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  1. Nicole Seaman

    YouTube T4-24: Fixed Income: Arbitrage to exploit violation of Law of One Price

    Financial Risk Manager (FRM), Topic 4: Valuation and Risk Models, Fixed Income, Bruce Tuckman Chapter 1, Prices Discount Factors and Arbitrage. How do we exploit the Law of One Price (which asserts that--absent confounding factors like liquidity or taxes--is only one set of discount factors)? We...
  2. Nicole Seaman

    YouTube T4-23: Fixed Income: Twists are steepening or flattening of the yield curve

    The drawback of yield-based duration and convexity is that implicitly they must assume a parallel shift in the rate curve. While there can be many non-parallel shift, the two most common are twists and butterflies. A twist is when the curve steepens or flattens. A STEEPENING is when either (i)...
  3. Nicole Seaman

    YouTube T4-22: Fixed Income: Bond's full/flat price on settlement date

    The example follows Bruce Tuckman's example 1.3. The bond settles on June 1st. The previous coupon was paid on February 15th and the next coupon is paid on August 15th; so it has been 106 days since the last coupon and 75 days until the next coupon. The bond matures in about 9.21 years, and has...
  4. Nicole Seaman

    YouTube T4-21: Fixed income: Law of One Price

    The Law of One Price says that only one discount factor exists at each maturity, absent confounding factors. On the first sheet, I demonstrate why "spot rate of 4.0%" is imprecise, yet "discount factors do not lie." On the second sheet, given observed bond prices, depending on the Law of One...
  5. Pam Gordon

    P1.T4.321. Fixed income single-variable regression hedge

    AIMs: Explain the drawbacks to using a DV01-neutral hedge for a bond position. Describe a regression hedge and explain how it improves on a standard DV01-neutral hedge. Calculate the regression hedge adjustment factor, beta. Calculate the face value of an offsetting position needed to carry out...