Motive A pension fund manager is expecting a term deposit of CHF 10,000,000 to be repaid in mid-June. These strategies therefore combine the motive for trading fixed income futures with the risk and reward profile of options. Certainly this book sets the benchmark for the level of expertise that swaps traders should strive for, and the style is aimed at the novice and professional alike. The futures price will track the price of the deliverable bond that presents the short futures position with the greatest advantage upon maturity. But at the same time, it will reduce counterparty risk. Interest Rate Swap, a plain vanilla interest rate swap is the most basic and common type of interest-rate derivative. Chapter Premium Payment and Risk Based Margining). Covitz, D and S Sharpe (2005 "Do non-financial firms use interest rate derivatives to hedge? The discount factor is: 1 1 (0.0363.315) The interest rate needs to be raised to a higher power for remaining lifetimes beyond one year (1.315,.315. 0.0363) 2 100.50 (1.0363).315.315 (9.315 1) 109.84.15 This convexity factor is used in the following equation: Percentage present value Modified duration Change in market rates.5 Convexity (Change in market rates) 2 change.

#### Interest, rate, derivatives - A Complete Beginner's Guide

Additional margin is released to the investor. These parameters are also known as the maturity ranges for delivery. Liquidity means that large amounts of a product can be bought and sold at any time without excessive impact on prices. For instance, an increasing share of transactions is being centrally cleared. Sterling kept its place as the third most important currency, with a market share of 8 despite a 13 fall in activity. Present value multiplied by maturity of cash flow Years Weights of individual cash flows Macaulay duration.65 years Macaulay duration can also be applied to bond portfolios by accumulating the duration values of individual bonds, weighted according to their share of the portfolios present value. June 2002 Expiration date has aa limited limited lifetime lifetime and and aa set setexpiexpiry Each option has date. Depending on the position to be hedged, they will buy or sell futures and thus, in effect, fix a future price level for their underlying position.

Chapter Conversion Factor (Price Factor) and Cheapest-to-Deliver (CTD) Bond. A more __interest rate derivatives trading strategies__ thorough analysis of the time series dimension requires better data and will thus be left for future research. The share of inter-dealer trades has shrunk to 35, the lowest since the survey's inception. The futures price is then equivalent to the price of the underlying instrument this effect is called basis convergence. In our example, the buyer acquires the right to enter into a long position of 20 Euro Bund Futures, at an exercise price of 106.50, and pays EUR 3,000 to the seller in exchange. The price of the put is higher, The price of the put is lower, the lower the price of the underlying instrument; the higher the price of the underlying instrument; the higher the exercise price; the lower the exercise. Description /Summary, the most professional and industry relatable text currently available for linear interest rate derivatives. The pedagogical examples and concise structure make this easily digestible and highly effective.". Options on short-term interest rates are the preferred instrument for taking leveraged positions on changes in policy rates. A bond with annual coupon payments maturing in exactly one years time is used for this step-by-step explanation. In comparison to outright position trading, inter-product spreads are also subject to lower risks. Due to the different interest rate sensitivities of the respective issues, the medium-term and long-term positions are weighted differently. Alternatively the calculation can be described as the difference between 121.65 121.50 15 ticks.

#### Interest, rate, derivatives - Fixed Income, trading, strategies

If that was the case an arbitrageur could buy the cash bond (7 05/13/02) at 114.12 and sell it immediately via the futures market at 106.94.067382 and receive 114.14. When yields are at the notional coupon level (6) the bonds are almost all equally preferred for delivery. 9 Among the administrative transactions included in the survey are FRA switches, which account for 16 of the turnover recorded by Fleming et al (2012). 13 EU-134 Fixed rat_E 18:05 Uhr Seite 14 Macaulay Duration In the previous section, we saw how a bonds price was affected by a change in interest rates. Almost everything included here is compulsory knowledge for a modern, successful, swaps trader or interest rate risk portfolio manager. This means that long-term yields will rise more (or fall less) than medium-term yields. The volume of transactions with non-financial firms also declined. These yields may be calculated using the bonds market value (price coupon payments and redemption (cash flows). Spread positions are designed to achieve profits on expected changes in the price difference between the long and short positions. The price intervals of this contract are set.50 points.Call Call option The buyer can convert this position into a long futures position.

For a futures position, contrary to investing on the cash market, only additional margin needs to be pledged (cf. Both payment streams are __interest rate derivatives trading strategies__ based on the same notional principal, and the interest payments are netted. And all Latin American centres combined traded 6 billion, which is well below the 32 billion turnover in contracts denominated in Latin American currencies. The most important specifications of Eurex fixed income futures are detailed in the following example based on Euro Bund Futures and conf Futures. The corresponding futures positions opened according to the original options position are outlined in the following table: Exercising.

Gamma can be described as the rate of change of delta. Zero basis futures price at 5 yield Coupon Maturity Conversion factor Price at 5 yield Price divided by conversion factor 5 07/15/2012.925836.99 108.00.54 107.58 7 05/13/2011.12 106.92 We can see from the table. Result: The proceeds of EUR 2,700 made on the difference between the purchase and sale is equivalent to the balance of the variation margin (EUR 8,600 EUR 5,900) calculated on a daily basis. In this way, the sellers obligations arising from the original short position have lapsed. Naturally, the greater the disparity between the bond to be hedged and the actual CTD bond, the less reliable the hedge will be, creating in some cases significant basis risk. A nominal value of 100 Lifetime and Remaining Lifetime One must differentiate between lifetime and remaining lifetime in order to understand fixed income bonds and related derivatives. Macaulay Duration (Average Remaining Lifetime Weighted by Present Value).

The price calculations in this chapter are based on the assumption that the only changes that occur are those that are given and that all other influencing factors remain constant (ceteris-paribus assumption). Cash bond price divided by the conversion factor) of each bond. The conversion factor (CF) of the bond delivered is incorporated as follows in the futures price formula (see. After growing rapidly prior to the financial crisis, activity in the market for over-the-counter (OTC) interest rate derivatives, such as swaps and forward rate agreements (FRAs has since expanded at a more moderate pace. For calls: Intrinsic value Futures price Exercise price of the option, if this is 0; otherwise it is zero. Trading Strategies Basic Futures Strategies Building exposure by using fixed income futures has the attraction of allowing investors to benefit from expected interest rate moves without having to tie up capital by buying bonds. Federal Reserve Board, Finance and Economics Discussion Series, no 2005-39. Example: 8 The bond has a lifetime of 10 years as at the valuation date March 11, 2002 (today) the remaining lifetime is 9 years and 115 days EU-134 Fixed rat_E 18:05 Uhr Seite 9 Nominal and Actual Rate. To help standardize the delivery process the concept of a notional bond is used. The contracts were bought at a price of 121.50. Selling bonds and simultaneously buying futures is referred to as a reverse cash-and-carry arbitrage.

#### Interest, rate, derivatives : Fixed Income, trading, strategies, eurex

43 EU-134 Fixed rat_E 18:05 Uhr Seite 44 The **interest rate derivatives trading strategies** modified duration of the futures position is expressed as the modified duration (MD) of the cheapest-to-deliver bond, divided by the conversion factor (based on the assumption that futures price cheapest-to-deliver/conversion factor). The reason for this is that during the life of a futures position, its value is marked to market each day by the clearing house in the form of variation margin. Alternatively the net profit is the sum of the futures price movement multiplied by 10 contracts multiplied by the value of EUR 10: (105.37 105.10) 10 EUR 10 EUR 2,700. Modified Duration Method The modified duration can be used to calculate the interest rate sensitivity of the cash and futures position, and to set the hedge ratio accordingly. The greater the gamma, the greater the reaction of the delta to price changes in the underlying instrument. Investors must weigh up the costs and benefits of an adjustment. It may takes up to 1-5 minutes before you received. Breaking down Interest-Rate Derivative. Major central banks have kept policy rates low since the financial crisis, resulting in low and stable money market rates ( Graph 7, left-hand panel). At least nine exercise prices per contract month are always available. In contrast, static hedging means that the original hedge ratio remains unchanged during the life of the hedge. Sensitivity Method The sensitivity or basis point value method is also based on the duration concept. A detailed review of all influences on cash-andcarry/reverse cash-and-carry positions would exceed the scope of this brochure.

#### Prcing and, trading, interest, rate, derivatives

Theta indicates by how many units the option price will change given a one period reduction in the remaining lifetime. Additional margin equivalent to that for the underlying future has to be deposited to cover the price risk. Lifetimes two __interest rate derivatives trading strategies__ June, September and December cycle;.e.one, lifetimes andone, three months, as well as a as maximum six of two and three months, well as aofmaximonths available. 7 EU-134 Fixed rat_E 18:05 Uhr Seite 8 In this chapter the following information will be used for a number of explanations and calculations: Example: Debt security issue German Government Bond. Changes in regulation have resulted in more contracts being centrally cleared. The central role of the derivatives markets is the transfer of risk between these market participants. Example: Money market interest rate.a. Volatility of the Underlying Instrument Volatility measures the propensity of price fluctuations in the underlying instrument. Alternatively the net result is the sum of the futures price movement multiplied by 20 contracts multiplied by the value of EUR 10: (102.98 103.60) 20 EUR 10 EUR 12,400 Spread Strategies A spread is the simultaneous purchase and sale of futures contracts. Electronic trading on Eurex guarantees extensive transparency of prices, volumes and executed transactions. Despite rapid growth in emerging market currency activity, trading remained concentrated in major currencies and financial centres. These dealers continue to be important as counterparties for other market participants, but the share of inter-dealer trading is falling.

Theoretically, it should thus be impossible to realize risk-free profits using counter transactions on the cash and forward markets (arbitrage). Their value is below or above the nominal value of 100 percent. Strategy The investor buys 10 Euro Bobl Futures June 2002 at a price of 105.10, with the intention to close out the position during the contracts lifetime. At a yield of 5 the table records the cash market price at delivery and the zero basis futures price (i.e. Otherwise parallel shifts in the yield curve would lead to a change in the value of the spread. At a determined price Exercise price 106.50 If the buyer claims his/her right to exercise the option, the seller is obliged to sell (call) or to buy (put) the futures contract at a set exercise price. Turnover in Australian dollar-based contracts even overtook trading in yen-denominated derivatives. Interest-rate derivatives are often used as hedges by institutional investors, banks, companies and individuals to protect themselves against changes in market interest rates, but they can also be used to increase or refine the holder's risk profile. The buyer is prepared to pay a certain sum the time value for this opportunity.