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CFA Level 2 COPY > Swaps, Credit default swaps and Interest Rate Derivatives > Flashcards

Swaps, Credit default swaps and Interest Rate Derivatives Flashcards

1
Q

Plain Vanilla Swap

A

Fixed for floating in the same currency

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2
Q
  • Li (m)
  • B0 (hj)
A
  • M-day Libor on day i
  • Present value factor on a zero-coupon instrument paying $1 on day j
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3
Q

Value of 1.0 in principal at hn - 1

A
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4
Q

FS(0, n, m)

A

Fixed swap interest payment rate

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5
Q

Present value of a series of fixed interest payments at the swap rate FS(0, n, m)

A
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6
Q

FS(0, n, m) price

A

*

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7
Q

Swap value on day t

A
  • Fixed payments = FS(0, n, m) * Σ Bt (hj) + 1 * Bt (hn)
  • Floating payments = [(Value of the first floating payment on day 0) + 1] * Bt (h1)
  • Value of the first floating payment on day 0 = L0 (m) * (m/360)
  • Value = floating payments - fixed payments
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8
Q

Swap value (pay fixed/receive equity return)

A
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9
Q

Swap value (pay floating/receive equity return)

A

(St / S0) - Value of the first floating payment on day 0 * Bt (h1)

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10
Q

CMT

A

Constant Maturity Treasury

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11
Q

OIS

A

Overnight Index Swap

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12
Q

Amortizing and accreting swaps are swaps in which the notional principal changes according to a formula related to the underlying

A

The more common of the two is the amortizing swap, sometimes called an index amortizing swap. In this type of interest rate swap, the notional principal is indexed to the level of interest rates

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13
Q
  • Diff swap
  • Arrears swap
  • Capped swap
  • Floored swap
A
  • Combines elements of interest rate, currency, and equity swaps
  • The floating payment is set at the end of the period and the interest is paid at that same time
  • The floating payments have a limit as to how high they can be
  • The floating payments have a limit as to how low they can be
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14
Q

Swaption

A

An option to enter into a swap

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15
Q
  • Payer swaption
  • Receiver swaption
A
  • Allows the holder to enter into a swap as the fixed-rate payer and floating-rate receiver
  • Allows the holder to enter into a swap as the fixed-rate receiver and floating-rate payer
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16
Q

Payoff of a payer swaption

A
17
Q

Payoff of a receiver swaption

A
18
Q

Variation margin

A

Additional margin deposited on a futures to get back to the initial margin

19
Q

Invoice price

A

Contract size x Futures settlement price x Conversion factor + accrued interest

20
Q

Cheapest-to-deliver

A

The bond with the highest implied repo rate

21
Q

Converted price

A

Futures price x Conversion factor

22
Q

Delivery options of the short on a CBOT Treasury bond futures contract

A
  • Quality or swap option
  • Timing option
  • Wild card option
23
Q

Credit derivatives types

A
  • Total return swap
  • Credit spread option
  • Credit-linked note
  • Credit default swap (CDS)
24
Q

CDS terminology

A
  • Single-name CDS - on one specific borrower
  • Reference entity - the borrower
  • Reference obligation - the particular debt instrument
  • Cheapest-to-deliver obligation - the payoff on which the CDS is based
25
Q

ISDA

A

International Swaps and Derivatives Association

26
Q

CDS industry

  • Seller is
  • Buyer is
A
  • Long
  • Short
27
Q

Credit and succession events

A
  • Bankruptcy
  • Failure to pay
  • Restructuring
  • Succession event
28
Q
  • Payout ratio
  • Payout amount
A
  • 1 - recovery rate (%)
  • Payout ratio x Notional
29
Q

Hazard rate

A

The probability that an event will occur given that it has not already occurred

30
Q
  • Protection leg
  • Premium leg
A
  • The contingent payment that the credit protection seller may have to make to the credit protection buyer
  • The series of payments the credit protection buyer promises to make to the credit protection seller
31
Q

Present value of credit spread

A

Upfront premium + Present value of the fixed coupons

32
Q

Approximation of the present value of a stream of payments on CDS

A
33
Q

The convention in the CDS market starting in recent years is for standardized coupons

A
  • 1% for investment-grade debt
  • 5% for high-yield debt
34
Q

Change in value of the CDS for a given change in spread

A
  • Profit for the buyer of protection ≈ +Change in spread (bps) × Duration × Notional
  • % Change in CDS price = Change in spread (bps) × Duration
35
Q

Monetizing

A

The conversion of the value of a financial transaction into currency

36
Q

Naked credit default swap

A

A credit protection purchased by a party with no exposure to the reference entity

37
Q

Curve trade

A

Involves buying a CDS of one maturity and selling a CDS on the same reference entity with a different maturity

38
Q

Basis trade

A

A trade based on the pricing of credit in the bond market versus the price of the same credit in the CDS market

39
Q

Synthetic CDO

A

Created by combining a portfolio of default-free securities with a combination of credit default swaps undertaken as protection seller

CFA Level 2 COPY (14 decks)

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