curve
G. Multinational Corporation
?
TIPS
4/17/2016
FINC736-MO1: Team Project A1
Team Project using Bloomberg Terminal
Teams are required to familiarize themselves with extracting data from the Bloomberg terminal(s). These terminals are available both at the Manhattan Trading Room (5thFloor, at 26 West, 61st Street) and at the Old Westbury Library. Please contact the Graduate Assistant Xunpo Wang who is stationed at 26 West 61st Street, in Room 503, to help you with signing on to Bloomberg and doing Bloomberg basic data extraction. There are also student-friendly user manuals available at each terminal in both locations.
(1) Select and collect the following Bloomberg screens:
a. One 26 week Treasury Bill and one 52 week Treasury Bill
b. One Floating Rate Note or Bond (floater)
c. One USA Government Bond with remaining time to maturity of 12 years
d. One Municipal Bond
e. One FANNIE MAE Bond
f. USA Government Yield Curve and Spot Rates
g. One Corporate Bond out of the list of customized Multinational Companies [see item (5) below].
(2) Next, collect Four data points of each of the above security’s end-of-year security prices at the closing dates of December 31st, 2012, 2013, 2014 and 2015.
(3) Calculate the Expected and the Actual Capital Gains Yield (CGY), the Current (Coupon) Yield (CY), and the Total Yield (TY) for each security during 2013 and 2014. Also find the present Yield-to-Maturity for each security.
(4) Examine and print the screens of the above chosen securities and collect all of the data that you need to use for your project including measures of Risk, Duration, Convexity and Yield Spreads.
(5) Use the Bloomberg Terminal to select your Corporate Bond out of the list of customized Multinational Companies as Follows:
a. Select one Corporate Bond (remaining m.
Similar to Evolution of Interest Rate Curves since the Financial Crisis (20)
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...
Evolution of Interest Rate Curves since the Financial Crisis
1. Evolution of Interest Rate Curves
Special CPT Seminar
Francois Choquet, Advanced Specialist
Bloomberg L.P.
December 8, 2010
2. Amounts outstanding of over-the-
counter (OTC) derivatives
(in Billions of USD)
Credit
Equity
Default
Linked, 6,
Swaps, 31 Commodity,
867 Breakdown by Interest Rate Instruments
,057 3,273
Foreign
Total FRAs
Exchange,
options 12%
62,933
11%
Interest
Rate, 478,
092 Swaps
77%
Source: BIS June 2010 S/A Survey
3. Floating Rate Notes (Libor)
Amount Outstanding in millions of US$
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1 mo
1,000,000
3 mo
800,000
6 mo
600,000
400,000
200,000
-
AUD EUR GBP JPY USD
Source: Bloomberg
4. Fixed to Float Bonds (Libor)
Amount Outstanding in millions of US$
300,000.00
250,000.00
200,000.00
150,000.00 1 mo
3 mo
100,000.00 6 mo
50,000.00
-
AUD EUR GBP JPY USD
Source: Bloomberg
5. Liquidity “freeze”
• Banks reluctant to lend long term in the inter-bank cash market (widening
of basis spread)
• Events:
– Sept 7 – Fannie Mae and Freddie Mac are put into receivership
– Sept 14 – Bankruptcy of Lehman; Merrill acquired buy BAC
– Sept 16- AIG bailout from the treasury
– GS and Morgan Stanley lose their status of broker dealer and converted into
bank holding companies
– Sept 19 – TARP announced by the US Treasury
– Sept 28- Half of Fortis Bank capital is nationalized
– Wachovia to be bought by Citi (later bought by wells Fargo)
– Sept 30- Bailout money made available to Dexia Bank
– Sept 30 – LIBOR rises from 4.7% to 6.88%.
• These events forced participants to review the data used in building their
interest curves.
6. LIBOR – OIS
Under the normal
circumstances prior to the
financial turmoil that
started in the summer of
2007, OIS rates tended to
move just below the
corresponding currency
Libor in a very stable
manner. After the onset
of the financial
turmoil, however, the
Libor-OIS spreads
widened
substantially, particularly
for the dollar LIBOR
spread.
7. FX SWAP IMPLIED USD 3MO RATE vs.
USD LIBOR
The EUR/USD FX swap
market acts as a
substitute for
European banks to
raise USD funding. The
increased demand for
dollar funding led to
large shift in the FX
forward prices with
the implied dollar
funding rate rising
sharply above the 3
month libor.
8. Curve Builder
• Use most liquid benchmark instruments for
different segments of the curve
– Prevent abnormal spikes in the implied forward curve;
– Best reflect the expected shape of the curve in the
market.
• Avoid overlapping between rates
– Cash or deposit rates for the short end;
– Futures or forwards (FRAs) for the intermediate
portion;
– Swaps for long end.
• Data availability may vary by currency
9. Libor and swap rates to build curves
• Data used on the next slide shows USD
forward curves on 7 specific days and
bootstrapped using cash and swap rates
• Days used
– Feb 18, June 20, Sep 1, Sep 15, Oct 20, 2008
– Jan 5, 2009
• Data used
– Cash rates from 1 week to 12 months
– Swap rates from 2 to 30 years
11. Cash, IR Futures and Swap rates
• The data used shows curves on 7 specific days
where curves were bootstrapped using cash, IR
Futures and swap rates.
• The same days were used from the previous
examples
• Data:
– Cash rates: overnight and 1 week
– Futures going out to 2 years on cycle
(March, June, Sept and Dec)
– Swap rates used: 3 to 30 years
13. Curve Comparison
6
5
4
3
2
1
0
3 6 9 12 15 18 2 3 4 5 6 10
mo Yr
30-Sep-08 30-Sep-08 with futures 5-Jan-09 5-Jan-09 with futures
14. Key Facts
• Use instruments that are liquid
• Review the forward curves you create to
ensure there are not strange “peaks and
valleys”
• Incorporate the use of futures or FRAs for the
mid part of the curve.
• Bloomberg Standard Curves use a
combination of cash, FRAs or Futures and
swap rates depending on the currency.
15. Eurodollar rates as forward rates
• Eurodollar futures rates are considered forward three-
month rates whose values reflect market expectations
for future three-month Libor.
– Each contract represents a deposit for a future, or
forward, period, the contract rate is thought of as a
forward rate.
• You can think of buyers of a particular contract as
agreeing to receive that forward rate—the rate at
which they are willing to lend money in the future.
• Conversely, contract sellers agree to pay the forward
rate, meaning, to lock in now a finance rate for future
borrowing.
16. Eurodollar Contract
CME Eurodollar Futures (ED) : EDA <Cmdty> CT <go>
Trade Unit Eurodollar Time Deposit have a principal
value of $1,000,000 with a three month
maturity
Point Description 1 point=.005=$12.50
Contract Listing Mar (H), Jun (M), Sep (U), Dec (Z)
Deposit Rate 100-Quote
Bloomberg Ticker EDZ0, EDH1, EDM1, EDU1 Cmdty <Go>
Contract Value 10,000*[100-.25*(100-Quote)]
Libor (%) Quote Contract Price
Sep 19, 2010 0.41 99.59 998,975
Dec 2010 0.405 99.595 998,987.5
Gain/Loss 0.005bps 12.5bps
17. Eurodollar Strip
• Investors can create longer forward periods by trading
a sequence of two or more contiguous
contracts, effectively fusing adjacent deposit periods
into an extended single period.
• Such a sequence of contracts is called a Eurodollar
strip.
• The individual forward rate of each component
contract in the strip is known, so, it is possible to
compute an equivalent single rate—called a Eurodollar
strip rate—for the strip as a whole. Then we can use
the strip rates to present-value, or discount cash flows.
18. Bloomberg Curve Builder ICVS
ICVS allows you to
fully customize a swap
curve with your choice
of instruments and
use it to derive either
the current value or
the historical mark to
market value of a
swap on SWPM. It can
also be used to
determine the asset
swap spread and z-
spread on ASW, the
price of floaters and
structured notes on
YASN. See IDOC
2054526 to set the
custom curve.
23. Standard vs. Non-Standard Curves
• Contracts that are used to build an interest rate
curve refer to the same tenor of the underlying
benchmark i.e. 3 month libor.
– A curve can be used to price swaps that reference to
the same tenor (standard).
– Cannot be used to price instruments that reference to
a different tenor (non-standard)
– Spread adjustment required to get the correct curve
for calculating implied forwards.
• Basis swap: A tenor of the index that is swapped
for a different tenor periodically.
24. Non Standard Curves on ICVS
ICVS allows you to
generate forward
curves adjusted to
the basis i.e. 3
month vs. 6 month
Libor. In turn, it can
be used to calculate
the market value of
swaps referenced
against the non
standard benchmark
e.g. 6 month Libor.
25. Pricing a Non Standard Swap
$10MM 5 year pay swap @ 2.42% effective 1/5/2009 against 6 mo US Libor
priced on December 6th 2010 (pays and resets semi-annually on both fixed and
floating sides)
6 month Curve 3 month Curve Difference
(no basis)
Principal $ -380,262.44 $ -414,247.25 $ 33,984.81
Par Coupon 1.17% 1.06% 11 bps
DV01 $3,508.36 $3,071.18 $437.18
28. How to create an ED strip
• The first step is to construct a forward strip that begins with the
soonest-to-expire, front futures
• It ends with the contract whose deposit contains the maturity of
the contiguous swap.
• A cash libor deposit that spans the period from settlement to the
front contract’s expiration is added to the front of the strip: The
‘front stub’.
• The resulting structure is a synthetic, long term, Libor quality
deposit that begins at settlement and terminates at the end of the
final contract’s deposit period.
• The rates in the chain determine the future value to which a
present value would grow if invested during the sequence of
deposits that makes up the strip.
• In other words, the chain also determines the PV of a future
payment occurirng at the final maturity of the strip.
29. Pricing a Eurodollar Strip
PV FV * [1 r /(t / 360)] 1
A eurodollarstrip is composedof n deposit periods- each witha unique
interestrate(ri ) and term(ni ). So, we can write:
PVi FVi * [1 ri (ti / 360)] 1
PVi present va at thestart of theith deposit period
lue
FVi future value at theend of theith deposit
ri interestratefor theith deposit period
i number of thedeposit period,i 1,2,3...,
n
30. Solving for the PV of a sequence of
investments starting from n to n-1
T hestrip is a sequence of investment : T heproceedsat theterminati of one deposit are
s on
fully and immediatel reinvestedin thenext deposit periodas a sequence.So, thepresent
y
value for a given periodis thefuture value of theprecedingperiod.FVi 1 PVi . Applying
thisequation t say, the thirddeposit period:
o,
PV3 FV3 *[1 r3 * (t3 / 360)] 1
to find thepresent va of thisdeposit,we must discount it over the
lue secondperiod:
PV2 FV2 * [1 r2 * (t 2 / 360)] 1
PV2 PV3 *[1 r2 * (t 2 / 360)] 1
or
PV2 FV3 *[1 r3 * (t3 / 360)] 1
*[1 r2 * (t 2 / 360)] 1
31. Solving for the PV of a sequence of
investments from n to today
We arriveat thepresent va of thecash flow at thesart of the
lue
deposit period- thatis, today- by discountin it over the
g first period,
PV1 FV3 *[1 r3 * (t3 / 360)] 1
*[1 r2 * (t 2 / 360)] 1
*[1 r1 * (t3 / 360)] 1
T hequantity[1 ri * (ti / 360)] 1 is thediscount factor,dfi , for periodi
over any deposit periodsn over whichFVn is discounted T hediscount factor
.
determines in present va - at thestart of period,i of a sum paid at theend of periodi.
, lue
di [1 ri * (ti / 360)] 1
32. Discount Factors
We can thenexpressthePV as :
PV FVn * (df1 * df2 * df3 ...* dfn )
T heright most termbetween th parenthese is theproduct of then discount fact ors
e s
thatcomposethest rip.It is called thediscount funct ionand is writ tenas :
DFn (df1 * df2 * df3 ...* dfn )
where dfi discount fact orfor periodi
DFn discount funct ioncomposedof theproduct of then - perioddiscount fact ors.
It gives PV FV * DFn .
33. Futures Vs. Forwards
• Assumption is often that 100-F = forward rate
• Not exact for several reasons:
– Interest differentials on margin surplus & funding.
– Futures are marked to market(p&l settled daily
=PV gain/loss).
– “Convexity” - stochastic interest rates give rise to
differences
34. Eurodollar vs. Forward Rates (FRAs)
+ρ(S,r)
Futures: Daily Settlement
+ρ(S,r)
Futures Contract Exchange Traded Contract
OTC agreement between two
Forward Contract counterparties
35. Exercise (Libor FRA convexity)
• Sell $100mm 3x9 IMM dated FRA today
• Hedge by selling futures
• Assume that the yield curve is flat
• Work out:
• Equivalent futures position
• Gain or loss on FRA and equivalent Futures
position for parallel shifts +/- 2%
36. Pricing convexity
• If not priced
– Short futures buys convexity for free
• If priced
– Forward rates implied by FRA’s differ from forward
rates implied by futures.
37. Convexity Adjustment (Ho-Lee)
Eurodollar Future March 20102 (EDM2) as
of 9/17/2009
Quote 99.9901
Rate 0.99%
Continuously compounded rate 1.0025% (LN(1+0.99%/4)*365/90
Volatility of change in short rate 0.88%
Delivery 1.783 years
Delivery + 90 days 2.033 years
Forward rate (after convexity adjustment) 0.9866% (1.0025-0.5*0.88%^2*1.783*2.03)
Forward rate = Futures Rate – 0.5σ2T1T2
38. Convexity Adjustment (Hull White)
B (t1,t 2 ) 2 at1
B (t1 , t 2 )(1 e ) 2aB(0, t1 ) 2
t 2 t1 a
a (T t )
1 e
B (t , T )
a
a mean reversionspeed
volat ilit ycaplet vol forward rat e(t1 , t 2 ) t hatexpriesat t1
, on
Eurodollar Future March 20102 (EDM2) as of Sep 17, 2010
Last trade 99.9901
Rate 0.99%
Continuously compounded rate 1.0025% (LN(1+0.99%/4)*365/90
Volatility of change in short rate 0.88%
Delivery 1.783 years
Delivery + 90 days 2.033 years
Forward rate (after convexity adjustment) 0.9892% (0.010025-0.000132381)
see next slide for calc prove out
39. Convexity Adjustment (Hull White)
B (t1,t 2 ) 2 at1
B (t1 , t 2 )(1 e ) 2aB(0, t1 ) 2
t 2 t1 a
0.248767 2*0.03*1.7833 2 0.88%
0.2487671 e
( ) 2 * 0.03*1.736437 0.000132381
2.0333 1.7833 * 0.03
0.03 ( 2.0333 1.7833 )
1 e
B (t1 , t 2 ) 0.248767
0.03
0.03*1.78333
1 e
B (0, t1 ) 1.736437
0.03
a 0.03
0.88%
40. USD FRA
Settle discount spot
/Term 9/21/2010 ASK BID Term Period expiry days factor rates
3m LIBOR 0.29156 3 m 12/21/2010 91 0.999263544 0.292%
6m 3X6 0.422 0.402 6 m 3/21/2011 91 0.998198743 0.357%
12m 6X9 0.4837 0.4637 9 m 6/21/2011 92 0.996966371 0.400%
18m 9X12 0.57 0.555 12 m 9/21/2011 92 0.995516235 0.443%
D3m=1/(1+0.29156*91/36000)=0.99263544
D3-6=1/(1+0.422*91/360000)=0.999834414
D6m=D3m*D3-6=0.99263544*0.999834414=0.998198743
41. Futures Discount Factors (no cnvx. adj.)
contract Expiry Term Period Rate The front stub is the
BBA LIBOR USD Overnight 9/23/2010 1 D 0.22788 rate that spans the
USD DEPOSIT T/N 9/24/2010 2 D 0.25 period from settlement
BBA LIBOR USD 1 Week 9/29/2010 1 W 0.2515 (Sep 22) to the expiry
BBA LIBOR USD 2 Week 10/6/2010 2 W 0.25181 of the front contract
BBA LIBOR USD 1 Month 10/22/2010 1 M 0.2575 (12/15/10- ED Dec 10).
BBA LIBOR USD 2 Month 11/22/2010 2 M 0.27438 Here, it is linearly
BBA LIBOR USD 3 Month 12/22/2010 3 M 0.29156 interpolated between
2 and 3 mo Libor (23
0.27438+23/30*(0.29156-0.27438)=0.28755 days)
Days in Day- Discount
contract yield Start Date End Date
period count factors
Libor* 0.28755 9/22/2010 12/15/2010 84 a360 0.999329 =1/(1+.28755*84/36000)
EDZ0 0.405 12/15/2010 3/16/2011 91 a360 0.998307 =1/(1+0.405*91/36000)*0.999329
EDH1 0.470 3/16/2011 6/15/2011 91 a360 0.997123 =1/(1+0.470*91/36000)*0.998307
EDM1 0.555 6/15/2011 9/21/2011 98 a360 0.995619 =1/(1+0.555*98/36000)*0.997123
9/22/2010 9/22/2011 365 a360 0.995600 =0.995619+1/90*(0.99396-0.995619)
EDU1 0.660 9/21/2011 12/21/2011 91 a360 0.993960 Future strip=0.995600*365/360=1.00942819
2 year swap 0.682 9/22/2010 9/24/2012 722 30360 0.986389 =(1-0.682/100*0.995600*365/360)/(1+0.682/100)
42. Bootstrapping Discount Factors and Zero
Rates from Swap Rates
A swap Rate is the coupon rate which the fixed side is going to pay for the par swap. The procedure to solve
the discount factor from a quoted swap rate is called bootstrapping. As shown above, To solve the 2-year
discount factor, we need 1 year discount factor. To solve 6-year discount factor, we need 1 year, 2 year, 3
year, 4 year, 5 year discount factors. Thus we have to go step by step to solve the discount factors.
N
100 C N dfn 100 df N
n 1
100 C N AN 100 df N
N
AN dfn AN 1 df N
n 1
1 C N AN 1
df N
1 CN
For example, we solvethe two year discountfactor from the 2 year swap rate :
df2 * 100 coupon df1 * coupon 100
df2 1 coupon df1 /( 1 coupon)
*
Similarly,we solvefor the three year discountfactor from the 3 year swap rate :
df3 * ( 100 coupon) df2 * coupon df1 * coupon
df * ( 100 coupon) coupon df2 * df1
* 100
df3 1 coupon ( df2
* df1 ) /( 1 coupon)
So, we can solvefor any discountrate using:
dfn ( 1 coupon previousannuity) /( 1 coupon)
*