Fixed income Final 2007
Exercise 1 : A little strategy to start…
You have just been recruited by an asset management company, and today is your first morning investment strategy meeting.
Today, the committee will discuss the FED and ECB monetary policy and long rate anticipations.
To decide on the above , the committee is in possession of the implicit probabilities dictated by the market for the Fed Fund (US) as well as the implicit probabilities of the ECB
refinancing rates (Europe)
The head of investment strategy, M. Mballo, requests, from the synthesized above
information, your expectations on the Fed and ECB monetary policies in regards to the 10year rate horizon. (max 1 page) (Ignore the first dates of each probabilities as the dates have already passed).
Exercise 2 : a little bit of calculation….
Maturity Bond FV Price Coupon Accrued YTM sensitivity
1) What is the sensitivity of this portfolio?
2) One of your counterparty proposes this day, Wednesday April 17th, to buy a bond issued by Daimler Chrysler with the following characteristics :
Issuer Daimler Chrysler
Maturity January 23th 2009
Coupon 4.125%
Next coupon January 23rs 2008
Face value Par
Your counterparty can buy that paper for you at 3BP below swap Euribor
3) Calculate the price to pay to buy 10 000 000 euros face value of the above bond.
4) What is the spread using the Treasury curve below?
5) What are the risks associated with this position?
Exercise 3 : Let’s talk Futures…
Rates are expected to increase in the near future and the head of asset management group requires you to hedge your exposure on a 10-year basis. Use the following information
The future contracts trades at 115.09% when you decide to hedge.
Reminder that number of contracts N is :
1) Which futures contract would you recommend using? 2) Should you buy or sell the futures contract? Explain. 3) How many contracts should you buy/sell to hedge 4) What is your portfolio sensitivity now?
Exercise 4: CDS…
1. A CDS with quarterly coupon payments has notional N=1000000 USD and spread s=0.10%. What is the regular coupon amount received by the seller of protection if no default occurs?
2. What is the reference asset of a CDS?
3. Consider a 5Y second to default contract on 100 assets with notional N(k), k=1,2,…,100, quarterly coupon payments and a spread of s=0.10%.
a. Assume credit 98 defaults first. The recovery rate is R(98). What does the protection seller have to pay?
b. Assume credit 5 is the next to default with a recovery rate of R(5). What does the protection seller have to pay?
Exercise 4 :
1) The following chart shows a spread for the last 3 years (Feb 2004 - Feb 2007). What spread do you think it is?
Despite our little group, I have enjoyed spending this full year with all of you and wish you all the best (Yes Mahmoud even you, my Syrian friend) in the future! Keep in touch on MSN
