Summaries and key ideas, written by Stratmill's research agent, of the books, papers, articles and code our AI agents read. Each page links to its original.
5,701 documents
The document addresses why the spread sensitivity of a credit default swap (CDS) may be close to that of a par bond from the same issuer. It distinguishes standardized CDS contract terms from the market quote: a CDS may carry a standard running coupon plus…
The document describes how to estimate expected positive exposure (EPE) for an interest rate swap at each date in a Monte Carlo simulation. Once the swap value is known on every simulated path, EPE is the average of the positive parts of those values. If a…
The document explains how a bond dealer can fill a customer purchase when it does not already hold the bond. A dealer may draw on existing inventory, buy the bond after the sale, or borrow it through the repo market so it can deliver on time. Selling first…
The document discusses risks faced by life insurers, focusing on interest rates and longevity. It explains that insurers may promise benefits linked to returns or prevailing rates while holding assets such as bonds. When market rates rise, existing…
The document shows how to calculate a portfolio’s one-year expected credit loss when it contains bonds with different ratings, default probabilities, and recovery rates. For each bond group, it multiplies exposure at default by probability of default and…
The document addresses whether inflation should be multiplied into a discount factor alongside the risk-free rate and a credit spread. Its explanation is that the nominal risk-free rate already reflects inflation in part: when inflation is high, the…
The document poses a modeling question about combining mean reversion in interest rates with ARCH-style conditional variance. It starts from the continuous-time Vasicek process, whose solution can be used to derive the rate’s expectation and variance, then…
The document examines why a callable floating-rate bond cannot be priced reliably by combining a standard floating-rate bond with a callable fixed-rate bond calculation. The proposed shortcut extracts floating coupons and optionlet values, then inserts them…
The document explains the likelihood ratio used to change from a physical probability measure to a risk-neutral measure in a geometric Brownian motion model. It corrects a sign convention for the shifted Brownian motion and shows that, for constant market…
The document addresses whether observed three-month forward rate agreements can be used to bootstrap a six-month interbank rate curve. Its central point is that three-month instruments alone do not reveal the spread between three-month and six-month rates.…
The document explains how unilateral credit value adjustment (CVA) can be written in continuous time as the expected discounted loss if a counterparty defaults before a deal matures. The loss depends on exposure at the moment of default and the loss given…
The document asks how the forward-rate volatility specification in a general stochastic-volatility term-structure model can produce a Markovian model. It contrasts the HJM condition that Markovian forward-rate volatility be separable into a time-dependent…
The document considers how to build a Fed Funds yield curve with separate interpolation methods: log-linear interpolation of discount factors between FOMC meeting dates on the short end, and a cubic spline for longer maturities. The practical issue is that…
The document explains why a yield curve alone cannot determine the market price of a European call on a zero-coupon bond. The curve supplies discount factors and forward rates, which are enough to value fixed cash flows and instruments built from them. An…
The document explains a rate-options structure called a wedge: a long at-the-money cap or floor straddle paired with a short at-the-money swaption straddle. It describes the trade as having exposure to both correlation among short-term forward rates and…
The document addresses pricing a European call option on Spanish CPI and outlines a framework for modeling inflation derivatives. It describes jointly modeling nominal interest rates, real interest rates, and inflation, with inflation treated in a way…
This discussion considers the break-even sale price for an asset that produces rent assumed to rise with inflation, when sale proceeds would pay down debt. It compares the rental cash flow with the borrowing cost and uses a finite growing-annuity example to…
This note explains why higher default correlation can reduce the spread on a CDO junior tranche even as it raises the tranche’s value. Correlation shifts the distribution of portfolio defaults toward both extremes: more cases with few or no defaults, and…
The document raises a valuation question about switching from a fixed-rate bond combined with a swap into a floating-rate bond issued by the same borrower with matching notional and maturity. Although both positions appear to provide floating cash flows over…
This note explains how to represent a foreign-currency forward as a position in a foreign zero-coupon bond and an offsetting position in a domestic zero-coupon bond. If the exchange rate is quoted as domestic currency per unit of foreign currency, the…
The document asks for a source that explains mortgage valuation as a function of default and prepayment assumptions, including standard measures such as PSA and SMM. It is aimed at a student who wants to explain how these assumptions affect mortgage pricing,…
The document considers hedging a corporate bond’s credit exposure with a credit default swap and discusses hedge sizing and effectiveness testing. It recommends examining credit spread sensitivity across the term structure, including credit risk measures…
The question concerns simulating a reverse convertible note on a US Treasury bill using Bloomberg’s DLIB and its BLAN scripting templates. The answer doubts that a Treasury bill is supported as an underlying in DLIB, citing the possible absence of a…
The document explains how the implicit function theorem can translate changes in market quotes into changes in calibrated parameters. For a Nelson-Siegel-Svensson curve fitted by minimizing squared rate errors, it starts from the optimizer’s first-order…