How to understand the connotation of financial engineering?
1. The fundamental purpose of financial engineering is to solve financial problems in real life. By providing a variety of creative problem-solving solutions to meet the rich and diverse needs of the market.
2. The main content of financial engineering is design, pricing and risk management. Product design and solutions are the basic content of financial engineering. After the design is completed, the pricing of products is also the key to financial engineering. Only reasonable pricing can ensure the feasibility of the product. Risk management is the core content of financial engineering.
3. The main tools of financial engineering are basic securities and various financial derivative products.
4. The main technical means of the discipline of financial engineering is a technical means that needs to be applied in combination of modern finance, various engineering technology methods, information technology and other disciplines.
5. Financial engineering has played an important role in promoting the development of the financial industry. It has greatly enriched the types of financial products and provided the financial market with more accurate, time-sensitive and flexible low-cost risk management methods, etc.
Tell me about your views on the place of risk management in financial engineering.
Risk management is one of the most important uses of financial engineering - and is at the heart of financial engineering. The birth of derivative securities and financial engineering technology stems from the needs of market entities to manage risks
What factors played the most important role in the development of financial engineering?
Important factors that promote the development of financial engineering: the increasingly turbulent global economic environment, the institutional environment that encourages financial innovation, the development and innovation of financial theory and technology, the advancement of information technology, and the result of the market's pursuit of efficiency.
How to understand the three types of participants in the derivatives market?
They are hedgers, arbitrageurs and speculators respectively. They have different participation purposes, and their actions all play an important role in the market. The hedger's operation is to transfer and manage the risk exposure of the existing position, and he is the driving force behind the emergence and development of the derivative securities market. Arbitrageurs obtain low-risk or risk-free arbitrage returns by discovering the irrational relationship between spot and derivative securities prices and operating simultaneously. His participation is conducive to the improvement of market efficiency.
Please list the existing financial products in the Chinese financial market.
1) Commodity futures, there are three exchanges in Shanghai, Zhengzhou and Dalian, mainly agricultural products and metals
2) Foreign exchange futures and treasury bond futures were trial traded in 1992, but they were suspended in 1993 and 1995 respectively. After 18 years, treasury bond futures were restarted in mid-September 2013. The existing 5-year treasury bond futures and 10-year treasury bond futures Two varieties of treasury bond futures
3) Stock index futures, which started trading on April 16, 2010. There are currently three types of CSI 300, SSE 50 and CSI 500
4) Company warrants, few varieties, strong hype
5) Products traded on the inter-bank market: foreign exchange forwards, foreign exchange swaps, foreign exchange options, interest rate swaps, forward interest rate agreements, bond forwards, credit mitigation instruments
6) SSE 50ETF options were listed on the Shanghai Stock Exchange on February 9, 2015
7) Derivatives contained in structured wealth management products
If the absolute pricing method is used directly to price derivative products, what problems may arise?
The problem of using absolute pricing method for pricing: the application of absolute pricing method depends on the determination of future cash flow. However, the future cash flow of many financial instruments is difficult to predict and determine (such as stocks).
Legal pricing poses difficulties. At the same time, the absolute pricing method needs to determine an appropriate and appropriate discount rate, which is also a relatively difficult thing. Because the discount rate often depends on people's risk appetite, and risk appetite is difficult
Measured.
Describe the basic ideas of replica pricing method, risk neutral pricing method and state price pricing method, and discuss the internal relationship among the three.
a. The principle based on the no-arbitrage pricing method: If the deviation of the market price from the reasonable price exceeds the corresponding cost, market investors can use the same reasoning for the sale and purchase of underlying and derivative securities, buy low and sell high, and use these arbitrage Therefore, the market price will inevitably make corresponding adjustments to return to a reasonable equilibrium state. Moreover, the method assumes that arbitrage activities are risk-free, that financial securities can be replicated, and that there are no short-selling restrictions in the market. Therefore, when pricing, you can construct combinations A and B by copying, so that the two combinations have the same return at the end of the period, then the value of the two combinations should be equal at any time, and arbitrage can be used if they are not equal. The key to this pricing method is replicability and no arbitrage.
b. Risk-neutral pricing method refers to making a purely technical assumption when pricing derivative securities, that is, all investors are risk-neutral. Under this condition, the expected return of all securities with the same risk as the underlying assets The rate is equal to the risk-free rate, and the discount rate is also applied to the risk-free rate to find the present value. In fact, the risk-neutral pricing method can only be implemented under the conditions of no arbitrage and replicability.
c. The state price pricing method refers to obtaining the state price of each state through the observable securities in the market, so that any asset can be priced.
All three methods belong to the relative pricing method, that is, to use the internal relationship between the underlying asset price and the price of the derivative securities to directly calculate the price of the derivative securities based on the underlying asset price. You only need to know the relative position and don't need too much information, so it is more convenient to use. The three pricing methods lead to the same goal, and they have exactly the same premise: no arbitrage plus complete market assumption. And the conclusions drawn are consistent.
9. How to understand the basic assumptions of financial derivatives pricing?
1. There is no friction in the market, no margin and short selling restrictions. This assumption can simplify the analysis process of pricing, and at the same time, for large-scale financial institutions, this assumption is also relatively reasonable, because the transaction costs of large financial institutions are low, and the restrictions on short selling are relatively small.
2. Market participants have no counterparty risk, that is, no default.
3. The market is perfectly competitive. Markets with larger breeds mature in the market are close to this assumption.
4. Market participants are risk-averse and want as much money as possible.
5. There is no risk-free arbitrage opportunity in the market. This is the most important assumption.
10. If the annual interest rate of continuous compound interest is 5%, what is the future value of the present value of 10,000 yuan after 4.82 years?
10000×e（5%×4.82）=12725.21
11. The annual interest rate of quarterly compound interest is 14%, please calculate the equivalent annual interest rate of annual compound interest and continuous compound interest annual interest rate.
Annual interest rate compounded once a year = (1+0.14/4) 4-1=14.75%
Continuously compounded annual interest rate = 4ln (1+0.14/4) = 13.76%
12. The annual interest rate of monthly compound interest is 15%, please calculate the equivalent annual interest rate of continuous compound interest.
Continuously compounded annual interest rate = 12ln (1 + 0.15/12) = 14.91%
13. The continuous compound annual interest rate of a certain deposit is 12%, but the interest is actually paid quarterly. How much interest can I get every quarter for a deposit of 10,000 yuan?
12% annual interest rate of continuous compound interest is equivalent to the annual interest rate of interest paid quarterly = 4 (e0.03-1) = 12.18%
Quarterly interest = 10000×12.18%/4=304.55 yuan
14. "It is usury to calculate interest with continuous compound interest, and it will charge a lot more interest than ordinary compound interest." May I ask this statement?
Right? Please explain.
No, interest rates of different accrual frequencies cannot be directly compared. It should be converted into the same standard interest rate (annual effective rate of return) for comparison. If both interest rates are converted into annual effective rate of return, the interest rate of ordinary compound interest is higher than that of continuous compound interest, and the former will charge more interest than the latter. If both interest rates are converted into annual effective rate of return, the interest rate of ordinary compound interest If the interest rate is lower than that of continuous compound interest, the former charges less interest than the latter.
15. Many financial literatures use ΔlnPt to represent the rate of return or growth rate (where P is the variable value at time t). Why is this? But for daily rate of return or daily growth rate, people often think that ΔlnPt and "ΔPt/ Pt" almost, do you agree?
ΔlnPt is the rate of return with continuous compounding. For the ordinary compound interest rate of interest calculated every day, it can be calculated and verified that it is similar to the continuous compound interest rate of return.
1. On September 13, 2015, a Chinese company signed a transnational order and expected to pay US$1,000,000 in half a year. In order to avoid exchange rate risk, the company purchased a semi-annual forward of USD 1,000,000 from the Industrial and Commercial Bank of China on the same day, and the forward exchange rate on that day is shown in Case 2.1. Half a year later, the actual buying price and selling price of the US dollar spot exchange of the Industrial and Commercial Bank of China were 6.6921 and 6.6930 respectively. What is the company's profit and loss on the forward contract?
1. On September 13, 2015, the company bought a semi-annual USD forward from ICBC, which means that it will buy USD from ICBC at a price of RMB 6.4959/USD half a year later. After the contract expires, the company's profit and loss on the long forward contract = 000000x (6.6930- 6.4959)= 197100.
2. A senior executive of a multinational company believes: "We don't need to use foreign exchange forward at all, because we expect that the chances of future exchange rate rise and fall are almost equal, and using foreign exchange forward will not bring us any benefits. "Please comment on this statement.
What he said was wrong. First of all, it should be clear that the futures (or forward) contract cannot guarantee that its investors will make certain profits in the future, but investors can obtain a certain future buying and selling price through the futures (or forward) contract, eliminating the risk caused by price fluctuations. In this example, the exchange rate change is an important factor affecting the company's cross-border trade costs, and it is one of the main risks faced by cross-border trade. Frequent changes in the exchange rate are obviously not conducive to the long-term stable operation of the company (even if the exchange rate has the same probability of rising and falling ); and by buying and selling foreign exchange forward (futures), multinational companies can eliminate the risks caused by exchange rate fluctuations, lock in costs, and thus stabilize the company's operations.
3. Sometimes the short side of the futures will have some rights, and can decide the place of delivery, the time of delivery, and what assets to use for delivery, etc. So, do these rights increase or decrease the price of the futures? Please explain why.
These rights to futures shorts make futures contracts more attractive to shorts and less attractive to longs. Therefore, this right will lower the futures price
4. "When a futures contract is traded on an exchange, there are three possibilities for the total number of open positions to change: increase by one, decrease by one, or remain unchanged." Is this view correct? Please explain.
This point of view is correct. When a contract is traded on the exchange, the respective situations and transaction results of the buyers and sellers are as follows:
1) If both parties to the transaction open a new contract, the number of open positions will increase by 1;
2) If both parties to the transaction have settled their existing futures positions, the number of open positions will be reduced by 1:
3) If one party opens a new contract and the other party closes an existing futures position, the number of open positions remains unchanged.
5. Discuss the system design adopted by the futures exchange to avoid credit risk.
The system design used by exchanges to avoid credit risks mainly includes the following three points:
1) Margin system and daily mark-to-market settlement system Buyers and sellers of futures need to open margin accounts in brokerage companies, and brokerage companies are also required to open margin accounts in clearing agencies. Futures transactions are settled daily under the daily mark-to-market settlement system, thus ensuring strict debt-free operation.
2) Daily price fluctuation limit and transaction suspension rules The exchange limits the daily price fluctuation range and the circuit breaker mechanism when the price fluctuation is too intense, which alleviates the impact of emergencies and excessive speculation on the market, thereby reducing credit risk.
3) Joint and several liquidation responsibilities among members Clearing institutions usually stipulate that all members must bear unlimited joint and several liquidation responsibilities for the liquidation responsibilities of other members. Since futures are a zero-sum game, this provision minimizes the risk of default.
7. Assume that A has signed a forward foreign exchange contract, while B has signed a foreign exchange futures contract. Both contracts stipulate that after 3 months, they will buy 100,000 euros with 140,000 US dollars. The current euro exchange rate is 1. 4000. If the euro depreciates sharply in the first two months of the contract period, then recovers in the third month, and finally closes at 1.4300, what is the difference in the financial situation between the two? If the euro appreciates in the first two months of the contract period, Then it plummeted in the third month, and finally closed at 1.3300. How would the financial situation of the two differ?
When closing at 1.4300:
Profit and loss: (1.4300- 1.4) *100000=3000 USD
Due to the margin system and the daily mark-to-market settlement system in the futures market, the sharp drop in the first two months caused a large amount of losses to Investor B, who had to continuously increase margin to maintain the margin level. Investor A's profit and loss level is not affected by price fluctuations during the period.
When closing at 1.3300:
Profit and loss: (1.3300-1.4)*100000=7000 USD
The appreciation in the first two months resulted in a surplus in Investor B's margin account. When the third month plummeted, if the margin level was lower than the minimum maintenance margin level, the investor had to call for additional margin. The profit and loss level of investor A is also not affected by price fluctuations during the period.
In short, futures and forwards cannot be simply said to be better or worse. However, futures has higher requirements for short-term trend judgment. If the judgment is wrong in a short period of time, you may have to continuously pay margins or even be forced out of the game; but if you make a correct judgment in a short period of time, you can make a lot of money
1. Assuming that the current market price of a stock that does not pay dividends is 20 yuan, and the annual rate of risk-free continuous compound interest is 10%, find the 3-month forward price of the stock. If the market price of the stock is 15 yuan after 3 months, find the value of the long side of the forward contract with a transaction volume of 100 units.
The 3-month forward price of the stock F=Ser(Tt)=20×e0.1×0.25=20.51 yuan.
Three months later, for longs, the value of the forward contract is (15- 20.51)×100= -551
2. Assume that the current market price of a stock that does not pay dividends is 20 yuan, and the term structure of interest rates is flat. The annual interest rate of risk-free continuous compound interest is 10%, and the 3-month forward price of the stock in the market is 23 yuan. How should arbitrage be carried out? If the stock will distribute a dividend of 1 per share after 1 month and 2 months respectively Yuan and 0.8 yuan, is there room for arbitrage? If so, should. How to carry out arbitrage?
If there is no bonus payment, F= Ser(Tt)=20×e0.1×0.35=20.51<23,
In this case, the arbitrageur can borrow X yuan in cash at a risk-free rate of 10% for three months to buy X/20 units of stock, and at the same time sell the forward contract of the corresponding number of shares of the stock at a delivery price of 23 Yuan. Three months later, the arbitrageur delivers the forward with a stock of X/.20,
Get 23X/20 yuan, and return the loan principal and interest X×e0.1×0.25 yuan, so as to realize the risk-free profit of 23X/20-Xe0.1×0.25>0 yuan.
If there is a dividend payment, the present value of the dividend obtained from the dividends that will be distributed per share after 1 month and 2 months is:
I=e0.1×1/12+0.8e0.1×2/12=0.99+0.79=1.78 yuan
Under the condition that there is no arbitrage, the 3-month forward contract price of this stock in the market should be:
F=(SI) is(Tt)=(20-1.78)e0.1×3/12=18.68＜23
So there is room for arbitrage. The following methods of arbitrage can be used:
In this case, the arbitrageur can borrow cash of 18.22 yuan for 3 months, 0.99 yuan for 1 month, and 0.79 yuan for 2 months at the current risk-free rate of 10% to buy 1 unit of stock and sell the corresponding share Count the forward contract of this stock, and the delivery price is 23 yuan. After 1 month and 2 months, you will receive 1 yuan and 0.8 yuan respectively. After receiving the dividends, you will immediately repay the loan with the corresponding period. After 3 months, the arbitrageur delivers the forward with 1 unit of stock, gets 23 yuan, and returns the remaining loan principal and interest of 18.68 yuan, thus realizing a risk-free profit of 4.32 yuan after 3 months
3. Assuming that the Shanghai and Shenzhen 300 Index is currently 2425 points, the three-month risk-free continuous compound interest rate is 4%, and the index dividend yield is about 1% per year. Find the futures price of the index for three months.
Index futures price=1000e(0.1-0.03)×4/12=10236 points
5. Please explain the following point of view: During the delivery period, there will be room for arbitrage if the futures price is higher than the spot price. What if the futures price is lower than the spot price at the time of delivery?
If during the delivery period, the futures price is higher than the spot price. Arbitrageurs will buy spot goods, sell futures contracts, and deliver immediately, taking the price difference. If the futures price is lower than the spot price during the delivery period, the same perfect arbitrage strategy will not exist. Because arbitrageurs buy futures contracts but cannot demand immediate delivery of the spot, the decision to deliver the spot is made by the short side of the futures.
6. Should the stock index futures price be greater or less than the future expected index level? Please explain why.
Since the systematic risk of the stock price index is positive, its expected rate of return is greater than the risk-free interest rate, so the stock price index futures price F = Ser(Tt) is always lower than the future expected index value E(Sr)=Sey(Tt)
7. A company signed a forward contract with the bank one month ago, agreeing to sell the underlying asset to the bank at a price K at time T in the future. The current time is t, and the target price is s, the company asks the bank whether it is possible to extend the contract delivery time from T, to T, (T,>T,). If you are a bank, do you think it can be extended? If so, how should it be done?
Banks can accommodate customers' deferment requests. The bank will set a new strike price
Make the new contract value equal to the original contract value.
The value of the original contract at time t is:
The value of the new contract at time t is:
The two contracts are equal in value, as follows:
8. Can the underlying asset of a forward or futures contract be a non-tradable asset? If so, please give an example and briefly describe the difference between the pricing of the forward or futures contract and the underlying asset that can be traded.
Answer: Yes. (Hint: The focus of this question is to distinguish whether the underlying asset can be traded or not in different pricing methods.)
The non-tradable targets in this question mainly refer to products such as climate and energy. The pricing method of such underlying derivatives is very different from traditional tradable derivatives. When the underlying asset is tradable, the pricing of its derivatives can be understood using replication techniques. The target can be traded, and forwards and futures can be regarded as redundant assets - which can be constructed through existing products. Such as forward (futures), can be constructed through stocks and liabilities: f=S-Ke-r(T1-t)
Therefore, the pricing of redundant assets can be accurately priced through the duplication technique.
Another understanding is the often mentioned risk-neutral pricing. Because redundant securities can be replicated, a fully risk-hedged portfolio can be constructed, which can take advantage of risk-neutral pricing.
For non-tradable targets like climate, because there is no spot market to provide price reference, there is no strategy for accurate replication, and derivatives are no longer redundant assets, and cannot be accurately priced in a risk-neutral way. Its pricing process - generally adopts the historical data method
10. At 15:00 on September 2, 2015, the spot and futures prices of CSI 500 are shown in Table 3.1. Please analyze the possible reasons.
On the one hand, CFFEX raised the trading margin for non-hedging positions of futures contracts out of pressure, restricting futures trading and severely limiting its functions. On the other hand, spot short selling is restricted (short lending is stopped), which severely limits the arbitrage power of the market and prevents it from functioning effectively, resulting in an increase in futures premiums and discounts. At the same time, since the market is generally bearish on the stock market, the later the expiration date, the lower the price of futures.
2. Please explain the situation that produces basis risk, and explain the viewpoint that "if there is no basis risk, the minimum variance hedging ratio is always 1".
Basis risk arises when the underlying asset of the futures is not the same asset as the asset that needs to be hedged, or when the maturity date of the futures is inconsistent with the date that needs to be hedged. The point stated in the question is correct.
Assuming that the hedge ratio is n, the value change of the portfolio is
Δπ=(H0- H1)+n(G1-G0).
When there is no basis risk, H1=G1. It can be obtained by substituting into the formula, n=1.
3. "If the minimum variance hedge ratio is 1, then the hedge must be perfect." Is this correct? Please explain why.
This view is incorrect. For example, the minimum variance hedging ratio is n=ρσΔH/σΔG, when ρ=0.5, σΔH=2ΔG, n=1, because ρ<1, it is not a perfect hedge.
4. Please explain the meaning of perfect hedging, and answer: "The result of perfect hedging is - - better than imperfect hedging? "
A perfect hedge is one that completely eliminates price risk. Perfect hedging can get more certain hedging returns than imperfect hedging, but the result is not necessarily better than imperfect hedging. For example, a company hedges its holdings of an asset, assuming that the price of the asset is on an upward trend. At this time, the perfect hedge completely offsets the gains brought about by the rise in asset prices in the spot market; the imperfect hedge may only partially offset the gains in the spot market, so the imperfect hedge has might yield better results.
7. Assuming that investor A traded on the Shanghai and Shenzhen 300 Index futures of China Financial Futures Exchange on October 10, 2011
For trading, open a position and buy 2 lots of October CSI 300 Index futures contracts, with an average price of 2600.0 points. Assuming that the initial margin and maintenance margin are both 12%, how much margin should the investor submit?
The margin that the investor needs to submit is: 2 x 2600.0x 300x 12% = 187,200 (yuan)
9. In the stock market crash in 2015, China's stock index futures were greatly impacted, and the regulatory authorities almost suspended the normal operation of stock index futures, causing its trading volume to drop by 99% within 3 months. In fact, stock index futures in the United States and Japan have also been severely criticized. Please find relevant historical data and the subsequent market changes, and then talk about how you view this issue as a professional after comparison.
1. Due to the fact that transactions can be carried out with a small deposit, the transaction cost is very low, and you can go long and short, all assets in the world basically show the characteristics that futures prices reflect information faster than spot prices, but this does not It means that the futures price causes the spot price to change. The essence of price changes is the influence of market fundamentals/risk appetite/market sentiment, etc. Futures prices are not the cause of price changes.
2. There is a view that stock index futures are a convenient tool for malicious short sellers to manipulate the spot, which led to the 2015 stock market crash. Such allegations have not been supported by actual evidence so far. In fact, manipulating the index is extremely difficult, and even the national team with financial and policy advantages has not done it. Moreover, in the system of stock index futures, it is specially designed for anti-manipulation.
3. Profit from short selling does not mean malicious short selling. Short selling is a right granted to investors by the futures market. As long as there is no false news and market manipulation, even if you profit from short selling, it does not violate laws and market rules. In fact, only a market that can be shorted can fully reflect and digest market information, truly achieve reasonable pricing, and play an effective resource allocation function.
4. It is believed that China is not yet suitable for introducing leverage tools. In fact, stock index futures are an important risk management tool. In a risky market, investors should be given reasonable risk management tools in order to reduce risks and promote the steady development of the market.
1. A fund company has an A-share investment portfolio with a coefficient of 2.2 and a value of 100 million yuan. The price of the one-month CSI 300 index futures is 2500 points. How should the company use CSI 300 index futures to hedge its investment portfolio? What effect will it achieve? If the fund company hopes to reduce the systemic risk to half of the original level, how should it operate?
(1) The company holds an investment portfolio and wants to conduct hedging, and the futures are short;
2.2×100000000/2500×300≈293 parts
(2) The beta coefficient of the target is 1.1, the contract multiplier is 300, and the number of trading contracts is: ——————————
That is, the trading period refers to short positions of 147 shares.
2. The two-month continuous compound interest rates of Switzerland and the United States are 2% and 7% respectively, the spot exchange rate of the Swiss franc is 0.6800 US dollars, and the 2-month Swiss franc futures price is 0.7000 US dollars. Is there any arbitrage opportunity?
The theoretical price of the Swiss franc futures contract is:
0.68e（7%-2%）×2/12=0.6859＜0.7
Therefore, there is a profit opportunity, because the futures price in the market is overestimated. If transaction costs are not considered, there is an arbitrage opportunity. You should buy the Swiss franc spot and sell the Swiss: Swiss franc futures contract at the same time. The investor borrows USD 0.68 for two months at an interest rate of 7%, and converts it into CHF 1 at the regular exchange rate.
Invest French francs at a risk-free rate of 2%, and sell 2-month e2%×1/6 Swiss franc futures at 0.7. Timely income
0.7e2%×1/6=0.70233 US dollars, to repay 0.68e7%×1/6=0.68798 US dollars, arbitrage profit 0.01435
3. Suppose an investor A holds a diversified stock investment portfolio with a β coefficient of 0.85. May I ask: If only futures trading is used instead of stock spot trading, can the β coefficient of the investment portfolio be increased?
Investors can use stock index futures to increase the β coefficient of the stock portfolio. Suppose the original β coefficient of the stock portfolio is , and the target β coefficient is β*
Then the number of stock index futures to be traded is (β*-β) VH/VG:
4. Assuming that a Eurodollar futures due in 60 days is quoted at 88, what is the forward LIBOR rate from 60 days to 150 days?
The quotation of Eurodollar futures is 88, which means that the discount rate is 12%, and the three-month LIBOR forward rate after 60 days is 2%/4=3%
8. Explain why forward rates are considered marginal rates to spot rates.
For spot and forward rates, we have the following formulas:
, It can be seen from the formula that the difference between the spot interest rate at time t2 and 2, is the forward interest rate r1,2 at the two moments. It can be understood that because the forward interest rate of one period is added on the basis of r1, the After obtaining the spot rate in period t2, according to the concept of "margin", that is, adding one unit of x leads to an increase in y, we can regard the forward rate as the "marginal value" of the spot rate.
Describe the main types of swaps.
The main types of swaps are: interest rate swaps, which means that both parties agree to exchange cash flows based on the same nominal principal of the same currency within a certain period of time in the future. A floating rate calculation, while the cash flow of the other party is calculated based on a fixed rate. Currency swap is to exchange the principal and fixed interest of one currency with the equivalent principal and fixed interest of another currency within the agreed period in the future. At the same time, there are cross-currency interest rate swaps, basis point swaps, zero-coupon swaps, post-determined swaps, difference swaps, forward swaps, stock swaps, etc.
Explain the main reasons for the rapid development of the international swap market.
1. Swap transactions have important applications in risk management, reducing transaction costs, avoiding controls and creating new products.
2. In the course of its development, some operating mechanisms formed by the swap market have also greatly promoted the development of the market.
3. The regulatory attitude of the authorities provides a legal space for the development of swap transactions.
One of the settlement methods of swap positions is to hedge the original swap agreement. This method completely offsets the risk of default. Please judge whether this statement is correct and explain the reason.
The settlement methods of swap positions are as follows:
1. Sell the original swap agreement, that is, sell the unexpired swap agreement on the market, and completely transfer the rights and obligations of the original interest collection and payment to the purchaser of the agreement.
2. Hedging the original swap agreement, that is, signing a swap agreement with the same principal, maturity date and swap interest rate as the original swap agreement, but opposite to the direction of interest payment.
3. Terminate the original swap agreement, that is, terminate the swap with the original counterparty in advance, and offset the rights and obligations of both parties at the same time.
This statement is wrong. If the hedging transaction is carried out with the original swap counterparty, this kind of hedging is also called "mirror swap", which is equivalent to terminating the original interest rate swap and offsetting the risk of default. If it is a mirror swap with other counterparties, hedging can only be realized on the cash flow of interest, but due to the different counterparties, it still cannot fully offset the risk of counterparty default.
Please explain how the pricing of the interest rate swap after the agreement is signed differs from the pricing of the swap at the time of the agreement.
The pricing of the interest rate swap after the agreement is signed is to determine the value of the interest rate swap contract based on the content of the agreement and the market interest rate level. For the holder of the interest rate swap agreement, this value may be positive or negative. The swap pricing method when the agreement is signed is to make the swap value of the long and short sides of the swap equal when the agreement is signed, that is, to choose a fixed interest rate that makes the initial value of the swap zero
4. Assume that the term structure of the LIBOR interest rate for USDJPY is flat, 4% in Japan and 9% in the US (both continuously compounded). In a currency swap, a financial institution receives Japanese yen at an interest rate of 5% and pays U.S. dollars at an interest rate of 8%. The principal amounts of the two currencies are USD 10 million and JPY 1,200,000,000, respectively. There is still a 3-year period for this swap, and the interest is exchanged every year, and the spot exchange rate is 1 US dollar = 110 yen. Try to use the bond portfolio and the forward foreign exchange portfolio to calculate the value of this currency swap to the financial institution.
4. (1) Using a bond portfolio:
If the local currency is U.S. dollars, then
Ten thousand U.S. dollars
JPY
Therefore, the value of this currency swap to the financial institution is
123055/110- 964.4= $1.543 million
(2) Using forward foreign exchange portfolio:
The spot exchange rate is 1 US dollar = 110 yen, or 1 yen = 0.009091 US dollars. because the dollar and
The annual interest rate difference of the white dollar is 5%. According to F=Se" "", the forward exchange rates of - -year, two-year and three-year are respectively
。
。
The values of the three forward contracts equivalent to the interest exchange are
Ten thousand U.S. dollars
Ten thousand U.S. dollars
Ten thousand U.S. dollars
The value of the forward contract equivalent to the final principal exchange is
Ten thousand U.S. dollars
Because the financial institution receives yen and pays dollars, the value of this currency swap to the financial institution is
201.46-12.69-16.47=1.543 million US dollars
6. Explain in detail the main risks associated with the swap.
The risks associated with swaps mainly include:
(1) Credit risk. Since the swap is an over-the-counter agreement reached privately between the counterparties, it contains credit risk, that is, the risk of the counterparty's default. When changes in market prices such as interest rates or exchange rates make the swap value positive for the trader, the swap is actually an asset of the trader and a liability of the other party to the agreement, and the trader faces The other party to the agreement does not perform the credit risk of the swap agreement. For the parties to the interest rate swap transaction, since what is exchanged is only the interest difference, the real credit risk exposure they face is much less than the nominal principal of the swap; The credit risk faced by both parties to the transaction is obviously greater than that of an interest rate swap.
(2) Market risk. For interest rate swaps, the main market risk is interest rate risk; while for currency swaps, market risks include interest rate risk and exchange rate risk. It is worth noting that when changes in interest rates and exchange rates are favorable to traders, traders often face credit risk. Market risk can be avoided by hedging transactions, while credit risk is usually avoided by credit enhancement.
1. Both companies A and B want to borrow a one-year loan of 1 million US dollars, A wants to borrow a floating rate loan related to a 6-month period, and B wants to borrow a fixed rate loan. However, the credit ratings of the two companies are different, so the market offers them different interest rates (see Table 8.3). Please briefly explain how the two companies use interest rate swaps for credit arbitrage.
It can be seen from the table that the borrowing rate of company A is lower than that of company B; but in the fixed rate market, A is 1.2% lower than B, and in the floating rate market, A is 0.5% lower than B. Therefore, Company A has an absolute advantage in both markets, but A has a comparative advantage in the fixed rate market, and B has a comparative advantage in the floating rate market. Therefore, A can borrow $1 million at a fixed rate of 10.8% in its comparatively advantageous fixed rate market, and B borrows $1 million at a floating rate of LIBOR+0.75% in its comparatively advantageous floating rate market, and then Use interest rate swaps for credit arbitrage to achieve the purpose of reducing financing costs. Since the principal is the same, the two parties do not need to exchange the principal, but only exchange interest cash flow, that is, AB pays floating interest, and B pays fixed interest to A.
Explain the use of interest rate swaps in risk management.
(1) Use interest rate swap to convert the interest rate attribute of assets. If a trader originally owns a fixed-rate asset, she can convert to a floating-rate asset by entering into a long position in an interest rate swap, and the paid fixed rate is offset by the fixed-rate income in the asset, and at the same time receives a floating rate; The same is true.
(2) Use the interest rate swap to convert the interest rate attribute of the liability. If a trader originally had a floating rate liability, she could convert to a fixed rate liability by entering into a long interest rate swap and receiving a floating rate offset against the floating rate payment on the liability while paying a fixed rate: vice versa.
(3) Use interest rate swap to manage interest rate risk. As interest rate sensitive assets, interest rate swaps, like interest rate forwards and interest rate futures, are often used for duration hedging and management of interest rate risk.
Assume that Company A has an investment with a 5-year annual rate of return of 11% and a principal of £1 million. If company A feels that the US dollar will strengthen against the British pound, briefly explain how company A should operate in the swap market.
Since Company A believes that the U.S. dollar will strengthen relative to the British pound, Company A can use the currency swap to convert the currency attributes of the assets, and convert its British pound investment into a U.S. dollar investment through currency swap. Assuming that its counterparty is a company B with a 5-year annual rate of return of 8% and a principal of US$1.5 million, the specific swap process is shown in the following figure:———
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4. Company A is a UK manufacturer that wants to borrow USD at a fixed rate. Company B, an American multinational corporation, wants to borrow GBP at a fixed rate. After making the necessary tax adjustments, they can obtain the following annual interest rate quotation as shown in Table 8.4:
Design a swap with the bank as the intermediary, so that the distribution of the swap income between Company A, Company B and the bank is 50%, 25% and 25% respectively.
If the two firms borrow independently, the total cost is:
7.0% + 10.6%= 17.6%
If companies A and B cooperate, the total cost is:
11.0%+6.2%= 17.2%
Therefore, the cost of 0.4% can be saved, among which the interest rate of company A is reduced by 0.2%, and the interest rates of the bank and company B are respectively reduced by 0.1%. The specific plan is as follows: ————————————————————