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Derivatives and Alternative Investments
Finance & Accounting
Pages 14 (3514 words)
Derivatives and alternative investments Name Professor Date Question 1 Number of future bonds to be shorted = 50,000,000/ (122*100,000)= 409.8 = 410 bond futures Question 2 The interest rate swap market is one of the most important fixed-income markets in the trading and hedging of interest rate risk.
If the swaps market were less liquid than it is, market mortgage lenders would find it more difficult and expensive to manage the interest rate risk of the prepayment option in fixed rate mortgages (Greenspan 2004). The extensive use of interest rate swaps means that volatility of the swap spread can affect a large range of market participants, as they rely on a stable relationship between the interest rate swap rate and other interest rates in using swaps for their hedging objectives. For this reason, trading activity that would stabilize the swap spread performs a useful role in ensuring that market participants can rely on the market for their trading and hedging needs. By market convention, the fixed-rate payer that has a long swap position in a fixed/floating interest rate swap is called the taker or buyer of the swap, while the floating-rate payer that has a short swap position in the fixed/floating interest rate swap is called the provider or seller of the swap. The fixed-rate payer and the floating-rate payer of an interest rate swap are called the counterparties of the swap. ...
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