Fixed Income Derivatives Immunization Strategies MGT 4850 Spring 2009 University of Lethbridge.

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Presentation transcript:

Fixed Income Derivatives Immunization Strategies MGT 4850 Spring 2009 University of Lethbridge

Duration Calculations

Outline of the class Duration summary Meaning of duration other math insights

Duration ( summary of previous class) Measure of the sensitivity of the price of a bond to changes in the interest rate at which Cash Flows are discounted Calculation Bank Immunization Bullet Immunization

Convexity

Meaning of Duration Weighted average of the bond’s payments maturities Bond’s price elasticity with respect to its discount rate Discount factor elasticity Price volatility

Bond Price elasticity in Excel

Babcock’s Formula Weighted average of “current yield” and PVIF

Duration Patterns Maturity

Duration Patterns Coupon

Interest Rate Term Structure

Treasury Futures contracts Trading the yield curve NOB spreads Trading spreads TED spreads Discount yield vs. bond equivalent yield

Eurodollar Futures and swaps Plain Vanila Swap Foreign Currency swap Circus swap Calibration of models – arbitrage free pricing models

Credit Risk Credit derivatives –Credit default options –Credit linked notes –Total return swaps

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