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PanzerMeyer


Total Posts: 1381
Joined: May 2004
 
Posted: 2004-08-02 09:57

I have to evaluate a Structured product which contains a Zero Coupon and an option. With a 6-year maturity.

The input is then the price of a 6-year ZC:

Date 6y Zc Price
Aug-04 0.7957
Aug-05 0.8150
Aug-06 0.8413
Aug-07 0.8737
Attached File: Zc valuation.zip

In fact I have to evaluate the price of this Zero coupon if the curve is bumped with -0.50%, +0.50%, +1%, etc.... in 1,2 and 3 years...

I am not really sure of my result in the attached excel file.. if someone has time to check this out...


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FDAXHunter
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Posted: 2004-08-02 10:14
You are bumping the spot rates, are you sure this is what you want to do? If so, then it looks correct.

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PanzerMeyer


Total Posts: 1381
Joined: May 2004
 
Posted: 2004-08-02 10:17

I thought about what to do last Friday... I started to calculate Forward curve in 1 year, 2 years and 3 years and then bumping it. But then that it's not very relevant (or is it ?)

So I then chose to bump the spot rate, which can show investor's price level of their structured product according to different scenarii on the yield curve....


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FDAXHunter
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Posted: 2004-08-02 10:26

Hehehe... somebody that is foregoing all his interest to invest in an option is hardly going to care about the future of interest rates now, is he Smiley

Anyway, so if you just want to illustrate the path this structure is taking as the spot rates change over the years than your approach works.

Forward rates are very relevant, but as I said above, the buyer is not concerned about rates, but rather in protecting his capital.

Just out of morbid curiosity... what spread are you charging for this? 2%?


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PanzerMeyer


Total Posts: 1381
Joined: May 2004
 
Posted: 2004-08-02 10:30

it s been sold already but spreads are sometimes more than that... yark yark yark.... it s insane.. anyway that's a good figure. However the options has a really exotic nature (mix of bermudean, baskets of equities, callable, etc.) so even if the price given by structuring or trading desk takes into account hedging cost, it's better to have more cash in the bank in case...

okay for the explanation.


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ComteZero


Total Posts: 523
Joined: Jun 2004
 
Posted: 2004-08-02 13:26
as one of your potential client, my desk appreciate your... transparency.

/* Trust is good, no trust is better. */

PanzerMeyer


Total Posts: 1381
Joined: May 2004
 
Posted: 2004-08-02 14:06

I make some good discount to friends. Buy one, get one free...


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NeroTulip


Total Posts: 1036
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Posted: 2004-08-02 14:56

This discount only applies to zero-cost structures, right? Tongue out

 

You da (sales)man!


Truck driver, Toxic Waste Capital Management LLC. Trash is our business.

quantie


Total Posts: 890
Joined: Jun 2004
 
Posted: 2004-08-02 18:47

>>I thought about what to do last Friday... I started to calculate Forward curve in 1 year,  >>years and 3 years and then bumping it. But then that it's not very relevant (or is it ?)

Well it depends if this sits in a bigger book, if you want to hedge across the book and you want to generate sensitivities that are additive then most places convert the DV01's to some "equivalent exposures", generally in terms of a set of "orthogonal" instruments. (generic swaps for instance)


Crassus


Total Posts: 1194
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Posted: 2004-08-02 23:40
Sorry, but what does "bumping" mean? Piss

Nonius
Founding Member
Nonius Unbound
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Posted: 2004-08-03 10:18

moving a rate up by a basis point.

 


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FDAXHunter
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Posted: 2004-08-04 20:31
(Deleted)

Edit: Oh sorry, wrong thread, I thought this one was titled "Humping a Zero Coupon."

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aiyanachristy
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Posted: 2019-11-02 11:33
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