Details

Interest Rate Swaps and Their Derivatives

A Practitioner's Guide
Wiley Finance, Band 510 1. Aufl.

von: Amir Sadr
60,99 €
Verlag:	Wiley
Format:	PDF
Veröffentl.:	04.08.2009
ISBN/EAN:	9780470526088
Sprache:	englisch
Anzahl Seiten:	272

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Beschreibungen

Titelbeschreibung

An up-to-date look at the evolution of interest rate swaps and derivatives Interest Rate Swaps and Derivatives bridges the gap between the theory of these instruments and their actual use in day-to-day life. This comprehensive guide covers the main "rates" products, including swaps, options (cap/floors, swaptions), CMS products, and Bermudan callables. It also covers the main valuation techniques for the exotics/structured-notes area, which remains one of the most challenging parts of the market. <ul> <li>Provides a balance of relevant theory and real-world trading instruments for rate swaps and swap derivatives</li> <li>Uses simple settings and illustrations to reveal key results</li> <li>Written by an experienced trader who has worked with swaps, options, and exotics</li> </ul> With this book, author Amir Sadr shares his valuable insights with practitioners in the field of interest rate derivatives-from traders and marketers to those in operations.

Inhaltsverzeichnis

Preface ix “Rates” Market ix Background ix Book Structure xi Acknowledgments xvii About the Author xix List of Symbols and Abbreviations xxi Part One Cash, Repo, and Swap Markets 1 Chapter 1 Bonds: It’s All About Discounting 3 Time Value of Money: Future Value, Present Value 3 Price-Yield Formula 5 PV01, PVBP, Convexity 11 Repo, Reverse Repo 16 Forward Price/Yield, Carry, Roll-Down 19 Chapter 2 Swaps: It’s Still About Discounting 25 Discount Factor Curve, Zero Curve 26 Forward Rate Curve 27 Par-Swap Curve 31 Construction of the Swap/Libor Curve 34 Chapter 3 Interest Rate Swaps in Practice 43 Market Instruments 43 Swap Trading—Rates or Spreads 48 Swap Spreads 51 Risk, PV01, Gamma Ladder 56 Calendar Rules, Date Minutiae 59 Chapter 4 Separating Forward Curve from Discount Curve 67 Forward Curves for Assets 67 Implied Forward Rates 69 Float/Float Swaps 70 Libor/Libor Basis Swaps 73 Overnight Indexed Swaps (OIS) 75 Part Two Interest-Rate Flow Options 77 Chapter 5 Derivatives Pricing: Risk-Neutral Valuation 79 European-Style Contingent Claims 80 One-Step Binomial Model 80 From One Time-Step to Two 84 From Two Time-Steps to 90 Relative Prices 91 Risk-Neutral Valuation: All Relative Prices Must be Martingales 92 Interest-Rate Options Are Inherently Difficult to Value 93 From Binomial Model to Equivalent Martingale Measures 94 Chapter 6 Black’s World 97 A Little Bit of Randomness 97 Modeling Asset Changes 103 Black-Scholes-Merton/Black Formulae 104 Greeks 112 Digitals 116 Call Is All You Need 117 Calendar/Business Days, Event Vols 120 Chapter 7 European-Style Interest-Rate Derivatives 123 Market Practice 124 Interest-Rate Option Trades 124 Caplets/Floorlets: Options on Forward Rates 125 European-Style Swaptions 129 Skews, Smiles 137 CMS Products 140 Bond Options 147 Part Three Interest-Rate Exotics 149 Chapter 8 Short-Rate Models 151 A Quick Tour 152 Dynamics to Implementation 153 Lattice/Tree Implementation 154 BDT Lattice Model 156 Hull-White, Black-Karasinski Models 168 Simulation Implementation 169 Chapter 9 Bermudan-Style Options 175 Bellman’s Equation—Backward Induction 176 Bermudan Swaptions 177 Bermudan Cancelable Swaps, Callable/Puttable Bonds 180 Bermudan-Style Options in Simulation Implementation 183 Chapter 10 Full Term-Structure Interest-Rate Models 185 Shifting Focus from Short Rate to Full Curve: Ho-Lee Model 186 Heath-Jarrow-Morton (HJM) Full Term-Structure Framework 186 Discrete-Time, Discrete-Tenor HJM Framework 188 Forward-Forward Volatility 191 Multifactor Models 197 HJM Framework Typically Leads to Nonrecombining Trees 199 Chapter 11 Forward-Measure Lens 201 Numeraires Are Arbitrary 201 Forward Measures 206 BGM/Jamshidian Results 208 Different Measures for Different Rates 210 “Classic” or “New Improved”: Pick Your Poison! 212 Chapter 12 In Search of “The” Model 215 Migration to Full-Term Structure Models 215 Implementation Era 216 Model versus Market: Liquidity and Concentration Risk 216 Complexity Risk 217 Remaining Challenges 218 Appendix A Taylor Series Expansion 219 Function of One Variable 219 Function of Several Variables 220 Ito’s Lemma: Taylor Series for Diffusions 220 Appendix B Mean-Reverting Processes 223 Normal Dynamics 224 Log-Normal Dynamics 226 Appendix C Girsanov’s Theorem and Change of Numeraire 229 Continuous-Time, Instantaneous-Forwards HJM Framework 230 BGM Result 232 Notes 235 Index 239

Autorenportrait

AMIR SADR, PHD, has experience as a quant, trader, financial software developer, and academic in fixed income markets. He traded options and exotics at HSBC in New York from 2005 to 2006 and traded at the proprietary desk for Greenwich Capital Markets (GCM) for four years prior to that. Sadr also has experience at Morgan Stanley as a vice president in the derivatives products group where he traded interest rate derivatives and exotics. Since 1996, Sadr has served as an adjunct professor at New York University in the Department of Finance and Accounting.

Back cover copy

INTEREST RATE SWAPS AND THEIR DERIVATIVES Interest rate swaps and their derivatives have become an integral part of the fixed income market, but many of the pricing and risk management issues for these now mainstream products can only be learned on a trading floor. While there are many books on fixed income and interest rate derivatives, they generally suffer from being either too elementary and bond-centric, mentioning swaps in passing, or too technical and focused on exotics and the myriad implementation issues and algorithms used to tackle them. Rather than focusing on exotics, Interest Rate Swaps and Their Derivatives thoroughly covers the mainstream products—swaps, flow options, Bermudans, semi-exotics—showing the common pricing techniques while also explaining how to generalize the concepts to more nuanced products. Author Amir Sadr, experienced as a quant, trader, financial software developer, and academic in the fixed income field, begins by presenting plain-vanilla swaps as an extension of fixed rate bonds—revealing how techniques for pricing these instruments are a generalization of similar methods used for pricing bonds and repos, and for the most part involve the concepts of financing cost, discount factors, and projection of forward curves. He then moves on to cover the options markets for flow products, including options on futures, caps and floors, and European swaptions—with detailed attention to the actual trading practice of these products. Sadr explains how, as with any option product, the pricing and risk management of these requires dealing with volatility as the main risk factor—and he shows that one does not need to have a PhD in math to understand options. Sadr presents risk-neutral valuation as the fundamental pricing paradigm for derivatives, and illustrates the core idea of dynamic replication in a simple binomial setting. This unified framework is used to derive industry-standard Black formula for flow products, and is developed into short-rate and full term-structure models for more complex interest rate exotics including Bermudans. For current or aspiring practitioners in interest rate products, Interest Rate Swaps and Their Derivatives provides a sound working knowledge and appreciation of the main features of these products and their pricing and risk management issues.