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An up-to-date look at the evolution of interest rate swaps and
derivatives
Interest Rate Swaps and Derivatives bridges the gap
between the theory of these instruments and their actual use in
day-to-day life. This comprehensive guide covers the main "rates"
products, including swaps, options (cap/floors, swaptions), CMS
products, and Bermudan callables. It also covers the main valuation
techniques for the exotics/structured-notes area, which remains one
of the most challenging parts of the market.
Provides a balance of relevant theory and real-world trading
instruments for rate swaps and swap derivatives
Uses simple settings and illustrations to reveal key
results
Written by an experienced trader who has worked with swaps,
options, and exotics
With this book, author Amir Sadr shares his valuable insights
with practitioners in the field of interest rate derivatives-from
traders and marketers to those in operations.
Autorentext
AMIR SADR, PHD, has experience as a quant, trader, financial software developer, and academic in fixed income markets. He traded options and exotics at HSBC in New York from 2005 to 2006 and traded at the proprietary desk for Greenwich Capital Markets (GCM) for four years prior to that. Sadr also has experience at Morgan Stanley as a vice president in the derivatives products group where he traded interest rate derivatives and exotics. Since 1996, Sadr has served as an adjunct professor at New York University in the Department of Finance and Accounting.
Klappentext
INTEREST RATE SWAPS AND THEIR DERIVATIVES Interest rate swaps and their derivatives have become an integral part of the fixed income market, but many of the pricing and risk management issues for these now mainstream products can only be learned on a trading floor. While there are many books on fixed income and interest rate derivatives, they generally suffer from being either too elementary and bond-centric, mentioning swaps in passing, or too technical and focused on exotics and the myriad implementation issues and algorithms used to tackle them. Rather than focusing on exotics, Interest Rate Swaps and Their Derivatives thoroughly covers the mainstream products—swaps, flow options, Bermudans, semi-exotics—showing the common pricing techniques while also explaining how to generalize the concepts to more nuanced products. Author Amir Sadr, experienced as a quant, trader, financial software developer, and academic in the fixed income field, begins by presenting plain-vanilla swaps as an extension of fixed rate bonds—revealing how techniques for pricing these instruments are a generalization of similar methods used for pricing bonds and repos, and for the most part involve the concepts of financing cost, discount factors, and projection of forward curves. He then moves on to cover the options markets for flow products, including options on futures, caps and floors, and European swaptions—with detailed attention to the actual trading practice of these products. Sadr explains how, as with any option product, the pricing and risk management of these requires dealing with volatility as the main risk factor—and he shows that one does not need to have a PhD in math to understand options. Sadr presents risk-neutral valuation as the fundamental pricing paradigm for derivatives, and illustrates the core idea of dynamic replication in a simple binomial setting. This unified framework is used to derive industry-standard Black formula for flow products, and is developed into short-rate and full term-structure models for more complex interest rate exotics including Bermudans. For current or aspiring practitioners in interest rate products, Interest Rate Swaps and Their Derivatives provides a sound working knowledge and appreciation of the main features of these products and their pricing and risk management issues.
Zusammenfassung
An up-to-date look at the evolution of interest rate swaps and derivatives
Interest Rate Swaps and Derivatives bridges the gap between the theory of these instruments and their actual use in day-to-day life. This comprehensive guide covers the main "rates" products, including swaps, options (cap/floors, swaptions), CMS products, and Bermudan callables. It also covers the main valuation techniques for the exotics/structured-notes area, which remains one of the most challenging parts of the market.
Inhalt
Preface ix
Rates Market ix
Background ix
Book Structure xi
Acknowledgments xvii
About the Author xix
List of Symbols and Abbreviations xxi
Part One Cash, Repo, and Swap Markets 1
Chapter 1 Bonds: It's All About Discounting 3
Time Value of Money: Future Value, Present Value 3
Price-Yield Formula 5
PV01, PVBP, Convexity 11
Repo, Reverse Repo 16
Forward Price/Yield, Carry, Roll-Down 19
Chapter 2 Swaps: It's Still About Discounting 25
Discount Factor Curve, Zero Curve 26
Forward Rate Curve 27
Par-Swap Curve 31
Construction of the Swap/Libor Curve 34
Chapter 3 Interest Rate Swaps in Practice 43
Market Instruments 43
Swap TradingRates or Spreads 48
Swap Spreads 51
Risk, PV01, Gamma Ladder 56
Calendar Rules, Date Minutiae 59
Chapter 4 Separating Forward Curve from Discount Curve 67
Forward Curves for Assets 67
Implied Forward Rates 69
Float/Float Swaps 70
Libor/Libor Basis Swaps 73
Overnight Indexed Swaps (OIS) 75
Part Two Interest-Rate Flow Options 77
Chapter 5 Derivatives Pricing: Risk-Neutral Valuation 79
European-Style Contingent Claims 80
One-Step Binomial Model 80
From One Time-Step to Two 84
From Two Time-Steps to 90
Relative Prices 91
Risk-Neutral Valuation: All Relative Prices Must be Martingales 92
Interest-Rate Options Are Inherently Difficult to Value 93
From Binomial Model to Equivalent Martingale Measures 94
Chapter 6 Black's World 97
A Little Bit of Randomness 97
Modeling Asset Changes 103
Black-Scholes-Merton/Black Formulae 104
Greeks 112
Digitals 116
Call Is All You Need 117
Calendar/Business Days, Event Vols 120
Chapter 7 European-Style Interest-Rate Derivatives 123
Market Practice 124
Interest-Rate Option Trades 124
Caplets/Floorlets: Options on Forward Rates 125
European-Style Swaptions 129
Skews, Smiles 137
CMS Products 140
Bond Options 147
Part Three Interest-Rate Exotics 149
Chapter 8 Short-Rate Models 151
A Quick Tour 152
Dynamics to Implementation 153
Lattice/Tree Implementation 154
BDT Lattice Model 156
Hull-White, Black-Karasinski Models 168
Simulation Implementation 169
Chapter 9 Bermudan-Style Options 175
Bellman's EquationBackward Induction 176
Bermudan Swaptions 177
Bermudan Cancelable Swaps, Callable/Puttable Bonds 180
Bermudan-Style Options in Simulation Implementation 183
Chapter 10 Full Term-Structure Interest-Rate Models 185
Shifting Focus from Short Rate to Full Curve: Ho-Lee Model 186
Heath-Jarrow-Morton (HJM) Full Term-Structure Framework 186
Discrete-Time, Discrete-Tenor HJM Framework 188
Forward-Forward Volatility 191
Multifactor Models 197
HJM Framework Typically Leads to Nonrecombining Trees 199
Chapter 11 Forward-Measure Lens 201
Numeraires Are Arbitrary 201
Forward Measures 206
BGM/Jamshidian Results 208
Different Measures for Diffe…