Interest rate forwards

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  • Topic 12 - Measuring and managing interest rate risk with financial forwards, futures and swaps. In this chapter, students can understand and can recall how DV01, Duration, Convexity, VaR, and Stress Tests are used to measure interest rate risk; how interest rate forwards, futures, and swaps are used to manage interest rate risk.

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  • (bq) part 2 book "an introduction to derivatives and risk management" has contents: interest rate forwards and options, advanced derivatives and strategies, managing risk in an organization, financial risk management techniques and applications; forward and futures hedging, spread, and target strategies,...and other contents.

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  • Lecture Multinational financial management - Topic 7: Interest rate parity. In this chapter, tudents can forecast exchange rates and expected appreciations using interest rate parity and unbiased forward rate.

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  • (bq) part 1 book "derivatives markets" has contents: introduction to derivatives; an introduction to forwards and options; insurance, collars, and other strategies; introduction to risk management; financial forwards and futures; commodity forwards and futures; interest rate forwards and futures,....and other contents.

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  • First, it is worth remembering that the reduction in reserve demand is in large part the result of the failure of reserves to pay interest. The incentive to economize on reserves was greater when inflation made nominal interest rates much higher than they are today. But even at current interest rates, banks continue to find ways to avoid holding reserves. 13 A falling demand for reserves is far from inevitable if the opportunity cost of holding reserve balances at a central bank is reduced by achieving price stability or by paying interest on reserves.

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  • (bq) part 1 book "options, futures and other derivatives" has contents: mechanics of futures markets, hedging strategies using futures, interest rates, determination of forward and futures prices, interest rate futures, swaps, mechanics of options markets,...and other contents.

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  • In this section we look at data concerning 10-year government bond yields. Although our main interest is the default risk, this presents only one channel through which fiscal policies can affect long-term yields. There are other channels operating through monetary-fiscal interaction, which should be reflected in the evolution of yields. Therefore we start our descriptive analysis in this section by looking at yields, forward rates and inflation expectations at a weekly frequency. Then we move to an analysis of interest rate swap spreads, at a weekly and daily frequency.

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  • England gained more operational independence and the long-term ináation target was known, the dynamics of the long-term forward rate was more stable. Orphanides andWilliams (2003) demonstrate also on a theoretical basis how the observed overreaction of long-term interest rates to the short-term interest rate could be explained by the presence of imperfect knowledge and a perpetual learning process by agents about the structure of the economy and the policymaker preferences.

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  • (bq) part 1 book "fundamentals of futures and options markets" hass contents: mechanics of futures markets, hedging strategies using futures, interest rates, determination of forward and futures prices, interest rate futures, securitization and the credit crisis of 2007,...and other contents.

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  • Because an interest rate swap is just a series of cash flows occurring at known future dates, it can be valued by sim ply summing the present value of each of these cash flows. In order to calculate the present value of each cash flow, it is necessary to first estimate the correct discount factor (df) for each period (t) on which a cash flow occurs. Dis count factors are derived from investors’ perceptions of in terest rates in the future and are calculated using forward rates such as LIBOR. The following formula calculates a theoretical rate (known as the “Swap Rate”) for...

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  • Additionally, this positive association holds for interest-rate options contracts, forward contracts, and futures contracts, suggesting that banks using any form of these contracts, on average, experience significantly higher growth in their C&I loan portfolios. Furthermore, C&I loan growth is positively related to capital ratio and negatively related to C&I loan charge-offs. The findings in this study are confirmed after a robustness check.

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  • Another notable increase occurred in the forward-rate agreement (FRA) usage. FRA is a contract that determines the rate of interest, or currency exchange rate, to be paid or received on an obligation beginning at some future date. At the end of 1996, 9.02 percent of the sample banks report using FRAs. By the end of 2004, the percentage using FRAs more than doubled. While the percentage of banks participating in the swaps and forwards increased over the sample period, the proportion of banks using interest-rate options fell.

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  • The international consequences of zero-interest-rate policies are also negative. With interbank markets in the U.S. and Europe congested, forward foreign exchange markets become more difficult to organize. Without forward cover, exporters and importers find it more difficult to secure normal letters of credit. In the financial panic of 2008, foreign trade imploded much more than domestic trade. In addition, the Fed’s zero interest rate strategy inevitably weakens the dollar in the foreign exchanges.

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  • The willingness of banks to make such forward commitments to lend to nonbank firms and households depends very much on the wholesale interbank market. If the wholesale interbank market works smoothly without counter party risk at positive interest rates, then even currently illiquid banks can make forward loan commitments to their retail customers. If such a bank happens to be still illiquid when a corporate customer suddenly draws down its credit line, the bank can cover its retail commitment by bidding for funds in the wholesale market...

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  • The wholesale interbank market (where banks trade with each other) reduces the risk for banks making forward commitments to lend at retail— to households and firms, including exporters and importers. The collapse of the U.S. housing bubble in 2007-08 impaired bank balance sheets so that banks became reluctant to lend to each other from counterparty risk. Consequently retail bank credit fell sharply, thus worsening the crisis. By 2009, the U.S.

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  • A more likely explanation is that target rate changes have been more widely anticipated in recent years, and this squares with the Roley and Sellon (1995) observation that interest rates rose somewhat in advance of target rate increases. Bond prices set in forward-looking markets should respond only to the surprise element of monetary policy actions, and not to anticipated movements in the funds rate.

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  • The main contents of this chapter include all of the following: Forwards and futures, interest rate calculations, bond portfolios and hedging, interest rate models, basic properties of options, the binomial option pricing model, the black-scholes model, FX and interest rate options, trading volatility.

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  • Topic 11B - Accrued interest, clean and dirty prices, yield curve models, and forward rates. After completing this unit, you should be able to: Compute bond accrued interest and invoice price, construct yield curves using an empirical curve fitting and theoretical model, compute forward interest rates given zero-coupon spot interest rates.

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  • The Basel Committee on Banking Supervision, after an extensive consultation process, redrafted its recommendations for credit institutions’ regulatory capital requirements (Basel I) issued in 1988. The revision was motivated by the wish to adequately refl ect current developments in banking and to strengthen the stability of the international fi nancial system.

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  • To which extent this decrease in bond yields is associated with changes in short-term or long-term rates becomes more evident when looking at the yield curve defined as the 10-year government bond yield minus the three months Euribor shown in Figure 2. Over the entire year, the slope of the yield curve fell by roughly 20 bp to somewhat less than 130 bp. The same trend is also illustrated by the implied one-year forward rate in nine years, as extracted from the German zero-coupon curve. 20 The rate falls by 10 bp in the course of year, although there are sizeable developments over time.

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