Fixed Income Derivatives

1
Fixed Income Derivatives

• MGT 4850
• Spring 2008
• University of Lethbridge

2
Duration Calculations
3
Outline of the class

• Duration summary
• Meaning of duration other math insights

4
Duration (summary of previous class)

• Measure of the sensitivity of the price of a bond
  to changes in the interest rate at which Cash
  Flows are discounted
• Calculation
• Bank Immunization
• Bullet Immunization

5
Convexity
6
Meaning of Duration

• Weighted average of the bonds payments
  maturities
• Bonds price elasticity with respect to its
  discount rate
• Discount factor elasticity
• Price volatility

7
Bond Price elasticity in Excel
8
Babcocks Formula

• Weighted average of current yield and PVIF

9
Duration Patterns

• Maturity

10
Duration Patterns

• Coupon

11
Interest Rate Term Structure

• http//www.smartmoney.com/onebond/index.cfm?story
  yieldcurve

12
Treasury Futures contracts

• http//jobs.efinancialcareers.co.uk/job-4000000000
  246502.htm/keywordAnyfixed20income20derivatives
  /Calls
• Trading the yield curve
• NOB spreads
• Trading spreads
• TED spreads
• Discount yield vs. bond equivalent yield

13
Eurodollar Futures and swaps

• Plain Vanila Swap
• Foreign Currency swap
• Circus swap
• Calibration of models arbitrage free pricing
  models

14
Credit Risk

• Credit derivatives
• Credit default options
• Credit linked notes
• Total return swaps