Interest Rate Swaps and Their Derivatives: A Practitioner's Guide
An up-to-date look at the evolution of interest rate swaps and derivatives
Interest Rate Swaps and Derivatives bridges the gap between the theory of these instruments and their actual use in day-to-day life. This comprehensive guide covers the main "rates" products, including swaps, options (cap/floors, swaptions), CMS products, and Bermudan callables. It also covers the main valuation techniques for the exotics/structured-notes area, which remains one of the most challenging parts of the market.
- Provides a balance of relevant theory and real-world trading instruments for rate swaps and swap derivatives
- Uses simple settings and illustrations to reveal key results
- Written by an experienced trader who has worked with swaps, options, and exotics
With this book, author Amir Sadr shares his valuable insights with practitioners in the field of interest rate derivatives-from traders and marketers to those in operations.
About the Author.
List of Symbols and Abbreviations.
PART ONE Cash, Repo, and Swap Markets.
CHAPTER 1 Bonds: It's All About Discounting.
Time Value of Money: Future Value, Present Value.
PV01, PVBP, Convexity.
Repo, Reverse Repo.
Forward Price/Yield, Carry, Roll-Down.
CHAPTER 2 Swaps: It's Still About Discounting.
Discount Factor Curve, Zero Curve.
Forward Rate Curve.
Construction of the Swap/Libor Curve.
CHAPTER 3 Interest Rate Swaps in Practice.
Swap Trading—Rates or Spreads.
Risk, PV01, Gamma Ladder.
Calendar Rules, Date Minutiae.
CHAPTER 4 Separating Forward Curve from Discount Curve.
Forward Curves for Assets.
Implied Forward Rates.
Libor/Libor Basis Swaps.
Overnight Indexed Swaps (OIS).
PART TWO Interest-Rate Flow Options.
CHAPTER 5 Derivatives Pricing: Risk-Neutral Valuation.
European-Style Contingent Claims.
One-Step Binomial Model.
From One Time-Step to Two.
From Two Time-Steps to . . .
Risk-Neutral Valuation: All Relative Prices Must be Martingales.
Interest-Rate Options Are Inherently Difficult to Value.
From Binomial Model to Equivalent Martingale Measures.
CHAPTER 6 Black's World.
A Little Bit of Randomness.
Modeling Asset Changes.
Call Is All You Need.
Calendar/Business Days, Event Vols.
CHAPTER 7 European-Style Interest-Rate Derivatives.
Interest-Rate Option Trades.
Caplets/Floorlets: Options on Forward Rates.
PART THREE Interest-Rate Exotics.
CHAPTER 8 Short-Rate Models.
A Quick Tour.
Dynamics to Implementation.
BDT Lattice Model.
Hull-White, Black-Karasinski Models.
CHAPTER 9 Bermudan-Style Options.
Bellman's Equation—Backward Induction.
Bermudan Cancelable Swaps, Callable/Puttable Bonds.
Bermudan-Style Options in Simulation Implementation.
CHAPTER 10 Full Term-Structure Interest-Rate Models.
Shifting Focus from Short Rate to Full Curve: Ho-Lee Model.
Heath-Jarrow-Morton (HJM) Full Term-Structure Framework.
Discrete-Time, Discrete-Tenor HJM Framework.
HJM Framework Typically Leads to Nonrecombining Trees.
CHAPTER 11 Forward-Measure Lens.
Numeraires Are Arbitrary.
Different Measures for Different Rates.
"Classic" or "New Improved": Pick Your Poison!.
CHAPTER 12 In Search of "The" Model.
Migration to Full-Term Structure Models.
Model versus Market: Liquidity and Concentration Risk.
APPENDIX A Taylor Series Expansion.
Function of One Variable.
Function of Several Variables.
Ito's Lemma: Taylor Series for Diffusions.
APPENDIX B Mean-Reverting Processes.
APPENDIX C Girsanov's Theorem and Change of Numeraire.
Continuous-Time, Instantaneous-Forwards HJM Framework.