Essay on Ted Spread in Financial Crisis - 1331 Words

Fixed Income Securities Ted Spread and Swap Spread in a Financial Crisis Discussion Questions Due April 12, 2012 Please complete these questions in groups of 2, to hand in. The grade is calculated as part of your participation grade, so participation, as with the last case, can improve your score substantially, even if your calculations aren’t all perfect! Should Albert Mills do this trade? Back up your answer with the following analyses: 1. Write out the initial transaction and cash flows for the trade based on entering the swap, purchasing the Treasury bond, and borrowing using the repurchase agreement. Assume $1 billion notional principal for the swap and $1 billion face value for the Treasury bond. You may be very†¦show more content†¦Off course, if we think about only these numbers it seemed that TKC is receiving more than it pays but this not exactly true since TKC paid for the bonds more than it is going to get after the 38 years (premium bond = coupongt;YTM plus TKC’ initial investment of $21 million. 2. Estimate the unrealized gain/loss on this trade as of November 19 (two weeks after the initial transaction date). Assume the following: repo rate stays at 0.15% for the full two week period with overnight rolling over of the loan (3 days on the weekend), the fixed swap rate is at 4.0%, the YTM on the Treasury is 4.2%. The Treasury will have an interest payment on November 15, so be sure to take this into account. The swap will not have a payment (either fixed or floating), but do account for the accrued interest on both sides of the trade, as well as the accrued interest on the Treasury bond (Treasury uses actual/actual day count, as you know). The floating piece of the swap uses actual/360 day count (stated in the case). The fixed piece of the swap uses actual/actual day count to calculate interest. Use DV01 measures to estimate the change in value of the swap and the bond. For the repo, assume actual/360 day count to calculate interest paid (interest is paid daily or on Monday i n the case of a weekend). a. Does this transaction generate a gain or a loss? The transaction generatesShow MoreRelatedLibor1547 Words   |  7 Pagesarithmetic mean of the middle two quartiles of rate submissions from a panel of the largest, most active banks in each currency. In the case of the U.S. LIBOR, the panel consists of fifteen banks. These rates are a benchmark for a wide range of financial instruments including futures, swaps, variable rate mortgages, and even currencies. The LIBOR represents the rate at which banks lend to one another. Due to some regulations (reserve requirements) imposed by US banking authorities on US banksRead MoreLibor1559 Words   |  7 Pagesarithmetic mean of the middle two quartiles of rate submissions from a panel of the largest, most active banks in each currency. In the case of the U.S. LIBOR, the panel consists of fifteen banks. These rates are a benchmark for a wide range of financial instruments including futures, swaps, variable rate mortgages, and even currencies. The LIBOR represents the rate at which banks lend to one another. Due to some regulations (reserve requirements) imposed by US banking authorities on US banks,Read MoreThe London Inter Bank Lending Rate1384 Words   |  6 Pagesconsidered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. 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For a while, the Thai government managedRead MoreVariable Measurement, Sampling Selection, And Empirical Design Essay983 Words   |  4 Pagesto book, cash flow/net assets, market-to-book ratio, sales growth, RD/Sales, diversification dummy, the TED spread (difference between the three-month LIBOR and the yield on three-month treasury bills), ,and the spread of three-month commercial paper over treasury bills of the same maturity, and the Chicago Board Options Exchange Volatility Index (VIX) (to control for the intensity of the crisis) 3.2. Empirical design This section provides the empirical model. My main empirical approach consistsRead MoreInternational and Global Trade Essay1168 Words   |  5 Pagesknown as a currency crisis. These happen when a devaluation of currency ends an attack in the foreign exchange market resulting in a deficit or market speculation. 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