Derivatives Chapter 2 Flashcards
UK Government Bonds
name
issued by …
(purpose) fund the ….
name: ‘gilts’
issued by: DMO
(purpose) fund the: PSNCR (public sector net cash requirement)
Overseas Government Bonds
US
France
Germany
Japan
UK
Italy
How long are..
Short-dated bonds?
Medium-dated bonds?
Long-dated bonds?
Undated/Perpetual/Irredeemable bonds?
Short-dated bonds: _< 7 y remaining
Medium-dated bonds: 7-15y remaining
Long-dated bonds: >15y remaining
Undated/Perpetual/Irredeemable bonds: no date given…
Special Features:
Index-linked
Strippable
question: if you have a 3 year strippable guilt, how many seperate instruments are created?
Index-linked: have their principal and coupon payments adjusted according to the official government Retail Price Index (RPI). Can protect you from inflation.
Strippable: coupons and principal can be seperately traded
question: if you have a 3 year strippable guilt, how many seperate instruments are created?
6 coupon payments (guilts have semi-annual coupons)
1 principal repayment
= 7 insruments!
Normal Yield Curve
if the yield curve is rotative clockwise & flattening, what does this mean?
if the yield curve is rotative clockwise & flattening, what does this mean?
long term interest rates are expected to go down and short term interest rates are expected to go up.
2 Theories about the shape: liquidity preference and expectations theory
Cross rates?
rate that does NOT involve the USD ($) e.g. ERUvsGPB
What is a Base Currency?
Most common Base Currencies?
What is a Base Currency? = the ‘1’. so, how many of the other currency are 1$? It is always the LEFT currency
Most common Base Currencies?
USD
(GBP)
(EUR)
for usa, you do GBP vs USD or
EUR vs USD
So here, GBP and EUR are the bases!
Foreign Exchyange
where is the exchange?
mkt place?
2 types of transaction?
Most common currency pairs?
Cross rates?
where is the exchange? = OTC institutional market dominated by banks (no central exchange)
mkt place? = No physical mkt place
2 types of transaction? = spot and forward (real time buying/selling, and agreeing a rate of exchange in advance)
Most common currency pairs? =
USD/JPY
USD/CHF
GBP/USD
EUR/USD
Cross rates? = Not involving USD
the current ‘cable’ (GBP/UDS) spot rate is 1.4457-1.4484.
What will it cost (in £) to buy $65,000 spot?
What is the base? Base is £
Are we buying or selling the base? Selling the base. So, 1.4457 is important.
Correct rate? convert $65,000 to £. So, 65,000/1.4457
= £44,961
current cable spot rate is 1.4457/84. The forward adjustment is 15/18 dis.
What will you receive (in £) if you sell $65,000 forward?
current cable spot rate is 1.4457/84. The forward adjustment is 15/18 dis.
What will you receive (in £) if you sell $65,000 forward?
- base rate? = £ (cable means GBP vs USD)
- buying or selling? Selling. So, the higher numbers 1.4484 and basis points 18 are important
it is at discount, so, add (you do the opposite of how it sounds) the 18 basis points. 1.4484+0.0018= 1.4502 (remember, basis points are in 0.00xx)
- use rate. remember, it is GBP vs USD.
So, 1£ = 1.4502$ remember, this shows we will get a smaller amount of £
x£ = 65,000$
= 65,000/1.4502 = £44,821
the current cable spot rate is £1/$1.4471. Interest rates are 1.5%pa in the UK and 2.5% pa in the US.
Calculate the 12 month forward rate.
the current cable spot rate is £1/$1.4471. Interest rates are 1.5%pa in the UK and 2.5% pa in the US.
Calculate the 12 month forward rate.
today: £1 = $1.4471
calculate what they will be in 12 months (add the per annum interest rate)
1+(1*0.015) 1.4471+(1.4471*0.025)
in 1 year: £1.015 = $1.4832
What is the spot rate? for that, the base currency needs to be at 1.
so, 1£ = $1.4831/1.105
so, 1£ = $1.4613
next year, the rate for cable will be 1.4613
This is assuming no arbitrage
Interbank cash market
ICE LIBOR
EURIBOR
EONIA
SONIA
ICE LIBOR: UK benchmark interest rate
EURIBOR: European version of LIBOR (US equivaket us Fed funds)
EONIA: daily overnight lending rate in EU
SONIA: nsecured rate for overnight transactions in London
UK Treasury bill (T-bill) key feautres
- short term
- typical maturity 3 months (91 days)
- tendered weekly by the DMO
- zero coupon, DISCOUNTED securites (no interest…)
Certificate of Deposit (CD)
time deposit with a promissory note (does pay interest)
Commercial Paper (CP)
- short term, unsecured corporate securities
- zero coupon, discounted securities
(corporate equialent of t-bill)
What’s traded on these Commodity Markets?
GME Group
Euronext Derivatives
Dubai Mercantile Exchange
ICE
LME
Tokyo Commodity Exchangen (TOCOM)
Dalian Commodity Exchange (DCE)
Multi Commodity Exchange India ltd (MCX)
Shanghai Futures Exchange
European Climate Exchange
Uses of Metals table
