Random Walks in Fixed Income and Foreign Exchange
The Moorad Choudhry Global Banking Series
edited by Professor Moorad Choudhry
The Moorad Choudhry Global Banking series is a new collection of books aimed at market practitioners, academics and graduate students in key areas of global banking. It covers core topics such as risk management, corporate governance and strategy, as well as recent developments affecting the future of banking, including digital banking, machine learning, fintech, blockchain and the latest in product development.
The series is designed to be all-encompassing, with titles ranging from technical and specialist areas such as derivatives central clearing to wider areas of social interest such as corporate governance and corporate social responsibility in banking. It aims to present current and future best-practice in all aspects of banking, from the world’s leading writers on this topic. Authors will be experienced and respected practitioners and academics from globally recognised institutions.
The series engages a global perspective on the changing nature of banking. It seeks authors with innovative approaches to the subject or an interest in challenging established conventions. It welcomes both monographs and edited collections that share these aims. We are looking for interesting new book proposals, which might include:
- Individual monographs which allow research ideas to be developed at greater length than might be possible in journal articles
- Edited volumes which draw together multiple contributors from different organisations and institutions around a particular theme
- Technical publications covering specialist topics
- Contributions which offer novel approaches to any aspect of banking.
If you are interested in submitting a proposal or have any questions, please contact the Series Editor:
Professor Moorad Choudhry
P.O. Box 101 East Horsley KT24 5EU
Title Page Copyright Contents Advance Praise for Random Walks in Fixed Income and Foreign Exchange Foreword Preface Chapter 1 What Really is the Cross-Currency Basis? The Calculation Underlying the Cross-Currency Basis Swap A Quick Note on Terminology Perhaps the Simplest Formula in Financial Mathematics How the Calculation Distorts No-Arbitrage Pricing On 29th December 2011 So, What Actually is a ‘Cross-Currency Basis Swap’? Conversion Factor Where does the Cross-Currency Basis Come from? What Keeps the Basis Swap from Being Arbitraged Away? Capital Cost of FX Derivatives Counterparty Risks and Credit Limits Clearing Horses for Courses How Could an Institution Make Money from the Cross-Currency Basis Swap? Appendix 1.A: The FX carry trade A Historical View – UIP and CIP Appendix 1.B: The Cross-Currency Toolkit The Three Elements FX Swap Chapter 2 XVA and the Cross-Currency Basis XVA – What is It? A Brief Summary of Counterparty Risk Risk vs Cost CVA – The First Horse in the XVA Stable DVA – The Next Calculation FVA – Funding Impact How XVA Costs Could Affect the Cross-Currency Basis Sample XVA Calculation Using Market Standard Calculation Approach Funding Constraints Detail on Daily Funding/Rollover Process Historical Funding Data Trading the xccy Basis Chapter 3 Calculating Novel Cross-Currency Bases and FX Hedged Pickups What is the FX Hedged Pickup? Finding xccy Bases Calculating FX Hedged Pickup Appendix 3.A: Xccy Bases To the EUR To the USD To the JPY Appendix 3.B: FX Hedged Pickups To the EUR To the USD To the JPY Chapter 4 FX Hedging of Fixed Income – What is the Best Way? FX Hedge Strategies Maturity-Matched Hedges Reducing Uncertainty to the Minimum Level for the Whole Tenor Practical Calculation of Maturity-Matched Yield Pickup Historical Results for G10 Maturity-Matched Yield Pickup Rolling Hedges Taking a Short-Term View Possible Actions at ‘Roll Point’ Historical Results for G10 Rolling Yield Pickup Rolling Pickup ‘One Period On’ and for the Tenor of the Instrument Translation Effect Volatility Breakdown – What is Driving the Performance? Numerical Example Chapter 5 Introducing the Conversion Factor The Issuer’s Choices Tenor Credit Spread Cross-Currency Basis Conversion Factor Fees and Charges What is the Conversion Factor? Simplest Possible Example – 1-Year Bond, Zero Basis, USD Corporate More Realistic – Using the Yield Curve Another Way to Think about It Examples of Conversion Factors Forecasting Conversion Factors Translating Spreads across Currencies Chapter 6 An Empirical Method of Calculating the Term Premium Introduction Why is the Term Premium Important? The Term Premium and Forward Rates An Empirical Method for Determining the Term Premium Results Median (Predicted – Actual) Moves for USD Choice of Forward Curve Lookback Period Discount Factor Calculation 10y Term Premium Results 2y Term Premium Results Recent Results: A General Pitfall with Term Premium Methods Discussion of Results Appendix 6.A: BIS Report Graphs References Chapter 7 An Update of the Term Premium Calculation Introduction Evolution of Yield Curves Term Premium Values Over Time Term Premium Models; Similarities and Differences Aggregating Model Results Chapter 8 Forward Curves, Duration and Convexity Are the Forwards a Useful Forecast? Why are Forward Curves so ‘Abnormal’? Simple Spot and Forward Curve Evolution Forward Implied Slopes vs Realised Data Analysis of Mean Forecast Slope vs Mean Actual Slope Forward Implied Slopes and Direction Can We Monetise This? The Value of Convexity Defining Duration Defining Convexity Numerical Calculation of Convexity The Long End of the Curve Value of Convexity through Time Conclusion Appendix 8.A: EUR Ratios Appendix 8.B: USD Ratios Appendix 8.C: Implied vs Actual Slope Changes, 2001–2007 Appendix 8.D: Implied vs Actual Slope Changes, 2007–2014 Appendix 8.E: Implied vs Actual Slope Changes, 2014–2020 Chapter 9 Implied vs Realised Convexity Defining Convexity Value of Implied Convexity Value of Realised Convexity References Index The Moorad Choudhry Global Banking Series Notes
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