Efnisyfirlit

• Copyright
• Contents
• Preface
• Acknowledgments
• Part I: Basics
  • Chapter 1: An Introduction to Fixed Income Markets
    • Introduction
      • The Complexity of Fixed Income Markets
      • No Arbitrage and the Law of One Price
    • The Government Debt Markets
      • Zero Coupon Bonds
      • Floating Rate Coupon Bonds
      • The Municipal Debt Market
    • The Money Market
      • Federal Funds Rate
      • Eurodollar Rate
      • LIBOR
    • The Repo Market
      • General Collateral Rate and Special Repos
      • What if the T-bond Is Not Delivered?
    • The Mortgage Backed Securities Market and Asset-Backed Securities Market
    • The Derivatives Market
      • Swaps
      • Futures and Forwards
      • Options
    • Roadmap of Future Chapters
    • Summary
  • Chapter 2: Basics of fixed Income Securities
    • Discount Factors
      • Discount Factors across Maturities
      • Discount Factors over Time
    • Interest Rates
      • Discount Factors, Interest Rates, and Compounding Frequencies
      • The Relation between Discounts Factors and Interest Rates
    • The Term Structure of Interest Rates
      • The Term Structure of Interest Rates over Time
    • Coupon Bonds
      • From Zero Coupon Bonds to Coupon Bonds
      • From Coupon Bonds to Zero Coupon Bonds
      • Expected Return and the Yield to Maturity
      • Quoting Conventions
    • Floating Rate Bonds
      • The Pricing of Floating Rate Bonds
      • Complications
    • Summary
    • Exercises
    • Case Study: Orange County Inverse Floaters
      • Decomposing Inverse Floaters into a Portfolio of Basic Securities
      • Calculating the Term Structure of Interest Rates from Coupon Bonds
      • Calculating the Price of the Inverse Floater
      • Leveraged Inverse Floaters
    • Appendix: Extracting the Discount Factors Z(0, T) from Coupon Bonds
      • Bootstrap Again
      • Regressions
      • Curve Fitting
      • Curve Fitting with Splines
  • Chapter 3: Basics of interest Rate Risk Management
    • The Variation in Interest Rates
      • The Savings and Loan Debacle
      • The Bankruptcy of Orange County
    • Duration
      • Duration of a Zero Coupon Bond
      • Duration of a Portfolio
      • Duration of a Coupon Bond
      • Duration and Average Time of Cash Flow Payments
      • Properties of Duration
      • Traditional Definitions of Duration
      • The Duration of Zero Investment Portfolios: Dollar Duration
      • Duration and Value-at-Risk
      • Duration and Expected Shortfall
    • Interest Rate Risk Management
      • Cash Flow Matching and Immunization
      • Immunization versus Simpler Investment Strategies
      • Why Does the Immunization Strategy Work?
    • Asset-Liability Management
    • Summary
    • Exercises
    • Case Study: The 1994 Bankruptcy of Orange County
      • Benchmark: What if Orange County was Invested in Zero Coupon Bonds Only?
      • The Risk in Leverage
      • The Risk in Inverse Floaters
      • The Risk in Leveraged Inverse Floaters
      • What Can We Infer about the Orange County Portfolio?
      • Conclusion
    • Case Analysis: The Ex-Ante Risk in Orange County’s Portfolio
      • The Importance of the Sampling Period
      • Conclusion
    • Appendix: Expected Shortfall under the Normal Distribution
  • Chapter 4: Basic Refinements in Interest Rate Risk Management
    • Convexity
      • The Convexity of Zero Coupon Bonds
      • The Convexity of a Portfolio of Securities
      • The Convexity of a Coupon Bond
      • Positive Convexity: Good News for Average Returns
      • A Common Pitfall
      • Convexity and Risk Management
      • Convexity Trading and the Passage of Time
    • Slope and Curvature
      • Implications for Risk Management
      • Factor Models and Factor Neutrality
      • Factor Duration
      • Factor Neutrality
      • Estimation of the Factor Model
    • Summary
    • Exercises
    • Case Study: Factor Structure in Orange County’s Portfolio
      • Factor Estimation
      • Factor Duration of the Orange County Portfolio
      • The Value-at-Risk of the Orange County Portfolio with Multiple Factors
    • Appendix: Principal Component Analysis
      • Benefits from PCA
      • The Implementation of PCA
  • Chapter 5: Interest Rate Derivatives: Forwards and Swaps
    • Forward Rates and Forward Discount Factors
      • Forward Rates by No Arbitrage
      • The Forward Curve
      • Extracting the Spot Rate Curve from Forward Rates
    • Forward Rate Agreements
      • The Value of a Forward Rate Agreement
    • Forward Contracts
      • A No Arbitrage Argument
      • Forward Contracts on Treasury Bonds
      • The Value of a Forward Contract
    • Interest Rate Swaps
      • The Value of a Swap
      • The Swap Rate
      • The Swap Curve
      • The LIBOR Yield Curve and the Swap Spread
      • The Forward Swap Contract and the Forward Swap Rate
      • Payment Frequency and Day Count Conventions
    • Interest Rate Risk Management using Derivative Securities
    • Summary
    • Exercises
    • Case Study: PiVe Capital Swap Spread Trades
      • Setting Up the Trade
      • The Quarterly Cash Flow
      • Unwinding the Position?
      • Conclusion
  • Chapter 6: Interest Rate Derivatives: Futures and Options
    • Interest Rate Futures
      • Standardization
      • Margins and Mark-to-Market
      • The Convergence Property of Futures Prices
      • Futures versus Forwards
      • Hedging with Futures or Forwards?
    • Options
      • Options as Insurance Contracts
      • Option Strategies
      • Put-Call Parity
      • Hedging with Futures or with Options?
    • Summary
    • Exercises
    • Appendix: Liquidity and the LIBOR Curve
  • Chapter 7: Inflation, Monetary Policy, and The Federal Funds Rate
    • The Federal Reserve
      • Monetary Policy, Economic Growth, and Inflation
      • The Tools of Monetary Policy
      • The Federal Funds Rate
    • Predicting the Future Fed Funds Rate
      • Fed Funds Rate, Inflation and Employment Growth
      • Long-Term Fed Funds Rate Forecasts
      • Fed Funds Rate Predictions Using Fed Funds Futures
    • Understanding the Term Structure of Interest Rates
      • Why Does the Term Structure Slope up in Average?
      • The Expectation Hypothesis
      • Predicting Excess Returns
      • Conclusion
    • Coping with Inflation Risk: Treasury Inflation-Protected Securities
      • TIPS Mechanics
      • Real Bonds and the Real Term Structure of Interest Rates
      • Real Bonds and TIPS
      • Fitting the Real Yield Curve
      • The Relation between Nominal and Real Rates
    • Summary
    • Exercises
    • Case Study: Monetary Policy during the Subprime Crisis of 2007 - 2008
      • Problems on the Horizon
      • August 17, 2007: Fed Lowers the Discount Rate
      • September - December 2007: The Fed Decreases Rates and Starts TAF
      • January 2008: The Fed Cuts the Fed Funds Target and Discount Rates
      • March 2008: Bearn Stearns Collapses and the Fed Bolsters Liquidity Support to Primary Dealers
      • September – October 2008: Fannie Mae, Freddie Mac, Lehman Brothers, and AIG Collapse
    • Appendix: Derivation of Expected Return Relation
  • Chapter 8: Basics of Residential Mortgage Backed Securities
    • Securitization
      • The Main Players in the RMBS Market
      • Private Labels and the 2007 - 2009 Credit Crisis
      • Default Risk and Prepayment in Agency RMBSs
    • Mortgages and the Prepayment Option
      • The Risk in the Prepayment Option
      • Mortgage Prepayment
    • Mortgage Backed Securities
      • Measures of Prepayment Speed
      • Pass-Through Securities
      • The Effective Duration of Pass-Through Securities
      • The Negative Effective Convexity of Pass-Through Securities
      • The TBA Market
    • Collateralized Mortgage Obligations
      • CMO Sequential Structure
      • CMO Planned Amortization Class (PAC)
      • Interest Only and Principal Only Strips.
    • Summary
    • Exercises
    • Case Study: PiVe Investment Group and the Hedging of Pass-Through Securities
      • Three Measures of Duration and Convexity
      • PSA-Adjusted Effective Duration and Convexity
      • Empirical Estimate of Duration and Convexity
      • The Hedge Ratio
    • Appendix: Effective Convexity
• Part II: Term Structure Models: Trees
  • Chapter 9: One Step Binomial Trees
    • A one-step interest rate binomial tree
      • Continuous Compounding
      • The Binomial Tree for a Two-Period Zero Coupon Bond
    • No Arbitrage on a Binomial Tree
      • The Replicating Portfolio Via No Arbitrage
      • Where Is the Probability p?
    • Derivative Pricing as Present Discounted Values of Future Cash Flows
      • Risk Premia in Interest Rate Securities
      • The Market Price of Interest Rate Risk
      • An Interest Rate Security Pricing Formula
      • What If We Do Not Know p?
    • Risk Neutral Pricing
      • Risk Neutral Probability
      • The Price of Interest Rate Securities
      • Risk Neutral Pricing and Dynamic Replication
      • Risk Neutral Expectation of Future Interest Rates
    • Summary
    • Exercises
  • Chapter 10: Multi-Step Binomial Trees
    • A Two-Step Binomial Tree
    • Risk Neutral Pricing
      • Risk Neutral Pricing by Backward Induction
      • Dynamic Replication
    • Matching the Term Structure
    • Multi-step Trees
      • Building a Binomial Tree from Expected Future Rates
      • Risk Neutral Pricing
    • Pricing and Risk Assessment: The Spot Rate Duration
    • Summary
    • Exercises
  • Chapter 11: Risk Neutral Trees and Derivative Pricing
    • Risk Neutral Trees
      • The Ho-Lee Model
      • The Simple Black, Derman, and Toy (BDT) Model
      • Comparison of the Two Models
      • Risk Neutral Trees and Future Interest Rates
    • Using Risk Neutral Trees
      • Intermediate Cash Flows
      • Caps and Floors
      • Swaps
      • Swaptions
    • Implied Volatilities and the Black, Derman, and Toy Model
      • Flat and Forward Implied Volatility
      • Forward Volatility and the Black, Derman, and Toy Model
    • Risk Neutral Trees for Futures Prices
      • Eurodollar Futures
      • T-Note and T-Bond Futures
    • Implied Trees: Final Remarks
    • Summary
    • Exercises
  • Chapter 12: American Options
    • Callable Bonds
      • An Application to U.S. Treasury Bonds
      • The Negative Convexity in Callable Bonds
      • The Option Adjusted Spread
      • Dynamic Replication of Callable Bonds
    • American Swaptions
    • Mortgages and Residential Mortgage Backed Securities
      • Mortgages and the Prepayment Option
      • The Pricing of Residential Mortgage Backed Securities
      • The Spot Rate Duration of MBS
    • Summary
    • Exercises
  • Chapter 13: Monte Carlo Simulations on trees
    • Monte Carlo Simulations on a One-step Binomial Tree
    • Monte Carlo Simulations on a Two-step Binomial Tree
      • Example: Non-Recombining Trees in Asian Interest Rate Options
      • Monte Carlo Simulations for Asian Interest Rate Options
    • Monte Carlo Simulations on Multi-step Binomial Trees
      • Does This Procedure Work?
      • Illustrative Example: Long-Term Interest Rate Options
      • How Many Simulations are Enough?
    • Pricing Path Dependent Options
      • Illustrative Example: Long-Term Asian Options
      • Illustrative Example: Index Amortizing Swaps
    • Spot Rate Duration by Monte Carlo Simulations
    • Pricing Residential Mortgage Backed Securities
      • Simulating the Prepayment Decision
      • Additional Factors Affecting the Prepayment Decision
      • Residential Mortgage Backed Securities
      • Prepayment Models
    • Summary
    • Exercises
• Part III: Term Structure Models: Trees
  • Chapter 14: Interest Rate Models in continuous Time
    • Brownian Motions
      • Properties of the Brownian Motion
      • Notation
    • Differential Equations
    • Continuous Time Stochastic Processes
    • Ito’s Lemma
    • Illustrative Examples
    • Summary
    • Exercises
    • Appendix: Rules of Stochastic Calculus
  • Chapter 15: No Arbitrage and The Pricing of Interest Rate Securities
    • Bond Pricing with Deterministic Interest Rate
    • Interest Rate Security Pricing in the Vasicek Model
      • The Long/Short Portfolio
      • The Fundamental Pricing Equation
      • The Vasicek Bond Pricing Formula
      • Parameter Estimation
    • Derivative Security Pricing
      • Zero Coupon Bond Options
      • Options on Coupon Bonds
      • The Three Steps to Derivative Pricing
    • No Arbitrage Pricing in a General Interest Rate Model
      • The Cox, Ingersoll, and Ross Model
      • Bond Prices under the Cox, Ingersoll, and Ross Model
    • Summary
    • Exercises
    • Appendix: Derivations
      • Derivation of the Pricing Formula in Equation 15.4
      • The Derivation of the Vasicek Pricing Formula
      • The CIR Model
  • Chapter 16: Dynamic Hedging and Relative Value Trades
    • The Replicating Portfolio
    • Rebalancing
    • Application 1: Relative Value Trades on the Yield Curve
      • Relative Pricing Errors Discovery
      • Setting Up the Arbitrage Trade
    • Application 2: Hedging Derivative Exposure
      • Hedging and Dynamic Replication
      • Trading on Mispricing and Relative Value Trades
    • The Theta - Gamma Relation
    • Summary
    • Exercises
    • Case Study: Relative Value Trades on the Yield Curve
      • Finding the Relative Value Trade
      • Setting Up the Trade
      • Does It Work? Simulations
      • Does It Work? Data
      • Conclusion
    • Appendix: Derivation of Delta for Call Options
  • Chapter 17: Risk Neutral Pricing and Monte Carlo Simulations
    • Risk Neutral Pricing
    • Feynman-Kac Theorem
    • Application of Risk Neutral Pricing: Monte Carlo Simulations
      • Simulating a Diffusion Process
      • Simulating the Payoff
      • Standard Errors
    • Example: Pricing a Range Floater
    • Hedging with Monte Carlo Simulations
    • Convexity by Monte Carlo Simulations
    • Summary
    • Exercises
    • Case Study: Procter & Gamble / Bankers Trust Leveraged Swap
      • Parameter Estimates
      • Pricing by Monte Carlo Simulations
  • Chapter 18: The Risk and Return of Interest Rate Securities
    • Expected Return and the Market Price Risk
      • The Market Price of Risk in a General Interest Rate Model
    • Risk Analysis: Risk Natural Monte Carlo Simulations
      • Delta Approximation Errors
    • A Macroeconomic Model of the Term Structure
      • Market Participants
      • Equilibrium Nominal Bond Prices
      • Conclusion
    • Case Analysis: The Risk in the P&G Leveraged Swap
    • Summary
    • Exercises
    • Appendix: Proof of Pricing Formula in Macroeconomic Model
  • Chapter 19: No Arbitrage Models and Standard Derivatives
    • No Arbitrage Models
    • The Ho-Lee Model Revisited
      • Consistent Derivative Pricing
      • The Term Structure of Volatility in the Ho-Lee Model
    • The Hull-White Model
      • The Option Price
    • Standard Derivatives under the “Normal” Model
      • Options on Coupon Bonds
      • Caps and Floors
      • Caps and Floors Implied Volatility
      • European Swaptions
      • Swaptions’ Implied Volatility
    • The “Lognormal” Model
      • The Black, Derman, and Toy Model
      • The Black and Karasinski Model
    • Generalized Affine Term Structure Models
    • Summary
    • Exercises
    • Appendix: Proofs
      • Proof of the Ho-Lee Pricing Formula
      • Proof of the Expression in Equation 19.13
      • Proof of the Hull-White Pricing Formula
      • Proof of the Expression in Equation 19.28
      • Proof of the Expressions in Equations 19.41 and 19.42
  • Chapter 20: The Market Model for Standard Derivatives
    • The Black Formula for Caps and Floors Pricing
      • Flat and Forward Volatilities
      • Extracting Forward Volatilities from Flat Volatilities
      • The Behavior of the Implied Forward Volatility
      • Forward Volatilities and the Black, Derman, and Toy Model
    • The Black Formula for Swaption Pricing
    • Summary
    • Exercises
  • Chapter 21: Forward Risk Neutral Pricing and the LIBOR Market Model
    • One Difficulty with Risk Neutral Pricing
    • Change of Numeraire and the Forward Risk Neutral Dynamics
      • Two Important Results
      • Generalizations
    • The Option Pricing Formula in “Normal” Models
    • The LIBOR Market Model
      • The Black Formula for Caps and Floors
      • Valuing Fixed Income Securities that Depend on a Single LIBOR Rate
      • The LIBOR Market Model for More Complex Securities
      • Extracting the Volatility of Forward Rates from Caplets’ Forward Volatilities
      • Pricing Fixed Income Securities by Monte Carlo Simulations
    • Forward Risk Neutral Pricing and the Black Formula for Swaptions
      • Remarks: Forward Risk Neutral Pricing and No Arbitrage
    • The Heath, Jarrow, and Morton Framework
      • Futures and Forwards
    • Unnatural Lag and Convexity Adjustment
      • Unnatural Lag and Convexity
      • A Convexity Adjustment
    • Summary
    • Exercises
    • Appendix: Derivations
      • Derivation of the Partial Differential Equation in the Forward Risk Neutral Dynamics
      • Derivation of the Call Option Pricing Formula (Equations 21.11)
      • Derivation of the Formula in Equations 21.27 and 21.31
      • Derivation of the Formula in Equation 21.21
      • Derivation of the Formula in Equation 21.37
  • Chapter 22: Multifactor Models
    • Multifactor Ito’s Lemma with Independent Factors
    • No Arbitrage with Independent Factors
      • A Two-Factor Vasicek Model
      • A Dynamic Model for the Short and Long Yield
      • Long-Term Spot Rate Volatility
      • Options on Zero Coupon Bonds
    • Correlated Factors
      • The Two-Factor Vasicek Model with Correlated Factors
      • Zero Coupon Bond Options
      • The Two-Factor Hull–White Model
    • The Feynman-Kac Theorem
      • Application: Yield Curve Steepener
      • Simulating Correlated Brownian Motions
    • Forward Risk Neutral Pricing
      • Application: Options on Coupon Bonds
    • The Multifactor LIBOR Market Model
      • Level, Slope, and Curvature Factors for Forward Rates
    • Affine and Quadratic Term Structure Models
      • Affine Models
      • Quadratic Models
    • Summary
    • Exercises
    • Appendix
      • The Coefficients of the Joint Process for Short- and Long-Term Rates
      • The Two-Factor Hull-White Model
  • References
  • Index

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