| |
| |
| 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 | |