R17 - Swaps, Fowards and Futures Strategie Flashcards
Describe the role of a payer swap, and explain when the payer swap increase in value.
Make a series of fixed payment and receive floating payments. If floating rate > fixed payment the payer swap increase in value.
When use a payer swap?
When a company need to change the exposition of fixed payments to floating payment
Explain the steps to calculate the payer swap obligations
1) Calculate net cash flow from fixed vs received floating rate
2) PLUS actual payment of floating rate
What is the impact of add a payer/ swap on a portifoilio duration?
Payer swap - INCREASE in value when exchange rate INCREASE = NEGATIVA DURATION
Otherwise receiver swap DECREASING in value when exchange rates increase = POSITIVE DURATION
TIPS
Payer is migrating to floating (lower dur.) to fixed (higher dur.) SO including the to the portifolio will DECREASE DURATION.
F- Formula for calculate the duration change by including a swap
Describe the main goal of foward rate agreement (FRA)
Hedge against the future short/ long term borrowing or lending rate. The goal is to fix the borrowing cost.
How value of FRA change by increase in interest rates
Long FRA positions increase in value when interest rates rise
AND Short FRA position increase in value when interest rates decrease
What’s the difference betwem FRA and a short term interest rate future
Future position will increase in value as foward rate decrease and decrease in value as foward rate increase. And futures contract are known by stadard contracts with defined terms expiration date, size…
F- Profit = 100 - contract value
Describe FI Future Mecanics AND the conversion factor AND the remuneration distribution between short and counterparty
Short need to deliver any treasury bond future w/ maturity between 15/25 years. The notional gov YTM is assumed flat 6%. So if coupon greater than 6%, the CF (Conversion factor) is greater than one, if equal to 6% (=1), lower than 6% (<1).
Short will deliver
Principal invoice price = futures settlement prince x 100 x CF
Short will receive
total invoice amount = principal invoice price + accrued interest
Describe the type of bond obligation for short counterparty
The counterparty need to deliver the cheapest to deliver bond (CDT), lower spend for the short counterparty
F- Indentify the cheapest to deliver bond in context of seller FI future contract
Describe how to hedge interest rate risk using treasury futures and the relation of price of the bond and the future due to the increase of int rates
For hedge a long port bond position manager should sell future bond.
As interest rise price of bond decrease and future increase, and if interest drop other way.
F - to calculate target duration in a context of hedge long bond portifolitio position
In the context of fully imunizing the long bond port with sell, describe the steps for calculate
Calculate the basis points in US amount for both sides and convert by conversion factor
In the context of change the target duration of the long bond port with sell, describe the steps for calculate
Describe currency swaps for each counterpartie
One partie agrees to make periodic interest ate payments on a notional amount, while the other party agrees to make periodic on notional amount in other currency
Describe the main goal of using equity swap and main benefits
Main goal is to create a synthetic exposure to stocks for increase in return, benefits of ownership without the associated cost and expense
Decribe the three options of equities swap
A) Pay fixed, receive equity return
B) Pay floating, receive equity return
C) Pay another equity, receive equity return
Describe main disavantage of equity swaps
Require collateral
Are illiquid
Not convey voting rights
Decribe the equity futures aditional return options for portifolio
- Standarized, require margin and low transaction cost
- Implement tatical allocation
- Portifolio diversification
- Exposure to international markets
- Direcional bets on the market directions
Describe the main disadivantage of equities foward
- Lack of liquidity
- Mark to market margin adjustments
- Conterpartie risk is a concern NO CLEARINGHOUSE
F- In context of equities futures position, describe the target beta
Describe the strategy of cash equitization
Purchase index futures to replicate the returns that would have been earned by investing the cash in the index with return caracteristcs similar to those of the portifolio
Describe the VIX future meaning
Expected vol of S&P 500 index vol in the 30-day period after the futures contract expiration date
