Fixed income analysis and risk management

Type :

Presentation

Pages :

9 pages

Format :

.doc

Published date :

01/16/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

The prices of 10 OAT on the last coupon date: Maturities, coupon frequencies and rates.
Usage of polynomial interpolation and 4 spot rates.
1. Limitations of the method.
Calculation of the value as on April 25 2007.
The yield-to-maturity of OAT 10.
1. The role of duration and convexity in fixed-income asset management.
The strategies that an active portfolio manager who anticipates a fall in interest rates could follow.
1. Market timing strategy: Trading on interest rates predictions.
2. Timing bets on specific changes in the yield curve.
Appendices.
Bibliography.

Abstract

As the ten OAT have the same anniversary dates, in other words the different cash-flows are paid at the same dates (25-Apr-08, 25-Apr-09, 25-Apr-10,), then we used a direct method of calculation of the spot rates, through two steps. Using a polynomial interpolation, we can recover the yield curve. We use a cubic interpolation of the term structure of zero-coupon rates. The interpolated discount rate R(0,t) is defined by R(0,t) = at3+bt²+ct+d with te[t1,t4] and we impose that R(0,t) is on the curve. Given a, b, c and d for each segment, we can compute all the intermediate rates (Cf appendix 1) and draw the term structure of discount rates. For the linear interpolation, we use the following formula : R(0,t) = [(t2-t) R(0,t1) + (t1-t) R(0,t2)] / (t2-t1). The strength of this method is to give a better approximation than the linear interpolation. The limitations of this method are the approximation of intermediate rates and the imposition of real prices as fair prices: the polynomial interpolation is indeed a direct method.