Fixed Income Markets

MOORAD CHOUDHRY works in Group Treasury at The Royal Bank of Scotland, and is a Professor at the Department of Mathematical Sciences, Brunel University. He was a UK government bond trader and money markets trader with ABN Amro Hoare Govett Securities Ltd and a sterling proprietary trader with Hambros Bank Limited. He later traded structured finance bonds and repo at KBC Financial Products. Moorad lives in Surrey, England.DAVID MOSKOVIC is a hybrid derivatives trader at The Royal Bank of Scotland. Prior to that he worked in market risk and as a quantitative analyst. He qualified as a Chartered Accountant at Ernst & Young before moving to RBS.MAX WONG is Head of Risk Model Validation at The Royal Bank of Scotland in Singapore. He was previously an index futures trader on the open-outcry floor at SIMEX and a risk quant at Standard Chartered. He is author of Bubble Value at Risk: A Countercyclical Risk Management Approach.

• Foreword xiiiPreface xviiAbout the Authors xixPart One Introduction to Bonds 1Chapter 1 The Bond Instrument 3Chapter 2 Bond Instruments and Interest-Rate Risk 43Appendix 2.1 Formal Derivation of Modified-Duration Measure 59Appendix 2.2 Measuring Convexity 59Appendix 2.3 Taylor Expansion of the Price/Yield Function 61Chapter 3 Bond Pricing, Spot, and Forward Rates 65Appendix 3.1 The Integral 83Appendix 3.2 The Derivation of the Bond Price Equation in Continuous Time 85Chapter 4 Interest-Rate Modelling 89Appendix 4.1 Geometric Brownian Motion 101Chapter 5 Fitting the Yield Curve 105Appendix 5.1 Linear Regression: Ordinary Least Squares 124Appendix 5.2 Regression Splines 127Part Two Selected Market Instruments 133Chapter 6 The Money Markets 135Appendix 6.1 179Chapter 7 Hybrid Securities and Structured Securities 181Chapter 8 Bonds with Embedded Options and Option-Adjusted Spread Analysis 205Appendix 8.1 Calculating Interest Rate Paths Using Microsoft Excel 232Chapter 9 Inflation-Indexed Bonds and Derivatives 235Appendix 9.1 Current Issuers of Public-Sector Indexed Securities 256Appendix 9.2 U.S. Treasury Inflation-Indexed Securities (TIPS) 257Chapter 10 Introduction to Securitisation and Asset-Backed Securities 261Part Three Derivative Instruments 297Chapter 11 Forwards and Futures Valuation 299Chapter 12 Bond Futures Contracts 309Appendix 12.1 The Conversion Factor for the Long Gilt Future 324Chapter 13 Swaps 329Appendix 13.1 Calculating Futures Strip Rates and Implied Swap Rates 370Chapter 14 Credit Derivatives I: Instruments and Applications 375Appendix 14.1 Bond Credit Ratings 418Chapter 15 Credit Derivatives II: Pricing, Valuation, and the Basis 421Chapter 16 Options I 435Appendix 16.1 Summary of Basic Statistical Concepts 456Appendix 16.2 Lognormal Distribution of Returns 457Appendix 16.3 Black-Scholes Model in Microsoft Excel 458Chapter 17 Options II 461Part Four Bond Trading and Hedging 475Chapter 18 Value-at-Risk and Credit VaR 477Appendix 18.1 Assumption of Normality 513Chapter 19 Government Bond Analysis, the Yield Curve, and Relative-Value Trading 517Chapter 20 Approaches to Trading and Hedging 551Appendix 20.1 Summary of Derivation of Optimum Hedge Equation 571Appendix 20.2 Forward-Rate Structure in Conventional Yield-Curve Environment 571Chapter 21 Derivatives Risk Management: Convexity, Collateral, and Correlation 573Appendix A Statistical Concepts 621Appendix B Basic Tools 627Appendix C Introduction to the Mathematics of Fixed-Income Pricing 633Appendix D About the Companion Website 639Glossary 641Index 669