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Interest Rate Markets: A Practical Approach to Fixed Income

Interest Rate Markets: A Practical Approach to Fixed Income

Siddhartha Jha

ISBN: 978-1-118-01779-1

Feb 2011

384 pages



How to build a framework for forecasting interest rate market movements

With trillions of dollars worth of trades conducted every year in everything from U.S. Treasury bonds to mortgage-backed securities, the U.S. interest rate market is one of the largest fixed income markets in the world.

Interest Rate Markets: A Practical Approach to Fixed Income details the typical quantitative tools used to analyze rates markets; the range of fixed income products on the cash side; interest rate movements; and, the derivatives side of the business.

  • Emphasizes the importance of hedging and quantitatively managing risks inherent in interest rate trades
  • Details the common trades which can be used by investors to take views on interest rates in an efficient manner, the methods used to accurately set up these trades, as well as common pitfalls and risks?providing examples from previous market stress events such as 2008
  • Includes exclusive access to the Interest Rate Markets Web site which includes commonly used calculations and trade construction methods

Interest Rate Markets helps readers to understand the structural nature of the rates markets and to develop a framework for thinking about these markets intuitively, rather than focusing on mathematical models



Chapter 1: Tools of the Trade.

Basic Statistics.

Regression–The Fundamentals.

Regression – How Good a Fit?

Principal Components Analysis.

Scaling Through Time.

Backtesting Strategies.


Chapter 2: Introduction to Bonds.

Basics of Bonds.

Risks Embedded in Fixed Income Instruments.


Bond Pricing.

Yield Curve.



Repo Markets.

Bid Offer.

Calculating Profit/Loss (P/L) of a Bond.

Carry and Forward Rates.

Forward Rates.


Curves and Spreads.

Butterflies and Condors.


Chapter 3: Overview of Fixed Income Markets.

Federal Reserve.





Agency Debt.

Corporate Bonds.

Municipal Bonds.


Chapter 4: Introduction to Futures Markets.

Basics of Futures Transactions.

Eurodollar Futures.

Convexity Bias (or Financing Bias).

Creating Longer Dated Assets Using Eurodollar Futures.

Treasury Futures.

Fed Funds Futures.

Futures Positioning Data.


Chapter 5: Introduction to Swaps.

Duration and Convexity.

Uses of Swaps.

Other Types of Swaps.


Chapter 6: Understanding Drivers of Interest Rates.

Supply and Demand for Borrowing.

Flight to Quality.

Components of Fixed Income Supply and Demand.

Treasury Supply.

Other Sources of Fixed Income Supply.

Fixed Income Demand.

Foreigner Holdings.


Federal Reserve.

Mutual Funds.


Pension Funds.

Short Term Yield Drivers.


Chapter 7: Carry and Relative Value Trades.

Carry Trades.

Carry Trade Set up and Evaluation.

Pitfalls of the Carry Trade.

Carry Efficient Directional Trades.

Relative Value Trades.

Setting Up Relative Value Trades.

Treasury Bond Relative Value—Par Curve.

Other Treasury Relative Value Trades.


Chapter 8: Hedging Risks in Interest Rate Products.

Principles of Hedging.

Choices of Instruments for Hedging.

Calculating Hedge Ratios.

Yield Betas.

Convexity Hedging.


Chapter 9: Trading Swap Spreads.

How Swap Spreads Work.

Why Trade Swap Spreads?

Directionality of Swap Spreads to Yields.

Futures Asset Swaps.

Spread Curve Trades.


Chapter 10: Interest Rate Options and Trading Volatility.

Option Pricing and Fundamentals.

Modifications for the Interest Rate Markets.

Quoting Volatility.

Measuring Risks in Option Positions.

Put call parity.

Implied and Realized Volatility.


Delta Hedging.

Interest Rate Options.

Embedded Options and Hedging.

More Exotic Structures.

Yield Curve Spread Options (YCSOs).

Forward Volatility.

Volatility Trading.

Interest Rate Skew.

Volatility Spread Trades.

Caps versus Swaptions.


Chapter 11: Treasury futures basis and rolls.

The Bond Basis.

Calculating the Delivery Option Value.

Option Adjusted and Empirical Duration.

Treasury Futures Rolls.


Chapter 12: Conditional Trades.

Conditional Curve Trades.

Conditional Spread Trades.



About the Author.

About the Website.


Page 255 Bachelier Correction Download
Correct Formula for Page 34 Download
Excel File Descriptions Download
Charts and Descriptions Download
Figure 6.2, Page 128 Correction Download
Taylor Series Formula (page 41) Download
Interest Rate Markets Calculations Download
128Figure 6.2, Page 128 Correction,See Downloads tab for the PDF file of the correction.10/07/2011