Fixed Income IV Flashcards
Initial margin (futures)
Amount must be deposited to trade, different for each asset class
Maintenance margin (futures)
Amount that must be maintained, if falls below, funds must be deposited to get back to initial margin.
Eurodollar futures
(1) add on yield to LIBOR
(2) price = (100 - annualized LIBOR yield)
(3) example: Libor = 2.4%, price = 97.6
Index option payoff
(Price - strike) * multiplier
Option adjustments
(1) adjusted for stock splits
(2) NOT adjusted for cash dividends
Future call option
Right to enter into long future at a given futures price
Puts work the same way
Interest rate caps
Series of interest rate call options with expirations corresponding to reset dates on floating loan.
Pay you if rate moves above cap.
Interest rate floors
Series of interest rate put options that pay you if floating rate falls
Effective duration
(bond price when yields fall - bond price when yields rise) / (2*initial price * change in yield in %)
Option adjusted duration (OAS)
Same as effective, but requires a pricing model that takes into account options.
Macaulay Duration
Estimate of bond’s interest rate sensitivity based on time in years until cash flows arrive.
Modified Duration
Slight improvement to macaulay, takes into account YTM as well. Not ideal for bonds with embedded options.
Interpreting duration
(1) slope of price-yield curve at current YTM
(2) weighted average time until cash flow received
(3) Approximate % change in price for a 1% change in yield
Duration and convexity formula
(-duration * change in yield) + (convexity(change in yield^2))100
Convexity adjustments
Positive when convexity is positive, and negative when convexity is negative
