Trading

Question 1

what type of asw level does harry quote in his runs? which swap curve does he use?

Answer 1

yield yield mid,
it is based off BBG curves,
YAS i-spread gives rough guide to where it asset swaps

Question 2

when basis is not favourable for an issuer what does that mean for the investor

Answer 2

it is favourable

Question 3

4yr euro quebec using xcf to convert to spread over usd was +14bps, 4yr usd quebec bond was +4.6bps on asset swap using YAS, what does this mean

Answer 3

Euro denom quebec is 9.4bps cheap to usd paper

Question 4

how are the spreads calculated in xcf, 4yr euro spread of 5bps to usd

Answer 4

4 year cross currency swap of 6 month euribor plus 5bps to 3m usd libor and solve for the spread on the usd leg that gives the swap a net market value of zero

Question 5

what is the largest amount harry seen go through a match, what is the general size

Answer 5

200m of 3bn cad issue,

general 50m largest sizes

Question 6

what is a greenshoe bond option

Answer 6

option to top up allocation. 9 days after colombia, 40% more. (if CB meeting or data is good option and risk free essentially)

Question 7

formula for the asw level,

what is the alternative formula

Answer 7

bond yield - swap rate,

treasury spread - swap spread

Question 8

what is the formula for swap spread

Answer 8

swap rate - government yield

Question 9

if treasury spreads stay the same, what impact will swap spreads cheapening from +12 to +10 have on the asset swapped level of the bond

Answer 9

will cheapen on asset swap by 2bp, from +2 to +4 for example

Question 10

with asset swap, is going from +10 to +12 cheapening or richening on asw

Answer 10

cheapening,

+10 to +12 is cheapening on asw

Question 11

how do you compare a new issue that is MS+2bp to paper trading in secondary

Answer 11

look at ASW level. if spread to treasuries is +10bp and swap spread is +12 then on asw is -2bp, the new issue has 4bp NIC (MS+2)

Question 12

with swap spreads, if they go from +12 to +10 what are they doing, richening or cheapening

Answer 12

cheapening

Question 13

if client buys on asw what does that mean

Answer 13

buy bond pay fixed on the swap,

client receives libor + spread.

Question 14

client selling a bond on asw would mean they pay libor + spread

Answer 14

true,

client sells bond and receives fixed in the swap (pay float + spread)

Question 15

how does b/o work for asw *

Answer 15

MM bid offer is the price i am willing to: buy bond pay fixed swap + rec spread / sell bond receive fixed on swap + pay spread.

client side: sell bond receive fixed on swap + pay spread / buy bond pay fixed on swap + receive spread

Question 16

what is the equation for flat yield = current yield

Answer 16

flat yield = coupon / bond price (as a percentage)

Question 17

what is the equation for gross redemption yield (yield to maturity)

Answer 17

flat yield (coupon/bond price *100%) + profit/loss at redemption.
profit/loss at redemption = if bought for £95 and redeem as £100 in 8 years, then (£5 profit/8 years)/£95*100%

Question 18

what is the difference between clean and dirty prices

Answer 18

clean: without taking into account between coupon payments
dirty: adjusted for coupon

Question 19

what is the formula to calculate the accrued interest on a bond

Answer 19

accrued interest = coupon * (number of days from last payment) / (number of days in payment period)

Question 20

what does convexity measure

Answer 20

changing nature of dv01 as yields change

Question 21

how do you calculate dv01

Answer 21

calculate the price for 1bp increase and a 1bp decrease in yield and calculate the average absolute price change

Question 22

what is the difference between modified duration and macaulay duration

Answer 22

modified duration: price sensitivity of the bond when there is a change in yield to maturity. Price effect of a 1% change in interest rates
macaulay duration: number of years for investor to recover initial investment

Question 23

what is DV01?
does dv01 stay the same for different sizes of notional?
What does the dv01 mean in terms of marking up

Answer 23

dollar value of one basis point.
no, DV01 changes as the notional changes,
this is how much you make by marking up the bond by one basis point

Question 24

what is risk on bloomberg

Answer 24

risk is identical to dv01 except expressed in basis points versus dollar value

Question 25

what do asw clients want to enter the market

Answer 25

they want cheap levels (HIGHER NUMBER) as they are receiving the spread (buy bond pay fixed on swap, receive libor + spread)

Question 26

BBG i-spread is +18, Nick is bidding at +13, is that a higher or lower price

Answer 26

higher price

higher i-spread = lower price (same as yield)

Question 27

is higher i-spread lower or higher price

Answer 27

lower price (same as yield)

Question 28

where do most clients mark their positions

Answer 28

bloomberg marks

Question 29

what tenor paper do IBRD hold

Answer 29

only up to 2 years, because like everyone else they got hurt in covid blowout

Question 30

what’s one way you can get people’s attention

Answer 30

big size

Question 31

if you pay fixed are you long or short the market

Answer 31

pay fixed = short the market

receive fixed = long the market

Question 32

what is a par par asset swap

Answer 32

match all cash flows of the bond on the swap: coupon 3.5%, swap pay 3.5% fixed,
(parfectly matches the cash flows of the bond,
match coupons and artificially change price

Question 33

what is a yield yield asset swap

Answer 33

pay whatever current swap rate is.
(yy yah getting what the current swap rate is),
whatever yield - swap to that date

Question 34

which asset swap is ‘easier’ to price

Answer 34

yield yield because pricing is transparent

Question 35

how to price the basic client buying bond

Answer 35

client look for offer,

i have to buy treasuries because when i sell bond will reduce duration, input offer treasury into yas

Question 36

client wants to sell me a bond

Answer 36

client look for bid,

i have to sell treasuries to reduce duration after i buy bond, input bid treasury into yas

Question 37

bid yield yield please

Answer 37

I buy bond pay fixed on swap,
to hedge need bid side of treasuries and bid side of swap because will need to receive fixed in swap.
in yas, put in spread to treasuries and change treasury price to bid side, take the yield and subtract the bid side swap rate to get asw level

Question 38

when converting a bond into floating, why do you need to take into account the yield

Answer 38

because of the fact that the bond is not at par

Question 39

what is yield to maturity

Answer 39

anticipated return if hold bond to maturity, and coupons reinvested

Question 40

what is the breakeven

Answer 40

nominal - real yield (inflation)

Question 41

how does the itraxx work

Answer 41

crossover increase = risk off, decrease = risk on,

measures return for long credit position in itraxx crossover

measures return for credit protection sellers (risk on, cost of credit protection goes down so sellers lose money as it goes down)

Question 42

what is the z spread

Answer 42

spread added to each zero coupon spot rate to make the present value of the cash flows equal to the bonds price

Question 43

what is the option adjusted spread (OAS)

Answer 43

z spread - option value

Question 44

bond price > / < than par value…

Answer 44

premium / discount