Various Flashcards
Define a payer and receiver IRS
In a IRS the payer is the party who wants to pay fixed interest rate and receive floating rate of interest. You do not buy or sell an IRA, you pay or receive (fixed).
What is difference between payment frequency and fixing frequency?
Payment frequency is how often interest is paid
And
Fixing frequency is how often the interest rate is reset (for an IRS the floating rate)
Why do we have day count conventions
To convert periods into year fractions when calculating interest rate payments
What are the use of rolling conventions, eg modified forward
If an event is scheduled to take place on a non-business day it dictates how to adjust this date to a business day
Define the modified forward rolling convention
If the payment date on a swap does not fall on a banking day, the modified following date will be the next banking day, except if the next extends into a new month
The start date if non-business is not adjusted
How to use the actual 360 day count convention?
= (end date - start date) / 360
= your year fraction to calculate interest
What is a spot trade
Two business days after the trading date
T+2 settlement
At what time are floating rates indexed? Think floating loans, floating bonds or the floating leg in an IRS
The floating rate is fixed at the start of each interest period and paid out at the end of the period
What day count convention is standard for (1) money market (2) danish bond market (3) repo transactions (4)
(1) Act360
(2) 30/360 for Fixed, Act360 for float
(3) act360 for danish bonds
More here
What are the traditionel curves to combine for a swap curve calibration? And what does no perfect overlapping mean?
Usually a cash curve with money market rates, a FRA curve with tenors between 1x7 and 9x15 and a swap curve from 2yrs and up to 30 yrs
What is the difference between a FRA and a IRS ?
A payer FRA (purchased contract) is similar to a payer IRS where you pay fixed and receives floating, i.e. bets on higher interest rates (since a lower deposit rate is better when interest rates increases).
However FRA only trade with short tenors of up to one year and IRS longer tenors (between 1-30 yrs).
What is the mid price used for?
Used as a reference and to evaluate P&L (whereas the bid and ask prices (the offers) are where you buy and sell)
Explain the quotation convention for FX forwards
Communicate the difference between forward and spot exchange rates - the forward points - measures in pips (1/10.000).
If the EURUSD spot rate is 1.3628 and the 1Y forward exchange rate is 1.3615, a trader would say that the 1Y forward is trading at -13pips
What is the contract size for 1 bund future lot?
100.000 EUR
What is a swaption?
The right but not the obligation to enter into an IRS on a future date with a prespecified fixed rate.
It can be settled with either physical or cash settlement. When there is physical the swap is initiated.
What is a xccy
An OTC agreement to exchange a series of floating rate payments in one currency against a series of floating rate payments in another currency.
It has initial and final exchange of notional (unlike an IRS).
Standard is to exchange the 3M IBOR rates in the two currencies with a spread to one of the legs. For swaps quoted against USD, this basis swap spread is applied to the non-USD leg.
The position is denoted relative to the spread (are we paying or receiving the spread).
Why is the market activity split between FX forward and Xccy market across maturities?
FX forwards carry interest risk against the fixed cash flow in each currency. This interest rate risk is roughly proportional to the time-to-maturity.
For longer dated FX forwards this risk can be quite significant. The interest rate risk can in turn be offset by exchanging floating rate payments - exactly as is done in the Xccy.
Intuitively, we can think of Xccy as being an FX forward contract where you simultaneously trade an IRS in each currency to remove the interest rate risk.
The market is split due to the significant interest rate risk above 1Y maturities.
What is an FX forward?
A bilateral (to-sidet) OTC contract to exchange cash flows in two different currencies at a future date at a prespecified exchange rate.
Simply two known opposing cash flows in two different currencies at a future date.
How to find the NPV of a FX forward?
Since it is two known opposing cash flows in different currencies at a future date, we can easily value the contract by simply discounting them back using their respective discount factors and collect the NPV in a single currency via the spot exchange rate.
Contracts are initiated with zero NPV
What is an FX swap and how does it differ from an FX Forward?
An OTC combination of a spot exchange trade and the reverse FX Forward.
Simply an agreement to e.g. buy Euros and sell dollars today against selling euros and buying dollars in the future.
While the FX forward in itself carries outright exposure to exchange rates, the fx swap has a more specialised risk profile since the simultaneous spot trade neutralises (most of) the outright exposure.
The fx swap exchanges cash flows on the spot date against exchange the reversed flow on the maturity date.
What does an investor who bought a given bond in an asset swap package and as such is receiving the spread hope the spread does afterwards?
Positioned/hope for the ASW spread to fall, i.e. the credit risk profile of the bond is improved and will increase the bond pricing
The receiver in a plain vanilla IRS is positioned for higher/lower rates?
Lower rates
What is an asset swap? How is it quoted? What does pricing represent?
An asset swap is a customised IRS where the coupons paid on the one leg is structured to match an existing asset. This leg is the asset leg. The other is typically just a xIBOR with a spread. The funding leg.
Structured such that the fixed asset leg match a bond and calculate some spread above or below xIBOR that matches the value of the asset leg coupons.
Priced by evaluating the credit quality of some given asset relative to the credit premium in the swap curve. Therefore can be negative, I.e. bond’s credit better than the unsecured interbank credit quality embedded in the xIBOR fixings and thus the swap curve
Define what the mid, bid, and ask price is?
The mid is the price used for reference and for evaluating PnL, and the bid and ask (also called offer) which are the prices for you to sell, respectively, buy at.
Are you a buyer you buy at the ask (or offer) price, and later sell at the bid price.
The ask price is always > the bid price
How can you manage your short term EURIBOR fixing risk? (Today, Tomorrow)
Through a purchase of a 0x3 and 0x6 EUR FRAs for today’s and tomorrow’s fix
What characterise a bullet notional?
A constant notional
How are xIBOR rates fixed and paid? What is the underlying concept?
The rate is fixed-in-advance (reset in the begging of accrual) and paid-in-arrears (paid in the end)
State the plain vanilla IRS of EUR, USD, and DKK in relation to standard floating rate frequency (float index period) and fixed rate frequency!
For EUR and DKK it’s 6M vs Annual and for USD it’s 3M vs Semi-annual
In broad notation, how do you calculate the first discount factor?
DF = 1 / ( 1 + swap rate x day count )
What’s negative convexity and where do we often experience it?
MBS’ have negative convexity.
Bond price falls when interest rates decline
Duration increases as yields increases
Define a curve steepener trade (i.e. a bet on higher longer rates and lower short)
Pay fixed long tenor and receive in shortest tenor
For instance, pay 30y EUR and receive in 10y EUR.
The trade earns on a higher spread between these two. If one were interning a curve flattener trade, one would earn on a lower spread.
What makes it more attractive for EUR investors to invest in danish mortgage bonds? Higher or lower EURDKK forward points?
Lower forward points make it more attractive.
A danish rate cut as seen in October 2021 makes it more attractive.
What is forward rates simply and how is it calculated?
The forward rate represent the yield of a bond that is purchased at a date in the future.
A reasonable approximation:
F1,2 = [(T1 + T2) x R2 - T1 x R1] / T2
A 5y5y:
= [(1+10ySwap)^10 / (1+5ySwap)^5]^(1/5) -1
If you want to position for a rate cut by a central bank, what to trade?
One could receive in the 1y1y forward swap, profiting from lower forward yields if short rates are lowered.
Quickly. When are you short and long rates in an IRS?
Receiver = rates down, short Payer = rates up, long
For low coupon callable; What is the relation between implied volatility, delta risk, and bond prices?
A fall in the implied volatility increases the interest rate risk of low coupon callables despite higher bond prices), since the probability of a bond being called decreases when implied vol decreases.
Hence,
Higher implied vol = lower delta (despite lower prices)
Or
Lower implied volatility = higher delta (despite higher prices)
Define a bear steepener and bull flattener.
Bear steepener: Long rates increases more than short rates, steepening curve.
Bull flattener: long rates decreases more than short rates, flattening the curve.
How do you calculate carry and roll?
Carry simply represents yield from coupon (net of funding) and roll is the performance from an upward sloping yield curve, where a bond rolls down the curve every year (assuming an unchanged curve) measured by difference between spot and forward yields or spot yields of different maturities.
Quick - bid/ask. What price do you’re quest in each case?
If you sell you get the bid price and buy at the ask/offer price
What is the carry currency (in a cross)?
The currency with the highest (short term) interest rates
What does a VAR of 3.2% with a 99 percent confidence level imply about potential loss?
Implies that the daily loss is expected to exceed 3.2% in only 1 out of 100 days.
The daily can be converted to monthly by multiply it by the square root of 22 (approx number of trading days a month) = 4.69
Hence the 3.2% daily VAR would imply a monthly expected loss to exceed 15% ( 3.2 x 4.69) in only 1 out of 100 days.
How much discounting curve exposure does an at-the-market IRS vs. an off-market swap have relative to forward curve risk exposure? Both have same tenor and pays fixed.
The at-the-market swap has identical forward curve exposure to the off-market swap, but much less discounting curve risk.
The off-market swap hence profits from not only higher forward- but also disc rates (since positive delta for both curves).
Repos: How is settlement cash determined? How is termination cash calculated?
Settle cash depends on dirty price of bond (incl accrued of bond with ACT/365 or similar, and haircut) times repo face amount.
Termination cash = Settle cash x repo rate x ((accrued days at termination - accrued days at initiation)/360)
Note: accrued calculate based on bond basis and repo on ACT/360
Difference between DV01 and PV01?
PV01 is the present value of adding one marginal basis point on the coupon of the swap
DV01 is the sensitivity of the curve shift [a 1bp parallel shift (i.e. up and down) in the curve]
Hvad gør du, hvis du betaler 6y EURUSD (3v3) xccy @-10.2?
Pay EUR betyder funding af EUR mod USD med et spread på -10.2 bps på EUR benet og USD flat.
Hvilken position har de to ben i en rhs USDDKK FX Swap?
Rec USD og Pay DKK
Whats the basic idea of the fx pricing relationship?
The basic idea is that the forward needs to be priced such that a market participant cannot borrow money in one currency, buy a foreign currency in the spot market, lens in the foreign currency, and then buy back the original currency at the forward rate covering the original loan at a risk free profit
How is delta risk displayed in Adaptives vs Lighthouseses?
Lighthouse have positive values positioned for lower yield, and Adaptive is opposite.
What does forward points represent?
The interest rate differential between teo currencies from one value date to another.
What is the hedging difference between a conventional bond and a mortgage bond?
The mortgage bond has negative convexity, and decreases in value from lower rates, and hence need to be hedged with a receiver swap (opposite to a conventional bond with positive convexity) to maintain same duration risk
Explain a 5y EURUSD (3m v 3m) Xccy with a basis spread of -35
If you are a payer, you are funding USD by delivering your EURs and receiving 3m EURIBOR + spread on your “deposit”. Hence,
Calculate the DV01.
Price of 99
Duration of 4.5
Time to maturity of 5yrs
50mDKK investment
DV01 = 4.5 x 99 = DKK 445.50 per million
Hence, 445.50 x 50 = 22,275.00 for 50m
Callables. What typically happens for duration and OAS when interest rates increases?
Duration increases with interest rates and OAS widens.
What is OAS performance and widening?
Performance is a lower figure (towards zero or more negative). Widening is opposite and not favourable.
Bid and offer
Buy or sell
