Trading the Fixed Income, Inflation and Credit Markets -- Contents -- Preface -- Acknowledgements -- About the Authors -- 1 Product Fundamentals -- 1.1 Chapter Overview -- 1.2 Bond Fundamentals -- 1.2.1 Fixed income structures -- 1.2.2 Floating-rate notes -- 1.2.3 Inflation -- 1.3 Repurchase Agreements -- 1.4 Credit Fundamentals -- 1.5 Derivative Fundamentals -- 1.5.1 Futures -- 1.5.2 Forwards -- 1.5.3 Swaps -- 1.5.4 Vanilla options -- 1.5.5 Exotic options -- 2 Pricing Relationships -- 2.1 Relative Value -- 2.2 The Relative Value Triangle -- 2.3 Spot Pricing -- 2.3.1 Pricing fixed income securities -- 2.3.2 Par yield curves -- 2.3.3 Zero-coupon yield curves -- 2.3.4 Forward yield curves -- 2.3.5 Pricing floating-rate notes -- 2.3.6 Inflation pricing -- 2.3.7 Credit pricing -- 2.4 The Spot-Forward Relationship -- 2.4.1 Fixed income -- 2.4.2 Credit markets -- 2.5 The Spot-Swap Relationship -- 2.5.1 Pricing swaps - counterparty credit risk -- 2.6 The Forward-Swap Relationship -- 2.7 Pricing Options-Relationship With The Underlying Market -- 2.7.1 Black-Scholes-Merton: an intuitive approach -- 2.7.2 From closed-form to binomial pricing techniques -- 2.7.3 Monte Carlo simulation -- 2.7.4 Put-call parity -- Appendix 2.1 Monetary Policy and Overnight Interest Rates -- Appendix 2.2 OIS Discounting -- 3 Market Risk Management -- 3.1 What Do We Mean By Risk? -- 3.2 Defining Market Risk -- 3.3 Spot Market Risk -- 3.3.1 Macaulay duration -- 3.3.2 Modified duration -- 3.3.3 Convexity -- 3.3.4 Dollar value of an 01 -- 3.3.5 Market risk of a floating-rate note -- 3.3.6 Market risk of credit instruments -- 3.4 Forward Risk -- 3.4.1 Fixed income -- 3.4.2 Credit -- 3.5 Swap Market Risk -- 3.5.1 Spot swap risk -- 3.5.2 Carry and roll down -- 3.5.3 Application of DV01 -- 3.5.4 Forward-starting swap risk -- 3.6 Option Risk Management -- 3.6.1 Delta -- 3.6.2 Gamma.

3.6.3 Theta -- 3.6.4 Vega -- 3.6.5 Smiles, skews and surfaces -- 3.7 Value at Risk -- 4 Expressing Views on the Interrelationships between Products -- 4.1 The Spot-Forward Relationship -- 4.1.1 Bond futures -- 4.1.2 The cheapest to deliver -- 4.1.3 Changes in the cheapest to deliver -- 4.1.4 The yield beta -- 4.1.5 Trading the basis -- 4.1.6 Implementing a basis trade -- 4.2 The Spot-Swap Relationship -- 4.2.1 Understanding swap spreads -- 4.2.2 Negative swap spreads -- 4.3 The Forward-Swap Relationship -- 4.4 Options and Trading Volatility -- 4.4.1 Expressing views on market direction and volatility -- 4.4.2 Assessing volatility: cheap or rich? -- 4.4.3 Expressing views on volatility of volatility -- 4.4.4 The relationship between volatility and the underlying asset -- 5 Identifying Value in Sovereign Bonds -- 5.1 What Is Relative Value? -- 5.2 Understanding the Yield Curve -- 5.2.1 Yield curve formation -- 5.2.2 How does the yield curve move? -- 5.2.3 Yield curve movements -- 5.2.4 How do yield curves actually move? -- 5.2.5 Yield curve modelling -- 5.3 Measures of Spread -- 5.3.1 Decomposing bond yields -- 5.3.2 Swap spreads -- 5.3.3 CDS spreads -- 5.3.4 I-spread -- 5.3.5 TED spread -- 5.3.6 Z-spread -- 5.3.7 Option-adjusted spread -- 5.3.8 Asset swap spread -- 5.4 Identifying Value in Sovereign Bonds Using Asset Swaps -- 5.4.1 Determining the appropriate benchmark -- 5.4.2 Term structure of asset swap spreads -- 5.4.3 Assessing value in sovereign bonds -- 5.4.4 Forward asset swap spreads -- 5.4.5 Inflation-linked asset swaps -- 5.5 Summary of Yield Measures -- Appendix 5.1 Curve flattening trade -- 6 Trading the Yield Curve -- 6.1 Trading Terminology -- 6.1.1 Long or short? -- 6.1.2 Roll down and carry revisited -- 6.2 Trading the Short End of the Yield Curve -- 6.2.1 Money-market loans and deposits -- 6.2.2 Interest rate futures.

6.2.3 Interest rate swaps -- 6.2.4 Options on single-period short-term interest rates -- 6.3 Trading the Slope of the Yield Curve -- 6.3.1 Short-term interest rate futures vs. bond futures -- 6.3.2 Fed Funds futures vs. interest rate swaps -- 6.3.3 Bonds and swaps -- 6.3.4 Conditional curve trades -- 6.3.5 Identifying slope trades using swaptions -- 6.3.6 Volatility and the level of interest rates -- 6.4 Trading the Curvature of the Yield Curve -- 6.4.1 An overview of butterfly spreads -- 6.4.2 2s5s10s Butterfly trade using bonds -- 6.4.3 2s5s10s Butterfly trade using swaps -- 6.4.4 Forward and spot spreads and carry -- 6.4.5 Volatility and yield curve slope and curvature -- 6.5 Volatility, Curvature and Skew -- 6.6 Constant-Maturity Products -- 6.6.1 Product definitions -- 6.6.2 CMS product pricing -- 6.6.3 CMS sensitivities and impact on market -- 6.6.4 Applications of CMS products -- 6.7 Structured Products - Range Accruals -- 7 Relative Value in Credit -- 7.1 Applying the Relative Value Triangle to Credit -- 7.1.1 The bond-credit default swap relationship -- 7.1.2 The forward-swap relationship -- 7.1.3 Volatility -- 7.2 Expressing Views on the Credit Term Structure -- 7.2.1 Steepening/flattening trades -- 7.2.2 Butterfly trades -- 7.2.3 Convexity -- 7.3 Expressing a View on a Single Reference Entity -- 7.3.1 Credit-linked notes -- 7.3.2 Expressing a view on a single reference entity - an example -- 7.4 Expressing a View on a Basket of Reference Entities -- 7.4.1 Total return swaps -- 7.4.2 Basket default swaps -- 7.4.3 Index tranche investing -- 8 Relative Value in Inflation -- 8.1 Payers and Receivers of Inflation -- 8.2 Term Structure of Breakeven Inflation and Real Yields -- 8.2.1 Trading the slope of inflation curves -- 8.2.2 The importance of liquidity -- 8.3 Seasonality -- 8.4 Identifying Value in Inflation-Linked Bonds.

8.4.1 Fitted curves - cheap/rich analysis -- 8.4.2 Forward rate analysis -- 8.4.3 Butterfly trades -- 8.5 An Overview of Inflation-Linked Trading Strategies -- 8.5.1 Inflation market risk -- 8.5.2 Forward prices and carry -- 8.5.3 Summary of popular inflation trades -- 8.6 Expressing Views on Breakeven Inflation -- 8.6.1 Cash strategies -- 8.6.2 Derivative strategies -- 8.6.3 Expressing views on swap breakevens -- 8.7 Expressing Views on Real Yields -- 8.7.1 Total return inflation swaps -- 8.7.2 Real rate swap -- 8.8 Forward Breakevens -- 8.8.1 Background -- 8.8.2 Assessing the risk premium -- 8.8.3 Trading forward breakevens using bonds -- 8.8.4 Trading forward breakevens using swaps -- 8.8.5 Calculating forward swap rates -- 8.8.6 Forward real-yield trades -- 8.9 Using Options to Express Views on Breakeven and Real Yields -- 9 Trading Axioms: An A to Z -- Notes -- Bibliography -- Index.