aci book dip
TRANSCRIPT
11
Contents
Chapter 1
Concluding and settling transactions 19
1.1 Concluding transactions 19
1.1.1 Exchange 20
1.1.2 Multilateral trading facility 20
1.1.3 The OTC market 20
1.1.4 Systematic internalization 22
1.2 Settling transactions 23
1.2.1 Money accounts and securities accounts 23
1.2.2 Sending settlement instructions 24
Chapter 2
Interest calculations and yield curves 27
2.1 Calculation of interest amounts 27
2.1.1 The duration of the coupon period 28
2.1.2 Daycount conventions 30
2.2 Interest rates for broken periods 34
2.3 Converting interest rates for different daycount conventions 35
2.4 Converting interest rates for different coupon frequencies 37
2.5 Present value and future value 38
2.5.1 Future value with single interest 38
2.5.2 Present value with single interest 39
2.5.3 Present value and future value with interim coupon payments and
annual coupon 40
2.5.4 Present value and future value with interim coupon payments and
n coupons per year 41
2.6 Yield and pure discount rate 43
2.6.1 Yield 43
2.6.2 Pure discount rate 43
2.6.3 Equations for converting the yield to pure discount rate and vice
versa 44
2.7 Yield curves 45
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2.8 Forward rates 46
2.8.1 Forward rates for forward periods of less than one year 47
2.8.2 Forward rates for forward periods longer than one year 51
2.8.3 Strip forwards 53
2.8.4 Forward curve 56
Chapter 3
The money market 59
3.1 Domestic and Euro money markets 59
3.2 Deposit 60
3.3 Money market paper 61
3.3.1 Commercial paper 61
3.3.2 Treasury Bills and bank bills 63
3.3.3 Certificate of deposit 63
3.4 Repurchase agreements 65
3.4.1 Initial and maturity consideration 66
3.4.2 General and special collateral 69
3.4.3 Transfer of collateral 69
3.4.4 Sell/buy back 70
3.5 Trading on the money market 71
3.6 Money market benchmarks 74
Chapter 4
The Foreign Exchange Market 77
4.1 FX spot rates 77
4.1.1 Exchange rates 77
4.1.2 Bid rate, ask rate and two way prices 79
4.1.3 Big figure and points/pips 80
4.1.4 Cross rates 81
4.1.5 Spot trading positions 83
4.2 FX forward 84
4.2.1 Theoretical calculation of an FX forward rate 85
4.2.1 Swap points, premium and discount 86
4.2.2 Forward value dates and corresponding FX forward rates 89
4.2.3 FX forward cross rates 92
4.2.4 Value tomorrow and value today FX rates 94
4.2.5 Time option forward contracts 97
4.2.6 Offsetting FX forwards 98
4.2.7 Theoretical hedge of an FX forward via FX spot and deposits 100
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4.3 FX swaps 100
4.3.1 FX swaps out of today / out of tomorrow 103
4.3.2 Overnight swaps and tom/next swaps 104
4.3.3 Hedging an FX forward via an FX spot and FX swap 105
4.3.4 Regulating cash positions using FX swaps 106
4.3.5 Rolling over FX forward contracts using FX swaps 107
4.3.6 Arbitrage between the FX swap market and the money
markets 108
4.3.7 Rolling over trading FX positions using tom/next swaps 112
4.3.8 Forward forward FX swap 113
4.3.9 Trading FX Swaps 114
4.3.10 Result and valuation of a position in FX swaps 116
4.4 Non-deliverable forward 118
Chapter 5
Fixed Income, Zero coupon rates and Duration 119
5.1 Domestic, foreign & euro capital markets 119
5.2 Issuing of fixed income securities 120
5.2.1 Pricing of fixed income securities 120
5.2.2 Exchange listed fixed income securities 121
5.2.3 Private placement (over-the-counter) 122
5.3 The yield of a fixed-income security 123
5.3.1 The general interest rate level on the capital market 123
5.3.2 The quality of the issuing entity 124
5.3.3 The liquidity of the bond 125
5.4 Special types of fixed-income securities 126
5.5 The price of a bond 129
5.6 Zero coupon rates 132
5.7 Relationship between bond price and yield, modified duration 136
5.7.1 Calculation of the modified duration 137
5.7.2 Factors that determine the level of the modified duration 139
5.7.3 Convexity 139
5.7.4 Adding and subtracting the modified duration of different
portfolios 140
5.7.5 Basis point value BPV 142
5.7.6 Modified duration of FRNs 144
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Chapter 6
Futures 147
6.1 Role of a futures exchange and of a clearing house 147
6.1.1 Order types 149
6.1.2 Role of central counterparty 149
6.1.3 Margins 150
6.2 STIR futures 150
6.2.1 Prices of STIR futures and implied forward rates 152
6.2.2 Fixing of the STIR futures settlement price on the expiry date 154
6.2.3 Basis 154
6.2.4 Daily result calculation and margin calculation 155
6.2.5 Hedging imperfections 156
6.2.6 Spread trading 159
6.2.7 Use of STIR futures by companies 162
6.3 Bond Futures 163
6.3.1 Delivery obligation / Cheapest to deliver 164
6.3.2 Buying the basis / cash and carry arbitrage 165
6.4 Swapnotes 167
Chapter 7
Forward Rate Agreements 169
7.1 Contract data 169
7.2 The pricing of FRAs 171
7.3 Settlement of FRAs 173
7.4 Use of FRAs by traders; trading and arbitrage 174
7.4.1 Straight forward trading in FRAs 174
7.4.2 Arbitraging between FRAs and STIR futures 176
7.4.3 Closing forward cash positions with FRAs 177
7.4.4 Arbitraging using FRAs and FX swaps 178
7.5 Use of FRAs by clients of the bank 181
7.6 Valuation of FRAs 183
Chapter 8
Interest rate swaps 185
8.1 Contract specifications and jargon 185
8.2 Settlement of an IRS 188
8.3 Overnight index swaps 189
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8.4 Trading interest rate swaps 191
8.4.1 Trading interest rate swaps 191
8.4.2 Arbitrage between IRS and FRAs or STIR futures 194
8.5 Applications of interest rate swaps for clients of the bank 196
8.5.1 Fixing the interest on loans with a floating rate 196
8.5.2 Fixing the floating rate of an investment / asset swap 197
8.5.3 Changing interest terms 199
8.5.4 Synchronising the interest conditions of an IRS 201
8.5.5 Forward starting interest rate swaps 202
8.6 Special types of interest rate swaps 203
8.7 The valuation of interest rate swaps 204
8.7.1 Modified duration of interest rate swaps 209
8.7.2 Convexity with interest rate swaps 210
8.7.3 The basis point value of interest rate swaps 212
Chapter 9
Cross currency swaps and other swaps 213
9.1 Basis swaps 213
9.2 Cross-currency swaps 214
9.2.1 Hedging and pricing a cross currency swap 215
9.2.2 Covered interest arbitrage using cross currency swaps 216
9.2.3 Valuation of a cross currency swap 219
9.3 Contracts for difference 221
9.4 Inflation swaps 222
Chapter 10
Options 225
10.1 Option terminology 225
10.2 The option premium 228
10.2.1 Intrinsic value 228
10.2.2 Expectations value 230
10.2.3 Call put parity 234
10.2.4 Calculation of forward prices with the use of option
premiums 235
10.2.5 Delta, gamma, theta, rho and vega: the ‘Greeks’ 236
10.2.6 The Black-Scholes model (synthetic option positions) 242
10.3 Delta position and delta hedging 246
10.4 Interest rate options 249
10.4.1 Interest Rate Guarantees / Caps and Floors 249
10.4.2 Swaption 254
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Chapter 11
Zero cost option strategies 257
11.1 Synthetic FX forward 257
11.2 Risk reversal 258
11.3 Participating FX forward 260
11.4 Conditional FX forward / FX forward extra 262
11.5 Interest collar 263
11.6 Participating cap 267
11.7 Trigger Swap 268
Chapter 12
Option trading strategies 271
12.1 Bull and bear spread 271
12.2 Straddle 273
12.3 Strangle 276
12.4 Butterfly 278
12.5 Condor 281
12.6 Ratio spreads 283
12.7 Calendar spread 286
Chapter 13
Fundamental analysis 287
13.1 Economic growth 287
13.1.1 The economic cycle 288
13.1.2 Figures that provide a picture of the economic growth 288
13.1.3 The impact of economic growth on the financial markets 290
13.2 Inflation 290
13.2.1 The impact of inflation and deflation on the economy 291
13.2.3 The impact of inflation on the financial markets 291
13.3 The balance of payments 292
13.4 The role of international organizations 293
13.5 Free market operations and interventions 297
13.5.1 Intervention in the money market / monetary policy 297
13.5.2 Interventions in the currency market 300
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Chapter 14
Technical analysis 303
14.1 Types of charts 303
14.1.1 Bar chart 303
14.1.2 Candlestick 305
14.1.3 Point and figure chart 305
14.1.4 Line chart 306
14.2 Support and resistance 307
14.3 Trends and trading ranges 309
14.3.1 Dow Theory 310
14.3.2 Trend supporting indicator: moving average 311
14.3.3 Trading range 312
14.4 Changing markets / trend reversals 313
14.4.1 Wedge 313
14.4.2 Head-shoulder formation 314
14.4.3 Momentum indicators 316
14.5 Determination of new support and resistance points after a trend break 318
14.5.1 Gann Analysis 318
14.5. 2 Fibonacci numbers 319
14.6 Waves 322
Chapter 15
Market Risk 325
15.1 Determining the size of the market risk 325
15.1.1 Historical VaR 326
15.1.2 Parametric method 327
15.1.3 Full valuation method and Monte Carlo simulations 331
15.2 Stress tests 333
15.3 Back tests 334
15.4 Trading limits 334
Chapter 16
Credit Risk 337
16.1 Types of credit risk 337
16.1.1 Debtor risk 337
16.1.2 Pre-settlement risk (replacement risk) 338
16.1.3 Settlement risk (delivery risk) 340
16.2 Factors that determine the size of the credit risk 341
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16.3 Counterparty Limits 342
16.4 Contractual netting / close-out netting 343
16.5 Collateral 343
16.6 Measures to reduce settlement risk / CLS Bank 345
Chapter 17
Risk Capital 349
17.1 Basel I 349
17.2 Basel II 350
17.2.1 Approach of the size of the credit risk under Basel II 351
17.2.2 Approach of the size of the market risk under Basel II 353
17.3 Basel III 353
17.3.1 General changes in equity requirements 353
17.3.2 Introduction of a leverage ratio 354
17.3.3 Changes in capital requirements for trading activities 354
17.3.4 Introduction of minimum global liquidity standards 355
17.4 Economic capital, RAROC, Sharpe ratio 355
Chapter 18
External reporting 357
18.1 Purpose, relevant standards and definitions IFRS 357
18.2 IAS 21 359
18.3 IAS 39 360
18.3.1 Recognition and de-recognition 360
18.3.2 Valuation 360
18.3.3 Originated loans and receivables 362
18.3.4 Assets held to maturity 362
18.3.5 Financial assets/liabilities at fair value through profit and
loss 363
18.3.6 Available for sale 363
18.3.7 Derivatives 364
18.3.8 Financial liabilities 364
18.3.9 Impairment 364
18.3.10 Hedge accounting 365
18.4 IFRS 7 368
18.5 New developments as of February 2011 369