Credit options – part 3
Valuation It is somewhat inevitable that a discussion on credit options will require some explanation of their valuation. We can value credit options using a modified version of the Black Scholes Merton framework. Although I…
Credit options – part 2
Recap In part 1, we focused on the features of credit indices, on which the options are most commonly based. This second post covers the terminology associated with credit options. Terminology Credit options have adopted…
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Credit options – part 1
Understanding Credit Default Swap Indices In this series of posts we will have a look at credit default options which reference CDS indices. However, to get there we need to make sure we understand the…
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Foreign Exchange Swaps – part 4
Moving the delivery date of a currency receivable The largest segment of the Foreign Exchange (FX) market is FX swaps. A useful resource to monitor developments is the triennial survey published by the Bank for…
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Foreign Exchange Swaps – part 3
The FX basis The question we seek to address in this blog is which interest rates should you use to calculate the forward rate? Different banks will use different rates which will reflect their credit…
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Foreign Exchange Swaps – part 2
Introduction In the first post we reviewed the theoretical methods used to calculate a forward FX rate. This was some background to the FX swap product https://www.fmarketstraining.com/foreign-exchange-swaps-part-1/ Having established the theory lets look at how…
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Foreign Exchange swaps – part 1
I always say that the three most difficult topics in finance to teach are index tranche investing (don’t ask), bond futures and FX swaps. There is a wonderful adage that comes from the UBS training…
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Total return swaps
Defintions A total rate of return swap is a fixed for floating swap in which cash flows are exchanged but the floating rate on one side is based on the total rate of rate of…
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Caps and floors in a risk free rate (RFR) world
Definition An interest rate cap is an option structure whereby the buyer is protected against rates rising above a pre-agreed level – the option’s strike. A floor gives the buyer protection against rates falling below…
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Understanding theta
Introduction In some previous posts I had explained the concept of delta and gamma within an option trading context. One of the strategies we analyzed was a delta-hedged short call position. This position has characteristics…
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