Interest Rate Markets: A Practical Approach to Fixed Income

Overview

With trades worth trillions of dollars annually, the U.S.interest rate markets are some of the largest and most importantmarkets in the world. These markets attract a wide variety ofparticipants, from individuals and corporations to governments, andoffer numerous financial instruments that include bonds, swaps,futures, and options. Each of these instruments requires carefulunderstanding of unique risks.

Growing out of the author's experience as a fixed incomestrategist, Interest...

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Interest Rate Markets: A Practical Approach to Fixed Income

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Overview

With trades worth trillions of dollars annually, the U.S.interest rate markets are some of the largest and most importantmarkets in the world. These markets attract a wide variety ofparticipants, from individuals and corporations to governments, andoffer numerous financial instruments that include bonds, swaps,futures, and options. Each of these instruments requires carefulunderstanding of unique risks.

Growing out of the author's experience as a fixed incomestrategist, Interest Rate Markets equips the reader with theknowledge and tools needed to rationally assess those risks forinformed investment decisions. Toward this end, the book discussesthe structural drivers and the main players of fixed incomemarkets; explains how to understand and forecast the yield curveand spreads; and elaborates on the trades in cash and derivativeproducts. To develop a complete picture of fixed income space, itanalyzes rate options and volatility trading.

A detailed primer, Interest Rate Markets starts from the firstprinciples to acquaint newcomers with interest rate products,mathematical tools, and intuitive understanding of market concepts.It then expands upon these basics and provides an in-depthunderstanding of the drivers of rates markets and interest ratevolatility. The experienced professional will find this book anindispensable resource on trading, hedging, and market indicators.Seasoned professionals and novices alike will also find value onthe companion website, including example sets, commonly usedcalculations, and trade construction methods.

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Product Details

  • ISBN-13: 9780470932209
  • Publisher: Wiley
  • Publication date: 4/5/2011
  • Series: Wiley Trading Series, #501
  • Edition number: 1
  • Pages: 368
  • Product dimensions: 6.10 (w) x 9.10 (h) x 1.50 (d)

Meet the Author

Siddhartha Jha is a Senior Analyst with Arrowhawk CapitalPartners. Previously, as part of J. P. Morgan's Fixed IncomeStrategy Team, he covered a wide range of rates markets—frommunicipals to liquid products including Treasuries, swaps, futures,and options—analyzing macroeconomic trends as well asshort-term technical factors. He spent five years there developingtrade ideas, building quantitative models, and discussing markettrends with institutional investors. He graduated cum laude with adual bachelor's and master's in applied mathematics and statisticsfrom Harvard University.

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Table of Contents

Acknowledgments.

Introduction.

Chapter 1: Tools of the Trade.

Basic Statistics.

Regression–The Fundamentals.

Regression – How Good a Fit?

Principal Components Analysis.

Scaling Through Time.

Backtesting Strategies.

Summary.

Chapter 2: Introduction to Bonds.

Basics of Bonds.

Risks Embedded in Fixed Income Instruments.

Discounting.

Bond Pricing.

Yield Curve.

Duration.

Convexity.

Repo Markets.

Bid Offer.

Calculating Profit/Loss (P/L) of a Bond.

Carry and Forward Rates.

Forward Rates.

Rolldown/Slide.

Curves and Spreads.

Butterflies and Condors.

Summary.

Chapter 3: Overview of Fixed Income Markets.

Federal Reserve.

Treasuries.

STRIPS.

TIPS.

Mortgages.

Agency Debt.

Corporate Bonds.

Municipal Bonds.

Summary.

Chapter 4: Introduction to Futures Markets.

Basics of Futures Transactions.

Eurodollar Futures.

Convexity Bias (or Financing Bias).

Creating Longer Dated Assets Using Eurodollar Futures.

Treasury Futures.

Fed Funds Futures.

Futures Positioning Data.

Summary.

Chapter 5: Introduction to Swaps.

Duration and Convexity.

Uses of Swaps.

Other Types of Swaps.

Summary.

Chapter 6: Understanding Drivers of Interest Rates.

Supply and Demand for Borrowing.

Flight to Quality.

Components of Fixed Income Supply and Demand.

Treasury Supply.

Other Sources of Fixed Income Supply.

Fixed Income Demand.

Foreigner Holdings.

Households.

Federal Reserve.

Mutual Funds.

Banks.

Pension Funds.

Short Term Yield Drivers.

Summary.

Chapter 7: Carry and Relative Value Trades.

Carry Trades.

Carry Trade Set up and Evaluation.

Pitfalls of the Carry Trade.

Carry Efficient Directional Trades.

Relative Value Trades.

Setting Up Relative Value Trades.

Treasury Bond Relative Value—Par Curve.

Other Treasury Relative Value Trades.

Summary.

Chapter 8: Hedging Risks in Interest Rate Products.

Principles of Hedging.

Choices of Instruments for Hedging.

Calculating Hedge Ratios.

Yield Betas.

Convexity Hedging.

Summary.

Chapter 9: Trading Swap Spreads.

How Swap Spreads Work.

Why Trade Swap Spreads?

Directionality of Swap Spreads to Yields.

Futures Asset Swaps.

Spread Curve Trades.

Summary.

Chapter 10: Interest Rate Options and TradingVolatility.

Option Pricing and Fundamentals.

Modifications for the Interest Rate Markets.

Quoting Volatility.

Measuring Risks in Option Positions.

Put call parity.

Implied and Realized Volatility.

Skew.

Delta Hedging.

Interest Rate Options.

Embedded Options and Hedging.

More Exotic Structures.

Yield Curve Spread Options (YCSOs).

Forward Volatility.

Volatility Trading.

Interest Rate Skew.

Volatility Spread Trades.

Caps versus Swaptions.

Summary.

Chapter 11: Treasury futures basis and rolls.

The Bond Basis.

Calculating the Delivery Option Value.

Option Adjusted and Empirical Duration.

Treasury Futures Rolls.

Summary.

Chapter 12: Conditional Trades.

Conditional Curve Trades.

Conditional Spread Trades.

Summary.

References.

About the Author.

About the Website.

Index.

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