Interest Rate Swaps and Other Derivatives

ISBN-10: 0231159641
ISBN-13: 9780231159647
Edition: 2012
Authors: Howard Corb
List price: $54.95 Buy it from $46.03
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Description: Interest rate swaps allow counterparties to exchange fixed rate streams of payment for floating ones. The first swap was executed over thirty years ago, and since then, the interest rate swaps market and other related derivative markets have grown  More...

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Book details

List price: $54.95
Copyright year: 2012
Publisher: Columbia University Press
Publication date: 9/14/2012
Binding: Hardcover
Pages: 624
Size: 6.50" wide x 9.50" long x 1.75" tall
Weight: 1.144
Language: English

Interest rate swaps allow counterparties to exchange fixed rate streams of payment for floating ones. The first swap was executed over thirty years ago, and since then, the interest rate swaps market and other related derivative markets have grown and diversified in phenomenal directions. Today interest rate swaps and other derivatives are used by myriad institutional investors for the purposes of risk management, expressing a view on the market, and exploiting market opportunities that are otherwise unavailable using more traditional financial instruments.In this volume, Howard M. Corb further explains the concepts behind interest rate swaps and the derivatives spawned from their success. While his book is filled with sophisticated formulas and analysis, it is geared toward the average reader in search of an in depth understanding of these markets. Corb helps readers develop an intuition about these products and their use in the market, and he follows their manipulation into more complicated trades and structures. Through examples from financial and reverse engineering, he demonstrates how such products are created and how they can be deconstructed and analyzed effectively.

Preface
Acknowledgments
List of Abbreviations
An Introduction to Swaps
Overview
Swaps
Fixed-Floating Swaps
Basis Swaps
Cross-Currency Swaps
The Risk Characteristics and the Traditional Uses of Swaps
Interest Rate Risk
PV01
Spread Risk
A Closer Look at Swap Spreads
Currency Risk
Counterparty Risk
Traditional Uses of Swaps
New Issue Hedging
Asset Swaps
Balance Sheet Management
The Pricing of Swaps
Where Do Swap Rates Come From?
The Link Between Swap Rates and Eurodollar Futures
The Futures Convexity Bias
Moving On: Bootstrapping the Curve and Creating a Swap Model
A Stylized Example
PV01s in Our Stylized Example
Moving On: Pricing Up Nonstandard Swaps
Mark-to-Markets
Unwinds
Assignments
Forward Starting Swaps
Caps and Floors
An Introduction to Caps and Floors
Cap-Floor Parity
Uses of Caps and Floors
An Embedded Cap Trade
Valuing Caps and Floors
Vol
Valuing Caps and Floors in Our Stylized Model
Variations of Standard Caps and Floors
Swaptions
An Introduction to Swaptions
The Value of Swaptions at Expiration
Swaption Parity
Uses of Swaptions
Valuing Swaptions Using Black's Formula
Swaption Vol
Pricing Swaptions in Our Stylized Example
The Link Between Caps/Floors and Swaptions
Questioning Black's Model for Interest Rate Options
Are Interest Rates Lognormal?
Swaption Prices and Implied Vol
Skew
The Normal Model
Background
The Model
Pricing Under the Normal Model
Relationship Between Normal Implied Vol and Lognormal Implied Vol for At-the-Money Swaptions
Explaining Skew: The Relationship Between Normal Implied Vol and Lognormal Implied Vol for Off-the-Money Swaptions
The Normal Model: The Industry Standard
Other Models Used to Price Interest Plate Options
Bermudan Swaptions
Optimal Exercise of Bermudan Swaptions
Valuation of Bermudan Swaptions
Swaps with Embedded Options
An Underlying Concept
Cancelable Swaps
Some Uses of Cancelable Swaps
Solving for the Fixed Rate in Cancelable Swaps
Bermudan Cancelables
Index Amortizing Swaps
An Explanation of the Trade
Pricing Index Amortizing Swaps
Relationship Between Index Amortizing Swaps and Cancelable Swaps
Knockout Swaps
Swaps with Convexity Adjustments
LIBOR in Arrears Swaps
CMS Swaps
Structured Notes
The Rise of the Structured Note Market
A Glossary of Structured Notes
Size of the Market
What Are Structured Notes?
In the Beginning … Floating Rate Notes
A Prime Floating Rate Note
Capped Floaters
An Example: Pricing Up a Capped Floater
Inverse Floaters
An Example: Pricing Up a Leveraged Inverse Floater
Orange County
Range Notes
LEANs
Binary Accrual Notes
Regulatory Response
Non-Inversion Notes
The Pricing of Non-Inversion Notes
Relative Value and Macro Trades
Carry and Roll-Down Analysis
Curve Trades
Yield Curve Trades for Longer Holding Periods
Forward Yield Curve Trades
Conditional Yield Curve Trades
Trading Swap Spreads
Spread Trades for Longer Holding Periods
Spread of Spread Trades
Conditional Spread Trades
Asset Swaps Revisited
Asset Swap Math
Asset Swaps Today
More Recent Product Innovations
An Introduction to Correlation Trades: Caps Versus Payer Redux
Forward Vol Trades
Preliminary
Description of Forward Vol
Heuristic Pricing of Forward Vol Trades
Will the Forward Price Be Higher or Lower Than the Spot Price?
Are Forward Vol Trades Truly a Pure View on Vol?
Bermudan Cancelable Swaps Revisited
Curve Options
Why Did Curve Options Come About?
Implied Correlation
Implied Volatility Versus Realized Volatility
Supply and Demand of Curve Options
The Pricing of Curve Options
A Couple of Trades
Delta Hedging Curve Options
So Why Did 30-Year Swap Spreads Go Negative - and What Does That Have to Do with Curve Options?
Appendixes
Refresher in Option Pricing
The Basics
Boundaries on Option Prices
European Put-Call Parity
Binomial Pricing
Multiperiod Extensions
The Black-Scholes Formula
Option Sensitivities
Delta
Gamma
Vega
Theta
Binary Options
Delta of Binary Options
Vega of Binary Options
Packages
A Brief Review of Some Fixed Income Topics
Present Value
Duration
Macaulay Duration
Modified Duration
Effective Duration
A Closer Look at Day Count and Payment Conventions in Swaps
A Quick Look at Mortgages
The Normal Model
The Relationship Between �<sub>LN</sub> and �<sub>N</sub> for Swaptions that Are Struck At-the-Money Forward
The Relationship Between �<sub>LN</sub> and �<sub>LN</sub> for Off-the-Money Swaptions
Option Sensitivities Under the Normal Model
Solutions to Selected Problems
Bibliography
Index

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