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More About This Title The Advanced Fixed Income and DerivativesManagement Guide
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The Advanced Fixed Income and Derivatives Management Guide provides a completely novel framework for analysis of fixed income securities and portfolio management, with over 700 useful equations. The most detailed analysis of inflation linked and corporate securities and bond options analysis available;, this book features numerous practical examples that can be used for creating alpha transfer to any fixed income portfolio. With a framework that unifies back office operations, such as risk management and portfolio management in a consistent way, readers will be able to better manage all sectors of fixed income, including bonds, mortgages, credits, and currencies, and their respective derivatives, including bond and interest rate futures and options, callable bonds, credit default swaps, interest rate swaps, swaptions and inflation swaps. Coverage includes never-before-seen detail on topics including recovery value, partial yields, arbitrage, and more, and the companion website features downloadable worksheets that can be used for measuring the risks of securities based on the term structure models.
Many theoretical models of the Term Structure of Interest Rates (TSIR) lack the accuracy to be used by market practitioners, and the most popular models are not mathematically stable. This book helps readers develop stable and accurate TSIR for all fundamental rates, enabling analysis of even the most complex securities or cash flow structure. The components of the TSIR are almost identical to the modes of fluctuations of interest rates and represent the language with which the markets speak.
- Examine unique arbitrage, risk measurement, performance attribution, and replication of bond futures
- Learn to estimate recovery value from market data, and the impact of recovery value on risks
- Gain deeper insight into partial yields, product design, and portfolio construction
- Discover the proof that corporate bonds cannot follow efficient market hypothesis
This useful guide provides a framework for systematic and consistent management of all global fixed income assets based on the term structure of rates. Practitioners seeking a more thorough management system will find solutions in The Advanced Fixed Income and Derivatives Management Guide.
English
SAIED SIMOZAR, PhD, has spent almost 30 years in fixed income portfolio management, fixed income analytics, scientific software development and consulting. He is a principal at Fipmar, Inc., an investment management consulting firm in Beverly Hills, CA. Prior to that, Saied was a Managing Director at Nuveen Investments, with responsibilities for all global fixed income investments. He has also been a Managing Director at Bank of America Capital Management responsible for all global and emerging markets portfolios of the fixed income division. Prior to that, he was a senior portfolio manager at Putnam Investments and DuPont Pension Fund Investments.
For any queries about the book, please contact the author at: fixedincomebook@fipmar.com
English
List of Tables xi
List of Figures xv
Abbreviations xv11
Notation xxv
Preface xxix
Acknowledgement xxxi
Foreword xxxiii
Introduction xxxv
1. Review of Market Analytics 1
1.1. Bond Valuation 1
1.2. Simple Bond Analytics 3
1.3. Portfolio Analytics 5
1.4. Key Rate Durations 8
2. Term Structure of Rates 11
2.1. Linear and Non-linear Space 11
2.2. Basis Functions 13
2.3. Decay Coefficient 16
2.4. Forward Rates 17
2.5. Par Curve 18
2.6. Application to the US Yield Curve 18
2.7. Historical Yield Curve Components 20
2.8. Significance of the Term Structure Components 23
2.9. Estimating the Value of the Decay Coefficient 25
3. Comparison of Basis Functions 29
3.1. Polynomial Basis Functions 29
3.2. Exponential Basis Functions 30
3.3. Orthogonal Basis Functions 30
3.4. Key Basis Functions 31
3.5. Transformation of Basis Functions 32
3.6. Comparison with the Principal Components Analysis 39
3.7. Mean Reversion 44
3.8. Historical Tables of Basis Functions 45
4. Risk Measurement 47
4.1. Interest Rate Risks 47
4.2. Zero Coupon Bonds Examples 49
4.3. Eurodollar Futures Contracts Examples 51
4.4. Conventional Duration of a Portfolio 52
4.5. Risks and Basis Functions 53
4.6. Application to Key Rate Duration 56
4.7 Risk Measurement of a Treasury Index 60
5. Performance Attribution 63
5.1. Curve Performance 64
5.2. Yield Performance 65
5.3. Security Performance 65
5.4. Portfolio Performance 67
5.5. Aggregation of Contribution to Performance 73
6. Libor and Swaps 77
6.1. Term Structure of Libor 79
6.2. Adjustment Table for Rates 80
6.3. Risk Measurement and Performance Attribution of Swaps 83
6.4. Floating Libor Valuation and Risks 84
6.5. Repo and Financing Rate 86
6.6. Structural Problem of Swaps 87
7. Trading 91
7.1. Liquidity Management 91
7.2. Forward Pricing 95
7.3. Curve Trading 95
7.4. Synthetic Securities 101
7.5. Real Time Trading 104
8. Linear Optimization and Portfolio Replication 107
8.1. Portfolio Optimization Example 110
8.2. Conversion to and from Conventional KRD 112
8.3. KRD and Term Structure Hedging 113
9. Yield Volatility 115
9.1. Price Function of Yield Volatility 116
9.2. Term Structure of Yield Volatility 118
9.3. Volatility Adjustment Table 122
9.4. Forward and Instantaneous Volatility 124
10. Convexity and Long Rates 127
10.1. Theorem: Long Rates Can Never Change 127
10.2. Convexity Adjusted TSIR 130
10.3. Application to Convexity 134
10.4. Convexity Bias of Eurodollar Futures 138
11. Real Rates and Inflation Expectations 145
11.1. Term Structure of Real Rates 145
11.2. Theorem: Real Rates Cannot Have Log-normal Distribution 146
11.3. Inflation Linked (IL) Bonds 149
11.4. Seasonal Adjustments to Inflation 155
11.5. Inflation Swaps 160
12. Credit Spreads 165
12.1. Equilibrium Credit Spread 165
12.2. Term Structure of Credit Spreads 167
12.3. Risk Measurement of Credit Securities 167
12.4. Credit Risks Example 168
12.5. Floating Rate Credit Securities 170
12.6. TSCS Examples 172
12.7. Relative Values of Credit Securities 174
12.8. Performance Attribution of Credit Securities 176
12.9. Term Structure of Agencies 178
12.10. Performance Contribution 179
12.11. Partial Yield 181
13. Default and Recovery 185
13.1. Recovery, Guarantee and Default Probability 185
13.2. Risk Measurement with Recovery 189
13.3. Partial Yield of Complex Securities 195
13.4. Forward Coupon 197
13.5. Credit Default Swaps 197
14. Deliverable Bond Futures and Options 201
14.1. Simple Options Model 202
14.2. Conversion Factor 204
14.3. Futures Price on Delivery Date 205
14.4. Futures Price Prior to Delivery Date 205
14.5. Early versus Late Delivery 209
14.6. Strike Prices of the Underlying Options 209
14.7. Risk Measurement of Bond Futures 210
14.8. Analytics for Bond Futures 211
14.9. Australian Bond Futures 213
14.10. Replication of Bond Futures 213
14.11. Backtesting of Bond Futures 216
15. Bond Options 217
15.1. European Bond Options 218
15.2. Exercise Boundary of American Options 221
15.3. Present Value of a Future Bond Option 222
15.4. Feedforward Pricing 226
15.5. Bond Option Greeks 230
15.6. Risk Measurement of Bond Options 231
15.7. Treasury and Real Bonds Options 233
15.8. Bond Options with Credit Risk 234
15.9. Theorem: Credit Prices Are Not Arbitrage-free 236
15.10. Correlation Model 238
15.11. Credit Bond Options Examples 239
15.12. Risk Measurement of Complex Bond Options 241
15.13. Remarks on Bond Options 242
16. Currencies 245
16.1. Currency Forwards 246
16.2. Currency as an Asset Class 247
16.3. Currency Trading and Hedging 248
16.4. Valuation and Risks of Currency Positions 249
16.5. Currency Futures 251
16.6. Currency Options 251
17. Prepayment Model 253
17.1. Home Sale 254
17.2. Refinancing 255
17.3. Accelerated Payments 256
17.4. Prepayment Factor 257
18. Mortgage Bonds 259
18.1. Mortgage Valuation 260
18.2. Current Coupon 262
18.3. Mortgage Analytics 264
18.4. Mortgage Risk Measurement and Valuation 268
19. Product Design and Portfolio Construction 273
19.1. Product Analyzer 275
19.2. Portfolio Analyzer 278
19.3. Competitve Universe 279
19.4. Portfolio Construction 280
20. Calculating Parameters of the TSIR 287
20.1. Optimizing TSIR 289
20.2. Optimizing TSCR 292
20.3. Optimizing TSCR with No Convexity 294
20.4. Estimating Recovery Value 295
20.5. Robustness of the Term Structure Components 295
20.6. Calculating the Components of the TSYV 296
21. Implementation 299
21.1. Term Structure 299
21. 1.1. Primary Curve 299
21. 1.2. Real Curve 300
21. 1.3. Credit Curve and Recovery Value 301
21.2. Discount Function and Risk Measurement 302
21.3. Cash Flow Engine 303
21.4. Invoice Price 306
21.5. Analytics 306
21.6. Trade Date versus Settle Date 308
21.7. American Options 309
21.8. Linear Programming 313
21.9. Mortgage Analysis 314
References 317
Index 319
