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Category Archives: Valuation and Modeling
A Guide to Duration, DV01, and Yield Curve Risk Transformations
Yield curve risk and sensitivities (DV01s) can be measured with respect to different variables: forward rates, par rates, zero yields, or others. This paper describes a simple method for transforming sensitivities between alternate representations and provides examples. The benefit of … Continue reading
Posted in Publications and Papers, Risk Management, Valuation and Modeling
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A Primer on Credit Default Swaps
What is a CDS? How does a CDS behave in response to changes in the markets? How does one value a CDS? What is the risk? This primer aims to answer these questions for plain-vanilla single-name CDS, showing that a … Continue reading
A Practical Guide To Bonds And Swaps
This manual provides a practical introduction to the fixed income capital markets. It is intended to provide the practical, institutional aspects of the markets together with the fundamental concepts used in today’s capital markets. In line with their ubiquity throughout … Continue reading
Fitting Forward Rates To Market Data
This paper has two purposes. First, to outline a general framework or methodology for fitting the forward curve to market data. Second, to report on and compare results from fitting forward curves using three particular functional forms: piece-wise constant forward … Continue reading
Accurately Estimating and Building the Yield Curve
Presentation for Risk Magazine Yield Curve Course, October 1999. Using methodology from “Fitting Forward Rates to Market Data,” discusses the general approach to fitting the yield curve, mathematics of yield and forward curves, a simple example, use of and criteria … Continue reading
Posted in Conferences, Valuation and Modeling
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Convexity And Correlation Effects in Swap Pricing
Presentation for Risk Magazine Swap Training Course, September 1997. Discusses some simple approaches to modeling products that incorporate correlation, such as yield curve spread options. Focus on using the simplest model which solves the problem and on hedging and managing … Continue reading
Posted in Conferences, Valuation and Modeling
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Convexity Adjustment for Constant Maturity Swaps
Both CMS (Constant Maturity Swap) and LIBOR-in-arrears swaps have payments that are linear with respect to an index while the offsetting hedges are convex. The linearity of the payment (relative to the convex hedges) imposes a cost that requires a … Continue reading