Details

Treasury Finance and Development Banking

A Guide to Credit, Debt, and Risk
Wiley Finance 1. Aufl.

von: Biagio Mazzi
60,99 €
Verlag:	Wiley
Format:	EPUB
Veröffentl.:	30.08.2013
ISBN/EAN:	9781118729366
Sprache:	englisch
Anzahl Seiten:	336

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Beschreibungen

Titelbeschreibung

Credit and credit risk permeates every corner of the financial world. Previously credit tended to be acknowledged only when dealing with counterparty credit risk, high-yield debt or credit-linked derivatives, now it affects all things, including such fundamental concepts as assessing the present value of a future cash flow. The purpose of this book is to analyze credit from the beginning—the point at which any borrowing entity (sovereign, corporate, etc.) decides to raise capital through its treasury operation. To describe the debt management activity, the book presents examples from the development banking world which not only presents a clearer banking structure but in addition sits at the intersection of many topical issues (multi-lateral agencies, quasi-governmental entities, Emerging Markets, shrinking pool of AAA borrowers, etc.). This book covers: <ul> <li>Curve construction (instruments, collateralization, discounting, bootstrapping)</li> <li>Credit and fair valuing of loans (modeling, development institutions)</li> <li>Emerging markets and liquidity (liquidity, credit, capital control, development)</li> <li>Bond pricing (credit, illiquid bonds, recovery pricing)</li> <li>Treasury (funding as an asset swap structure, benchmarks for borrowing/investing)</li> <li>Risk and asset liability management (leverage, hedging, funding risk)</li> </ul>

Inhaltsverzeichnis

List of Figures xiii List of Tables xvii Acknowledgments xix Introduction xxi I. 1 Treasury, Funding, and the Reasons behind This Book xxi I. 2 Funding Issues as Credit and Pricing Issues xxiii I. 3 Treasury Finance and Development Banking xxv I. 4 The Structure of the Book xxvi Chapter 1 An Introductory View to Banking, Development Banking, and Treasury 1 1.1 A Representation of the Capital Flow in a Financial Institution 2 1.2 Lending 3 1.3 Borrowing 7 1.4 Investing and ALM 10 1.5 The Basic Structure of a Traditional Financial Institution 12 1.5.1 Private and Public Sides 12 1.5.2 Sales and Trading Desks 13 1.5.3 The Treasury Desk 14 1.6 Development Banking 17 1.6.1 The Different Types of Development Institutions 17 1.6.2 The Structure of a Development Bank 19 Chapter 2 Curve Construction 21 2.1 What Do We Mean by Curve Construction? 22 2.2 The Instruments Available for Curve Construction 24 2.2.1 Discount Bonds and Cash Deposits 24 2.2.2 Interest Rate Futures and Forward Rate Agreements 26 2.2.3 FX Forwards 28 2.2.4 Interest Rate Swaps 30 2.2.5 Basis Swaps 34 2.2.5.1 Tenor Basis Swaps 34 2.2.5.2 Cross Currency Basis Swaps 35 2.3 Using Multiple Instruments to Build a Curve 37 2.4 Collateralized Curve Construction 42 2.4.1 The Evolution of the Perception of Counterparty Credit Risk 42 2.4.1.1 Overnight Index Swaps 43 2.4.2 Discounting in the Presence of Collateral 46 2.4.2.1 Collateral in a Foreign Currency 47 2.4.3 Clearing, the Evolution of a Price, and the Impact of Discounting 48 2.4.4 The Special Case of AAA-Rated Institutions 52 2.5 Numerical Example: Bootstrapping an Interest Rate Curve 55 2.5.1 The Short End of the Curve: Deposits and FRAs 56 2.5.2 The Long End of the Curve: Interest Rate Swaps 58 2.5.3 Interpolation and Extrapolation 62 Chapter 3 Credit and the Fair Valuing of Loans 67 3.1 Credit as an Asset Class 67 3.1.1 The Underlyings 69 3.1.2 Credit Default Swaps 71 3.2 A Brief Overview of Credit Modeling 75 3.2.1 Hazard Rates and a Spread-Based Modeling of Credit 78 3.2.2 The Bootstrapping of a Hazard Rate Curve 81 3.2.3 Different Quotations and Different Currencies 84 3.3 Fair Value of Loans and the Special Case of Development Institutions 88 3.3.1 The Argument around the Fair Valuing of Loans 88 3.3.2 Prepayment Option and the Case of Development Institutions 91 3.4 Numerical Example: Calculating the Fair Value of a Loan 95 Chapter 4 Emerging Markets and Liquidity 101 4.1 The Definition of Emerging Markets 101 4.2 The Main Issues with Emerging Markets 103 4.2.1 Liquidity 103 4.2.2 Maturity 108 4.2.3 Credit 110 4.2.4 Capital Control 112 4.3 Emerging Markets and Development Banking 116 4.3.1 Borrowing 116 4.3.2 Lending 118 4.4 Case Studies of Development Projects 122 4.4.1 Rural Development in X 122 4.4.2 Development of Textile Exports in Y 124 Chapter 5 Bond Pricing 127 5.1 What Is a Bond? 127 5.2 A Few Fundamental Concepts of the Bond World 129 5.2.1 Par 129 5.2.2 Yield 130 5.2.3 Duration 134 5.3 Expressing Credit Explicitly When Pricing a Bond 138 5.3.1 Benchmarks and Z-Spreads 138 5.3.2 Asset Swaps 142 5.3.3 Constructing a CDS-Implied Credit Framework for Bond Pricing 146 5.4 Illiquid Bonds 150 5.4.1 Pricing at Recovery 151 5.4.2 Case Study: The Default of Greece 155 5.4.3 Building Proxies 161 5.4.3.1 The Case of Missing Maturities 162 5.4.3.2 The Case of Quasi Government Entities 162 5.4.3.3 Similar Countries 162 5.4.3.4 Similar Companies 163 5.5 Numerical Example: Estimating the Coupon of an Emerging Market Debt Instrument 164 Chapter 6 Treasury Revisited 171 6.1 Funding as an Asset Swap Structure 171 6.1.1 Asset Swaps Revisited 171 6.1.2 The Impact of Discounting on Asset Swap Levels 177 6.2 Funding Level Targets 179 6.2.1 The Objective of Ever-Smaller Funding Levels 179 6.2.2 Different Funding Levels for Different Types of Debt 182 6.3 The Fundamental Differences between Investment Banking and Development Banking 187 6.4 Benchmarks for Borrowing and Investing 189 6.4.1 Borrowing 190 6.4.2 Investing 195 6.4.3 Case Study: A Note on the LIBOR Scandal 203 Chapter 7 Risk and Asset Liability Management 207 7.1 The Issue of Leverage 208 7.2 Hedging 210 7.2.1 Risk Neutrality and the Meaning of Hedging 210 7.2.2 Static and Dynamic Hedging 214 7.2.3 Valuation in the Absence of Dynamic Hedging 219 7.3 Managing Risk Related to Financial Observables 224 7.3.1 Interest Rate and FX Risk 225 7.3.1.1 Hedging a Fixed or Structured Bond 225 7.3.1.2 The Unhedgeable Nature of the Discount Spread 226 7.3.1.3 Hedging a Fixed-Rate Loan 228 7.3.1.4 Hedging a Foreign Currency Bond or Loan 230 7.3.1.5 Hedging a Credit-Linked Instrument Such as an Asset-Backed Security 234 7.3.1.6 Hedging an Equity Position 236 7.3.1.7 Locking an Interest Rate Position 237 7.3.2 Credit Risk 238 7.4 Funding Risk 242 7.4.1 Funding Gap Risk 242 7.4.2 Refinancing Risk 246 7.4.2.1 The Case of Constant Funding Level 250 7.4.2.2 The Case of Funding Level Lower Than Expected 250 7.4.2.3 The Case of Funding Level Higher Than Expected 251 7.4.3 Numerical Example: Estimating Refinancing Risk 251 7.4.4 Reset Risk 255 7.4.5 Numerical Example: Estimating Reset Risk 257 Chapter 8 Conclusion 261 8.1 Credit Is Everywhere 261 8.2 The Fundamental Steps to Borrowing, Lending, and Investing: A Summary 263 Appendix A Implying Zero Rates from FX Forward Quotes 269 Appendix B CDS Spreads and Default Probabilities 271 Appendix C Modeling the Credit-Driven Prepayment Option of a Loan 273 Appendix D The Relation between Macaulay and Modified Durations 275 Appendix E The Impact of Discounting on an Asset Swap Spread 277 Appendix F Replication Leading to Risk-Neutral Probabilities 279 References 283 About the Web Site 289 Index 293

Autorenportrait

BIAGIO MAZZI, PHD, is a Senior Financial Officer on the Structured Notes Desk in the World Bank Treasury. Prior to the World Bank, Biago Mazzi was a Vice President at Morgan Stanley, where he was responsible for modeling exotic credit derivatives on the Emerging Markets Desk. Before working in fixed income, he was an equity derivatives quant at Barclays Capital and Banca Caboto. He holds a PhD in theoretical physics from the University of Cambridge.

Back cover copy

It used to be that credit and the cost of debt were considered only when dealing with counterparty credit risk, high-yield debt, or credit-linked derivatives. In the wake of the 2007–2009 credit crisis, that is no longer the case. Credit and credit risk are now of crucial concern throughout the banking sector and the financial markets. But, as expert Biagio Mazzi explains, any practical knowledge of credit and debt must be rooted in a thorough understanding of where credit originates: i.e., in treasuries—or more specifically, the point at which a borrowing entity, such as a corporation, bank, or sovereign nation, decides to raise capital through its treasury or debt management operation. Which is why it is so surprising that, until now, there were no books devoted to the impact of the treasury desk on the pricing and valuation of financial instruments. This book fills that gap in the literature, offering a formal, yet highly accessible overview of the structure and function of treasuries, along with in-depth discussions of how debt affects all subsequent downstream financial activities. With the help of numerous real-world examples—including an abundance of graphs and market data screen shots—taken from the trading and development banking world, Dr. Mazzi explores an array of critical topics, including: <ul> <li>Curve construction and the increasing role of credit in discounting</li> <li>Asset swaps as the key to funding</li> <li>Basic credit modeling as a framework for understanding default</li> <li>Fair value of loans and its implications</li> <li>Emerging markets and their key financial characteristics</li> <li>Bond pricing and the challenges of illiquid or distressed debt</li> <li>Asset liability management as a manifestation of debt and credit flowing through an institution</li> </ul> On the Treasury Finance and Development Banking companion website, you'll find a host of powerful tools for implementing the practices covered in the book, including spreadsheets and macros, interest rate and credit modeling apps, and more. The first practical guide to understanding how treasury funding affects the operations of financial institutions and, more importantly, how it impacts the ways in which activities are assessed, transactions priced, and financial risks managed, Treasury Management and Development Banking is an invaluable working resource for banking and other finance professionals, especially those involved in the fixed income markets.

Unpublished endorsement

“This is an important and timely book that demonstrates the motivation and mathematics underlying the role of Treasury in banking. From first principles, the theory of development banking, emerging market finance, and funding is derived based on the underlying interest rate products available.” —Jamie Walton, Global Head of Rates, FX and Emerging Markets Quants, Morgan Stanley “An outstanding description of what banking is all about. From the point of view of a treasury in a development bank, Biagio performs a deep analysis of the essential activities of banking, so useful in a moment when, after times of delusion, credit and funding are again recognized to be the heart of finance. Everyone in this field will find this book detailed, useful, and yet enjoyable.” —Massimo Morini, Head of Interest Rate and Credit Models, Banca IMI