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FISM-P10
PGDM : 2010-12 (Term-IV)
Fixed Income Securities Markets
Course Instructor: Golaka C Nath, Ph. D.
Time taken to complete each Module: Two hours (approx)
Batch Size: 50 (Max)
Course Description
Effective risk management is essential in today’s uncertain business environment. Derivatives and especially fixed income derivatives are standard instruments for managing financial risk. More than 90% of the World’s largest 500 companies use fixed income derivatives to manage interest rate risk exposure. For global Banks, Fixed Income portfolio consists of a major portion of
the their assets in Balance sheet. While vanilla fixed- for-floating swap contacts are by far the most common fixed income derivative, financial engineers keep inventing new fixed income derivatives to help firms transfer risks more effectively and selectively. It is critical for anyone involved in corporate or financial risk management to have a deep-rooted understanding of interest rate risk and fixed income securities.
This course explores key issues in fixed income. It develops tools for valuing and modeling the risk exposures of fixed income securities and their derivatives, with the ultimate goal of deploying these instruments in a corporate or financial risk management setting. The course is divided into two parts, covering (1) basic fixed income securities and (2) fixed income derivatives. To make the material broadly accessible, concepts are, whenever possible, explained through hands-on applications and examples, rather than through advanced mathematics.
Prerequisites and pre-assignment:
The only prerequisite for the course is good understanding of Macroeconomics and Financial Management that students have gone through in 1st Year. There is no formal preassignment, but I assume basic understanding of valuation and derivatives as well as of Probability, Matrices, Calculus and Regression. MS-Excel is the most important tool we will use in the class to internalize the concepts. Have some good practice of the MS-Excel. If you have done your Summer Internship in Bank Treasury, it will be an added advantage.
Course Outline
1. Fixed Income Markets - Overview
• Characteristics of fixed income markets
• Monetary Policies and Market Interface
• Various instruments and their classification
2. Bond Pricing and Yield Measures
• Types of bonds and their pricing
• Various yield measures
3. Treasury Securities
• Market terminology
• Pricing Treasury notes and bonds
4. Corporate Bonds
• Corporate bonds market terminology
• Pricing
• Role of Credit ratings
• Credit Default Swap Price Computation using Black-Scholes-Merton Model
5. Duration
• Basics of duration and modified duration
• Computation of duration for various types of instruments
6. Convexity
• Basics of convexity
• Calculation of convexity for portfolios
• Positive and negative convexities and their role
7. Basis Point Value
• The relationship between BPV, duration and convexity
• Calculating methodologies of BPV for on and off balance sheet items
8. Option Embedded Bonds
• Callable and puttable bonds
• Valuation
• Convertible bonds and their valuation
9. Repo Market
• Repo Maths
• Securities Lending
10. Interest Rate Swaps
• Importance of interest rate risk
• Pricing and valuation of interest rate swaps
• Variants in interest rate swaps
• Interest Rate Options
11. Interest Rate Futures
• Futures Pricing
• C Factor Computation
• CTD
12. Forward Rate Agreements
• Trading mechanics of FRAs
• Trading and arbitrage strategies using FRAs
13. Bond Trading and Hedging Strategies
• Bond trading mechanics
• Bond stripping
• Relative value trade
14. Risk Capital and Fixed Income securities
• VaR Concept
• Methodology
• Risk Computation
Required Reading and Text books
Most lectures are supplemented with required readings from the book:
Bruce Tuckman, 2002,
Fixed Income Securities: Tools for Today's Markets
(2nd edition), John Wiley & Sons, Inc.
This book is available at the bookstore and at www.amazon.com. Additional readings (both required and optional) may also be distributed in class.
I have a special liking for Kenneth Garbade’s book on Fixed income and I recommend my students to read the same at any point of time in their life if you choose Fixed Income as a career. If you are interested in having another fixed income or risk management textbook, I recommend any of the following:
Fixed Income
Frank J. Fabozzi, 2007, Fixed
Income Analysis
(2nd edition), McGraw-Hill Companies, Inc. (for CFA)
Frank J. Fabozzi, 2005, Fixed
Income Mathematics: Analytical and Statistical Techniques
(4th edition), McGraw-Hill Companies, Inc.
Frank J. Fabozzi, 2001,
The Handbook of Fixed Income Securities
(6th edition), McGraw-Hill Companies, Inc.
Kenneth D Garbade, 1998,
Fixed Income Analysis
, MIT Press
Risk Management
Linda Allen, Jacob Boudhoukh, and Anthony Saunders, 2004,
Understanding Market, Credit, and Operational Risk
, Blackwell Publishing. ·
Michel Crouhy, Dan Galai, and Robert Mark, 2001,
Risk Management
, McGraw-Hill Companies, Inc. ·
Philippe Jorion, 2006,
Value at Risk
(3rd edition or later), McGraw-Hill Companies, Inc.
Grading
Absolute Grading will be followed. Grading will be fair and objective. Quiz results and Assignment results will be generally available in 24 hours time but it can take more time if external expert’s view is sought on trading assignment (17%).
The following components will be taken for Grading:
1. Quiz - 25% (Average of 3 quizzes of 1 hour duration with 25-30 MCQ). Quizzes will be held outside Class timing.
2. Assignment (25%) - 8% - Auction assignment and Position Covering using Live Market Auction and Trading and 17% - Fixed incomeTrading Strategy using a portfolio of Bonds and interfacing with Money Market Instruments. Assignment submissions will be in standard format. No group assignments are encouraged. These assignments will be done live using Google Sheet uploaded by me.
3. End Term (50%) - 15% - End term-I using MS Excel and 35% End Term Test of 3 hours duration (Close Book).
Feedback
During the course, there will be a Google Sheet opened for receiving anonymous feedback from students. The feedbacks are objectively processed and used for future course correction and empowerment. Unparliamentary words and sentences are not encouraged.
Student!Contact!
Two students (preferably a male and a female) will volunteer to interact with the Instructor for all correspondence and courseware uploads to course web.
Student!Counseling!
The Instructor will be available in the campus for discussion on any issues pertaining to the course or career or in any other topics that students feel okay to discuss with the Instructor.
Contact!Details
Course Instructor will be available at
gcnath@hotmail.com
and
gcnath@yahoo.com
You can also reach me on 91-9820511897 and 91-22-66620134.
Created By:
Janaki Jagan
on
05/28/2011
at
10:02 AM
Category
:
PGDM-II
Doctype
:
Document
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