David breaks down the valuation of an interest rate swap into three steps: 1. The assumptions, which includes understanding the TIMELINE; e.g., we are valuing the stop at some point after origination and it has some remaining life (in this case 15 months); 2. Extracting the implied semi-annual...
AAACorp has a comparative advantage in fixed-rate markets, but BBBCorp has a comparative advantage in floating-rate markets (even as it pays more everwhere!). The difference in spreads (in this case, the difference is 0.50% = 1.20% - 0.70%) is the gross total advantage that can be conferred...
Learning objectives: Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure. Identify typical credit exposure profiles for various derivative contracts and combination profiles.
Questions:
910.1. Consider credit exposure...
Learning objective: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
Questions:
717.1. A portfolio manager evaluates the risk of the following two-bond portfolio:
We assume that specific risk is negligible and that the volatility of...
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