(MISC241) -  George Chalamandaris

Περιγραφή Μαθήματος

EDUCATIONAL AIM

 

The course aims to provide an in-depth understanding of the main concepts, issues and practices regarding the field of fixed income. It introduces students to the structure and participants of the fixed income market, while covering various types of bonds, linear derivatives and structured securities. In the process, the main principles and techniques used for managing fixed income portfolios are developed, while presenting their respective advantages / disadvantages. Finally, the close relationship of fixed income to the foreign exchange market is explored.

 

 

EDUCATIONAL OBJECTIVES

 

• Introduce students to the role, taxonomy and mechanics of the fixed income (and foreign exchange) markets.
• Familiarize students with the mains techniques and issues in analyzing, pricing, hedging fixed income portfolios.
• Provide a sound basis for further training in financial engineering applications (e.g. structuring assets or liabilities to meet customized needs).

 

The course will make it possible for participants:

• To acquire a unified perspective regarding the trading and management of fixed income securities and portfolios.
• To determine the appropriate tools for solving complex financing and risk management problems.
• To be able to seek positions in the asset management, research or fixed income analysis and structuring departments of large financial institutions and in various funds pursuing complex trading strategies (private equity/hedge funds).

 

LEARNING OUTCOMES

 

Upon completion, the course participants will

• Understand the main forces behind debt issuance and securitization of various assets.
• Be able to choose the appropriate instruments and methods to solve practical problems of financial engineering from the viewpoint of

• the issuer (financing)
• speculator (building customized risk profiles to meet subjective expectations)
• hedger (neutralizing unwanted risks)
• or arbitrageur (benefiting from apparent deviations from the Law of One Price).

• Be able to understand the risk and implicit bets behind complex trading strategies implemented by sophisticated market participants.
• Be able to contribute to the shaping, implementation and evaluation of a portfolio management strategy.

 

THEMATIC AREAS

 

• Thematic area 1

     Over The Counter Markets and The Role of Banks

     Fixed Income Market Overview

·     Thematic area 2

     Market Quotations

·     Thematic area 3

     Yield and Return Metrics

• Thematic area 4

Arbitrage-free Pricing

• Thematic area 5

Spot Yield Curve Analysis: Structuring Bond Issues

• Thematic area 6

      Interest Rate and Currency Swaps

• Thematic area 7

      Forwards, Repos and Futures

• Thematic area 8

     Case Study: R.J. Reynolds International Financing of a Leveraged Buyout       (HBS)  

• Thematic area 9

     Traditional Measures of Interest Rate Risk

• Thematic area 10

     Advanced Measures of Interest Rate Risk and Applications

 

 

BRIEF DESCRIPTION OF THEMATIC AREAS

 

• Over The Counter Markets and The Role of Banks

Fixed income and foreign exchange (FX) departments: the case of Goldman Sachs. Some debt markets data. Derivatives market growth. Linear derivatives & Options. Global Over the Counter (OTC) derivatives. Global exchange-traded derivatives

 

• Fixed Income Market Overview

Taxonomy of fixed income securities. Primary Markets: Issuance process for government securities and eurobonds. Alternative syndication strategies.

 

• Market Quotations

Dealers and other liquidity providers. Quotations in OTC Money Markets. Quotation of Fixed Income Securities. Spot & Forward FX Quotations

 

• Yield and Return Metrics

Spot Yields, discount factors & value relatives. Bank discount rate. Simple yield, cross-section aggregation. Classic compounded yield and U.S. bond yield quotation. Log yield (continuously compounded yield). Time-series Aggregation. Siegel’s paradox. Total return.

 

•  Arbitrage-free Pricing

Arbitrage in finance. Time-0 arbitrage & FX cross rates. Transaction costs. Forward prices. Spot and forward yields. Forward FX Parity (Covered Interest Parity)

 

• Spot Yield Curve Analysis: Structuring Bond Issues

Spot Yield Curves (SYC). Pricing coupon bonds off the SYC. Yield to Maturity (YTM): The modern interpretation.  Coupon rate, YTM, Par yield. Recovering the SYC from a regularly spaced series of bond or Swap rates. Zero coupon bonds: Origins of a financial innovation. Structuring of a bullet bond given the spot yield curve. Structuring of an amortizing bond given the SYC.

 

•  Interest Rate and Currency Swaps

Swaps: The origin of a financial innovation. Interest Rate Swaps (IRS): a primer. Marking-to-market and counterparty risk for swaps. Asset swaps & amortizing swaps. Pricing interest rate swaps. Currency swaps. Total Return Swaps.

 

•  Forwards, Repos and Futures

Hedging with forwards & basis risk. Forward Rate Agreements (FRAs). Repos and Reverse Repos. Short-selling. FX forwards and swaps. Futures: a primer. The CME $/€ futures. The CME Eurodollar futures. Bond futures.

 

•  Case Study: R.J. Reynolds International Financing of a Leveraged Buyout (HBS)

The developments preceding Nabisco’s acquisition. The setting of the case. Eurodollar bond. Euroyen bond hedged with forwards. Euroyen bond hedged with a currency swap. Dual currency bond hedged with forwards.

 

• Traditional Measures of Interest Rate Risk

Macaulay’s Duration.. Duration Metrics for Zero Coupon Bonds. Convexity of a Zero. Duration of Coupon Bonds. More on the Duration of Bullet Bonds.

 

• Advanced Measures of Interest Rate Risk and Applications

Duration of LIBOR-flat Floating Rate Notes. Duration of plain vanilla Interest Rate Swaps. Duration of Inverse Floaters. Effective duration (Fisher-Weil Duration). Naïve duration hedging. The Orange County Case.

 

 

READING ΜΑTERIAL

• Lecture Slides.
• Fabozzi F. (2007), 'Fixed Income Analysis', CFA Institute, 2nd edition.
• Tuckman Η. (2002). 'Fixed Income Securities', Wiley.
• Questa G. (2004), 'Fixed-Income Analysis for the Global Financial Market: Money Market, Foreign Exchange, Securities, and Derivatives', Wiley.

 

 

In addition to the above, it is recommended to read:

• The finance related journals, such as: Journal of Finance, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Journal of Financial Economics, Financial Analysts Journal, Journal of Fixed Income, Journal of Portfolio Management, Journal of Investment Management, Financial Management, Journal of Futures Markets, Journal of Derivatives, etc.
• Financial periodicals/papers, which include: Financial Times, Economist, Wall Street Journal, Nautemporiki.

 

Useful Databases for data collection:

Reuters, Bloomberg, Datastream, Web pages of Companies and Stock Exchanges.

 

 

Other references - publications in the area which may be used during lectures

• Andersen, L., Andreasen, J. (2000), “Volatility Skews and Extensions of the LIBOR Market Model,” Applied Mathematical Finance 7(1), 1–32.
• Aıt-Sahalia,Y. (1996), “Testing Continuous-Time Models of the Spot Interest Rate,” Review of Financial Studies 9(2), 385–426.
• Black, F., Derman, E., Toy, W. (1990), “A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options,” Financial Analysts Journal 46(1), 33–39.
• Brace, A., Gatarek, D., Musiela, M. (1997), “ The market model of interest rate dynamics,”Mathematical Finance 7, 127–154.
• Demeterfi, K., Derman, E., Kamal, M., Zou, J. (1999), “A Guide to Volatility and Variance Swaps,” Journal of Derivatives 6(4), 9–32.
• Derman, E., Kani, I. (1994), “The Volatility Smile and Its Implied Tree,” Quantitative Strategies Research Notes, Goldman Sachs.
• Derman, E., Kani, I., Chriss, N. (1996), “Implied Trinomial Trees of the Volatility Smile”, Quantitative Strategies Research Notes, Goldman Sachs.
• Glasserman, P., Zhao, X. (2000), “Arbitrage-free discretization of lognormal forward Libor and swap rate model,” Finance and Stochastics 4, 35–68.
• Jamshidian, F. (1997), “LIBOR and Swap Market Models and Measures,” Finance and Stochastics 1, 293–330.
• Johnson, S., Lee, H. (2003), “Capturing the smile,” Risk March, 89–93.
• Merton, R. C. (1974), “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates”, Journal of Finance 29(3), 449–470.
• Merton, R. C. (1976), “Option Pricing when the Underlying Stock Returns are Discontinuous,”Journal of Financial Economics 3(1), 125–144.
• Miltersen, K. R., Sandmann, K., Sondermann, D. (1997), “Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates,” Journal of Finance 52(1),409–430.
• Pedersen, M. (1999), Bermudan Swaptions in the LIBOR Market Model, Manuscript.[52] Pedersen, (2000)
• Vasicek, O. (1977), “An Equilibrium Characterisation of the Term Structure,” Journal of Financial Economics 5, 177–188.

Ημερομηνία δημιουργίας

Πέμπτη, 16 Φεβρουαρίου 2017