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