Fifty-Three Lessons, Six Tracks, One Logic

Understood literally this means the value of a dollar erodes because of inflation and with passage of time.

Understood literally this means the value of a dollar erodes because of inflation and with passage of time.

Par curve is the spot interest rate curve for coupon bearing instruments as traded in the market,…

Duration quite literally is the average time taken to receive the promised cash flows on a financial instrument.

It’s important to cover this base too, as for floating rate bonds if we apply the ‘time taken to receive the promised cash flow’…

let’s begin with the most basic building block of the fixed income cash market that would become the foundation of derivative instruments ahead.

Spot denotes the price of currency A in terms of currency B settled typically T+2. Any contract with non-standard settlement…

Interest rate swaps the way the desk trades them: pricing and DV01, forward-start leverage, unwind mechanics, CVA and FVA, and cross-currency basis — from FX points to bootstrapped par yields.

I’ll share the practical workings of interest rate swaps, cross currency swaps…

swap unwinds are computed as the present value of the cash flows (positive or negative) reflected in the difference…

Other considerations while entering into a swap are counterparty credit risk and funding of cash flows…

A variation of interest rate swaps, cross currency one can think of a CCS contract…

Now as a follow-up here’s the intuition behind the cross currency basis product – the term basis refers…

We have discussed both FX swaps and cross currency swaps and now understand that both products…

We are about to navigate back and forth between cash and derivatives and their mix to discuss some popularly talked

We are about to navigate back and forth between cash and derivatives and their mix to discuss some popularly…

Comparison between ‘Standard’ Market Repos and Securities Lending/Borrowing…

Repo cash flows can be mimicked by going long a bond in spot and selling futures on it…

Asset Swaps is a term used to describe a ‘swapped’ return whereby an investor in a cash product desires…

Collateral Swaps is the exchange of two different assets for any given tenor. The lender of the lower quality collateral generally pays a spread…

Probably one of the most overused terms in financial markets across asset classes is carry and roll, often used interchangeably.

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credit default swap as the name suggests is a derivative contract that facilitates the swapping/exchange of credit risk…

Let’s illustrate the computation of the credit default swap spread. Few things to remember…

CDS cash flows work like fixed coupon interest rate swaps i.e. the payments made by the CDS buyer to the seller in practice…

In theory bonds can be delivered on CDS contracts in case of a default which should imply that credit spreads…

Standard market convention is for the protection seller to pay par minus recovery value…

CDS pricing theory and the recovery mechanisms seem fairly standard when we read about it…

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Pricing of an Option – Most pricing models calculate the price of an option using some form of hedging such that the portfolio of the option…

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Option Greeks – risks embedded in an option contract that appear with movements in its variables and determine…

Implied vs Realised Vol – an extensively used term for the options world and one that crucially determines an option’s price…

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Hedging and valuation of the option portfolio also crucially depends on the vol model assumptions…

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Generally structured as buying a lower strike (base case at the money) call and selling a higher strike…

Generally structured as buying a higher strike put and selling a lower strike put for the same expiry and same notionals…

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Risk reversals involve either selling an OTM Put and Buying an OTM call or Buying an OTM Put and Selling an OTM call…

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Are a binary payoff strategy – i.e. payoff is either zero or the notional of the trade – conditional on the underlying’s price trading…

These options officially fall in the realm of structured products as they can be understood as a combination of at least two different options…

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Interest rate Options – are options on interest rates that at it’s very basic construct can be described…

Bonds are frequently structured with optionality in them for either the issuer or investor.

Interest Rate Caps – are a certain type of option on interest rates that cap the exposure to higher rates…

Swaptions – are options on interest rate swaps either with a right (but not an obligation) to enter a received or a paid position…

The series of swap cash flows we have discussed so far are of the nature of an annuity…

The series of swap cash flows we have discussed so far are of the nature of an annuity…

Conditional Spread strategies using rate options now let’s look at option strategies on two different underlying…