Interest Rate Risk Modeling: The Fixed Income Valuation Course / Edition 1by Gloria M. Soto, Natalia K. Beliaeva, Sanjay K. Nawalkha
Pub. Date: 04/22/2005
The importance of managing interest rate risk cannot be overstated. The explosive growth of interest rate swaps over the last quarter century is a telling sign that financial institutions and other market participants are concerned about the risk interest rates pose. Yet there is no easy way to address this issue. This bookthe first of three in the Fixed… See more details below
The importance of managing interest rate risk cannot be overstated. The explosive growth of interest rate swaps over the last quarter century is a telling sign that financial institutions and other market participants are concerned about the risk interest rates pose. Yet there is no easy way to address this issue. This bookthe first of three in the Fixed Income Valuation Courseseeks to improve the current information available on interest rate risk, and upgrade your understanding of how to measure and manage it.
Written by fixed income specialists Sanjay Nawalkha, Gloria Soto, and Natalia Beliaeva, Interest Rate Risk Modeling offers a detailed introduction to the various modeling techniques used by today's fixed income professionals. Whether you're measuring the non-parallel durations of a naked call option, adjusting the notional amounts in swaps and caps using the LIBOR market model, or computing the durations of default-prone bonds using the cutting-edge first-passage probability models, this book has what you need to succeed in a volatile interest rate environment. It examines the latest innovations in the area of interest rate risk management and provides a detailed look at the most widely used models in this field, including duration, convexity, M-absolute, M-square, duration vector, key rate durations, principal component durations, and others.
Interest Rate Risk Modeling also illustrates the applications of these models to regular bonds, callable bonds, T-Bill futures, T-Bond futures, Eurodollar futures, interest rate swaps, forward rate agreements, bond options, yield options (caps, floors, and collars), swaptions, mortgage-backed securities, and default-prone coupon bonds.
Accompanying the authors' in-depth insights and practical advice found within these pages is an information-packed CD-ROM that can show a term structure "movie" or estimate yield curves in seconds, in addition to solving the advanced risk management models. This electronic companion contains Excel®/VBA® spreadsheets for hands-on analysis, using various models presented in the book. Through a user-friendly format, these spreadsheets compute non-parallel interest rate risk measures for a variety of interest rate derivatives, and can implement passive portfolio strategies, such as immunization and index replication, or speculative strategies based upon expected yield curve movements.
Whether you are a manager of a pension bond fund, a manager of GICs at an insurance company, an analyst at a speculative hedge fund, or a VP at a commercial bank, if you want to excel at measuring and managing interest rate risk, you have to understand how to model it. Interest Rate Risk Modeling can show you how.
For more information on the three books in this course, including demo software and special features, please visit www.fixedincomerisk.com.
Table of Contents
List of Figures.
List of Tables.
Chapter 1: Interest Rate Risk Modeling: An Overview.
Duration and Convexity Models.
M-Absolute and M-Square Models.
Duration Vector Models.
Key Rate Duration Models.
Principal Component Duration Models.
Applications to Financial Institutions.
Interaction with Other Risks.
Chapter 2: Bond Price, Duration, and Convexity.
Bond Price under Continuous Compounding.
Common Fallacies Concerning Duration and Convexity.
Formulas for Duration and Convexity.
Appendix 2.1: Other Fallacies Concerning Duration and Convexity.
Chapter 3: Estimation of the Term Structure of Interest Rates.
Bond Prices, Spot Rates, and Forward Rates.
Term Structure Estimation: The Basic Methods.
Advance Methods in Term Structure Estimation.
Chapter 4: M-Absolute and M-Square Risk Measures.
Measuring Term Structure Shifts.
M-Absolute versus Duration.
M-Square versus Convexity.
Closed-Form Solutions for M-Square and M-Absolute.
Appendix 4.1: Derivation of the M-Absolute and M-Square Models.
Appendix 4.2: Two-Term Taylor-Series-Expansion Approach to the M-Square Model.
Chapter 5: Duration Vector Models.
The Duration Vector Model.
Generalized Duration Vector Models.
Appendix 5.1: Derivation of the Generalized Duration Vector Models.
Chapter 6: Hedging with Interest-Rate Futures.
Treasury Bill Futures.
Treasury Bond Futures.
Treasury Note Futures.
Appendix 6.1: The Duration Vector of the Eurodollar Futures.
Appendix 6.2: The Duration Vector of the T-Bond Futures.
Chapter 7: Hedging with Bond Options: A General Gaussian Framework.
A General Gaussian Framework for Pricing Zero-Coupon Bond Options.
The Duration Vectors of Bond Options.
The Duration Vector of Callable Bonds.
Estimation of Duration Vectors Using Non-Gaussian Term Structure Models.
The Durations of European Options on Coupon Bonds and Callable Coupon Bonds.
Chapter 8: Hedging with Swaps and Interest Rate Options Using the LIBOR Market Model.
A Simple Introduction to Interest Rate Swaps.
Motivations for Interest Rate Swaps.
Pricing and Hedging with Interest Rate Swaps.
Forward Rate Agreements.
Pricing and Hedging with Caps, Floors, and Collars Using the LIBOR Market Model.
Interest Rate Swaptions.
Chapter 9: Key Rate Durations with VaR Analysis.
Key Rate Changes.
Key Rate Durations and Convexities.
Risk Measurement and Management.
Key Rate Durations and Value at Risk Analysis.
Limitations of the Key Rate Model.
Appendix 9.1: Computing Key Rate Risk Measures for Complex Securities and under Maturity Mismatches.
Chapter 10: Principal Component Model with VaR Analysis.
From Term Structure Movements to Principal Components.
Principal Component Durations and Convexities.
Risk Measurement and Management with the Principal Component Model.
VaR Analysis Using the Principal Component Model.
Limitations of the Principal Component Model.
Applications to Mortgage Securities.
Appendix 10.1: Eigenvectors, Eigenvalues, and Principal Components.
Appendix 10.2: Computing Principal Component Risk Measures for Complex Securities and under Maturity Mismatches.
Chapter 11: Duration Models for Default-Prone Securities.
Pricing and Duration of a Default-Free Zero-Coupon Bond under the Vasicek Model.
The Asset Duration.
Pricing and Duration of a Default-Prone Zero-Coupon Bond: The Merton Framework.
Pricing and Duration of a Default-Prone Coupon Bond: The First Passage Models.
Appendix 11.1: Collin-Dufresne and Goldstein Model.
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