Syllabus
Part I: Fixed Income Securities1. Bond contract: classification of bonds, fair pricing of straight bond, cleans and dirty price, yield measures on bonds (yield to maturity, holding period yield, current yield).2. Analysis of the yield curve: zero yield curve (bond stripping, synthetic zero-coupon bond), implied forward yield curve, excepted changes in interest rates, par yield curve, pricing of floating rate notes, inflation-indexed bond (break-even inflation), theories of the yield curve.3. Measurement of interest rate risk: types of risks, duration and its properties (measure of interest rate risk, immunization property), convexity.4. Sale and repurchase agreement: classical repo (legal versus economic treatment, terminology, margining), application of repo (funding long position, covering short position, yield enhancement, leveraging bond portfolio, liquidity management).5. Mortgage loans and mortgage-backed securities: traditional mortgage (mathematics of mortgage payments), prepayments (contraction risk, extension risk), inflation-adjusted mortgages (graduated-payment mortgage, price-level-adjusted mortgage, dual-rate mortgage), mismatch-adjusted mortgage (adjustable rate mortgage, hybrid mortgage), mortgage-backed securities (mortgage securitization, pass-through securities, collateralized mortgage obligations, stripped mortgage-backed securities).6. Money market securities: money market conventions, quotation on yield and discount basis, money market instruments (money market deposit, negotiable certificate of deposit). Part II: Swaps7. Interest rate swap: swap mechanism, taking and transforming interest rate risk, hedging, arbitraging assets and liabilities, new issue arbitrage, warehousing interest rate swaps, valuation of swaps.8. Forward rate agreement: market conventions, hedging with FRAs, FRA strips, pricing links with futures contracts, pricing links with swaps.9. Currency swap: related financial instruments, risk management with currency swaps, new issue arbitrage, warehousing currency swaps, valuation.10. Equity swap: swap mechanism, equity swap with fixed and variable principal amount, esoteric swaps, swaption.11. Credit derivatives: credit swaps (credit default swap, total return credit swap), structuring swaps through SPV, credit options (credit level and credit spread option), credit forward, credit linked notes.
Annotation
The course Financial Markets Instruments II is the continuation of the winter course Financial Markets Instruments I. Its objective is to provide basic and medium-level knowledge about theoretical background and practical functioning of selected segments of financial markets, namely the fixed-income securities (bonds, repos, mortgages), swaps and credit derivatives.
The stress is laid primarily on understanding the role of these instruments in managing financial risks and in speculative, hedging and arbitrage trading strategies.