Fixed income Final 2007
Fixed income Final 2007
Exercise 1 : A little strategy to start…
You have just been recruited by an asset management company, and today is your first
morning investment strategy meeting.
Today, the committee will discuss the FED and ECB monetary policy and long rate
anticipations.
To decide on the above , the committee is in possession of the implicit probabilities dictated
by the market for the Fed Fund (US) as well as the implicit probabilities of the ECB
refinancing rates (Europe)
The head of investment strategy, M. Mballo, requests, from the synthesized above
information, your expectations on the Fed and ECB monetary policies in regards to the 10year
rate horizon. (max 1 page) (Ignore the first dates of each probabilities as the dates have
already passed).
Exercise 2 : a little bit of calculation….
M. Mballo is very impressed with your comments and decides to let you handle the following
bond portfolio.
Maturity
Oct25 07
Ap25 08
Ap25 09
Oct25 09
Ap25 17
Bond
TSY
TSY
TSY
TSY
TSY
FV
2,500,000.00
10,000,000.00
12,500,000.00
5,000,000.00
17,000,000.00
Price
100.80%
101.21%
99.97%
103.48%
97.06%
Coupon
5.50%
5.25%
4%
4.75%
3.75%
Accrued
2.426%
4.948%
3.77%
2.095%
3.534%
YTM
3.89%
4.05%
4.01%
4.03%
4.11%
sensitivity
0.54
0.95
1.85
4.72
7.89
1) What is the sensitivity of this portfolio?
2) One of your counterparty proposes this day, Wednesday April 17th, to buy a bond
issued by Daimler Chrysler with the following characteristics :
Issuer
Maturity
Coupon
Next coupon
Face value
Daimler Chrysler
January 23th 2009
4.125%
January 23rs 2008
Par
Your counterparty can buy that paper for you at 3BP below swap Euribor
3) Calculate the price to pay to buy 10 000 000 euros face value of the above bond.
4) What is the spread using the Treasury curve below?
5) What are the risks associated with this position?
6) The sensitivity of the Daimler Chrysler bond is 1.69. what is now the new sensitivity
of your portfolio if you decide the 10 000 000 FV of this bond?
Exercise 3 : Let’s talk Futures…
Rates are expected to increase in the near future and the head of asset management group
requires you to hedge your exposure on a 10-year basis. Use the following information
The future contracts trades at 115.09% when you decide to hedge.
Reminder that number of contracts N is :
Where: M = Face value of portfolio
K = Face value of hedging instrument
P = price of bund
Fs = cheapest to deliver bund price
Ss = sensitivity of the CDT
Sp = bund sensitivity
f=1
1)
2)
3)
4)
Which futures contract would you recommend using?
Should you buy or sell the futures contract? Explain.
How many contracts should you buy/sell to hedge
What is your portfolio sensitivity now?
Exercise 4: CDS…
1. A CDS with quarterly coupon payments has notional N=1000000 USD and spread
s=0.10%. What is the regular coupon amount received by the seller of protection if
no default occurs?
2. What is the reference asset of a CDS?
3. Consider a 5Y second to default contract on 100 assets with notional N(k),
k=1,2,…,100, quarterly coupon payments and a spread of s=0.10%.
a. Assume credit 98 defaults first. The recovery rate is R(98). What does the
protection seller have to pay?
b. Assume credit 5 is the next to default with a recovery rate of R(5). What does
the protection seller have to pay?
c. The default of credit 98 happens after 17 months and the default of credit 5 is
after 20 months. How many coupons does the protection buyer have to pay?
Exercise 4 :
1) The following chart shows a spread for the last 3 years (Feb 2004 - Feb 2007). What
spread do you think it is?
Despite our little group, I have enjoyed spending this full year with all of you and wish you all
the best (Yes Mahmoud even you, my Syrian friend) in the future! Keep in touch on MSN
☺☺☺☺
Exercise 1 : A little strategy to start…
You have just been recruited by an asset management company, and today is your first
morning investment strategy meeting.
Today, the committee will discuss the FED and ECB monetary policy and long rate
anticipations.
To decide on the above , the committee is in possession of the implicit probabilities dictated
by the market for the Fed Fund (US) as well as the implicit probabilities of the ECB
refinancing rates (Europe)
The head of investment strategy, M. Mballo, requests, from the synthesized above
information, your expectations on the Fed and ECB monetary policies in regards to the 10year
rate horizon. (max 1 page) (Ignore the first dates of each probabilities as the dates have
already passed).
Exercise 2 : a little bit of calculation….
M. Mballo is very impressed with your comments and decides to let you handle the following
bond portfolio.
Maturity
Oct25 07
Ap25 08
Ap25 09
Oct25 09
Ap25 17
Bond
TSY
TSY
TSY
TSY
TSY
FV
2,500,000.00
10,000,000.00
12,500,000.00
5,000,000.00
17,000,000.00
Price
100.80%
101.21%
99.97%
103.48%
97.06%
Coupon
5.50%
5.25%
4%
4.75%
3.75%
Accrued
2.426%
4.948%
3.77%
2.095%
3.534%
YTM
3.89%
4.05%
4.01%
4.03%
4.11%
sensitivity
0.54
0.95
1.85
4.72
7.89
1) What is the sensitivity of this portfolio?
2) One of your counterparty proposes this day, Wednesday April 17th, to buy a bond
issued by Daimler Chrysler with the following characteristics :
Issuer
Maturity
Coupon
Next coupon
Face value
Daimler Chrysler
January 23th 2009
4.125%
January 23rs 2008
Par
Your counterparty can buy that paper for you at 3BP below swap Euribor
3) Calculate the price to pay to buy 10 000 000 euros face value of the above bond.
4) What is the spread using the Treasury curve below?
5) What are the risks associated with this position?
6) The sensitivity of the Daimler Chrysler bond is 1.69. what is now the new sensitivity
of your portfolio if you decide the 10 000 000 FV of this bond?
Exercise 3 : Let’s talk Futures…
Rates are expected to increase in the near future and the head of asset management group
requires you to hedge your exposure on a 10-year basis. Use the following information
The future contracts trades at 115.09% when you decide to hedge.
Reminder that number of contracts N is :
Where: M = Face value of portfolio
K = Face value of hedging instrument
P = price of bund
Fs = cheapest to deliver bund price
Ss = sensitivity of the CDT
Sp = bund sensitivity
f=1
1)
2)
3)
4)
Which futures contract would you recommend using?
Should you buy or sell the futures contract? Explain.
How many contracts should you buy/sell to hedge
What is your portfolio sensitivity now?
Exercise 4: CDS…
1. A CDS with quarterly coupon payments has notional N=1000000 USD and spread
s=0.10%. What is the regular coupon amount received by the seller of protection if
no default occurs?
2. What is the reference asset of a CDS?
3. Consider a 5Y second to default contract on 100 assets with notional N(k),
k=1,2,…,100, quarterly coupon payments and a spread of s=0.10%.
a. Assume credit 98 defaults first. The recovery rate is R(98). What does the
protection seller have to pay?
b. Assume credit 5 is the next to default with a recovery rate of R(5). What does
the protection seller have to pay?
c. The default of credit 98 happens after 17 months and the default of credit 5 is
after 20 months. How many coupons does the protection buyer have to pay?
Exercise 4 :
1) The following chart shows a spread for the last 3 years (Feb 2004 - Feb 2007). What
spread do you think it is?
Despite our little group, I have enjoyed spending this full year with all of you and wish you all
the best (Yes Mahmoud even you, my Syrian friend) in the future! Keep in touch on MSN
☺☺☺☺