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REUTERS 3000 XTRA
University of Hong KongUniversity of Hong Kong
Trading WorkshopTrading Workshop
David Lo
Class 5Class 5
Treasury Workshop IIITreasury Workshop III
Interest Rate DerivativesInterest Rate Derivatives
REUTERS 3000 XTRA
Agenda
• How to get the real-time and historical rates of FRA, IRS & Zero Coupon Rates
• How to use 3000Xtra for pricing FRA from deposit rates, futures or zero curve
• How to price IRS /Asset Swap from spot or historical zero coupon curve
REUTERS 3000 XTRA
What is a FRA? (FRA = Forward Rate Agreement)
• An FRA (forward rate agreement) is a contract between two parties to lock in a forward interest rate, for a period, starting at a specific date in the future.
For example, a 6 v 9 FRA is a contract that begins 6 months from now and ends after 9 months, i.e., lasts for 3 months.
The two counterparties, one buyer and one seller, settle by cash payment at the start of the contract (in this example 6 months from now).
REUTERS 3000 XTRA
Example : 6X9 FRA
• It begins in 6 months for a 3 month period
• To hedge the risk of rising rates, you can buy a 6X9 FRA to protect yourself from a rise in interest rate you expected to occur in 6 months time.
Interest Rate Rises Interest Rate Falls
FRA Buyer Winner (Gain $) Loser (Pay $)
FRA Seller Loser (Pay $) Winner (Gain $)
REUTERS 3000 XTRA
• Interest Rate Futures
• Cash Deposits
• Zero Coupon Curve
FRA Pricing is via :
REUTERS 3000 XTRA
FRA Pricing Model
REUTERS 3000 XTRA
How to use the Model ?
• Choose Currency (eg. HKD, USD…..)
• (type in command line, or drop down box on top left)
• Choose FRAs from Deposit, Futures or Zero Coupon
• Who will trade the FRA?
• Ans : Money Dealer, Short-term IRD Desk...
REUTERS 3000 XTRA
Benefits
• Automatic real-time update or you can input the value by yourself
• Use hyperlinks to access relevant quotes
• Able to calculate broken-dates by specific start and end dates
• Have choice of Normal or IMM dates
• Have choice of underlying instruments :deposit, futures or zero coupon
REUTERS 3000 XTRA
What is an IRS? (IRS = Interest Rate Swap)
• Swap fixed rates with floating rates or vice versa
• It can cover interest rate exposure risk
• Plain Vanilla Swap – Fixed for Floating
• Alter the structure of cash flows into a desired format
• Quoted as fixed rate against standard floating rate (such as 3 month or 6 month LIBOR)
REUTERS 3000 XTRA
Interest Rate Swap
• Two sides – receive & pay
• No principal exchange, just swapping interests flows
• Fixed interest
- does not change throughout life of swap
• Floating interest
- changes every pre determined period
Spot Date 1Y 2Y 3Y
Fixed Interest payments
Floating Interest payments
REUTERS 3000 XTRA
Terminology
• 2 legs or sides
• Receive side or offer side
- ( Lend Money receive interest)
• Pay side or bid side
- ( Borrow Money pay interest)
• Notional not exchanged in IRS
- Lend Money and Borrow Money net off
- Credit risk is lower
REUTERS 3000 XTRA
Quoting Conventions
• USD IRS
- Annual Money against 3 month Libor
Spot Date 1Y 2Y 3Y
Fixed Payments = Principal x Fixed Rate(%) x actual nos. days/360
Floating Payments = Principal x 3M Libor(%) x actual nos. days/360
REUTERS 3000 XTRA
IRS as a Hedge
• Scenario
- Corporate has an outstanding floating rate term loan with a remaining life of 3 years
- Corporate feels that interest rates may rise in the future in tandem with economic recovery
- Corporate wishes to lock the remaining life of the term loan into a Fixed Rate
- Corporate seeks Bank for a strategy
REUTERS 3000 XTRA
IRS as a Hedge
Corporate Bank
Interest payments on outstanding loan
6 month Libor + 150bps
IRS
Corp receives 6 month Libor + 150bps
Corp pays Fixed @ 4.875%
To protect against rising interest rates
REUTERS 3000 XTRA
Reference Code
• 0#IRS-HKD by institutions
• 0#IRS-HKD-BRK by broker
• 0#MARKETS
Interest Rate Rises Interest Rate Falls
IRS Buyer Winner (Gain $) Loser (Pay $)
IRS Seller Loser (Pay $) Winner (Gain $)
REUTERS 3000 XTRA
Swaps (Swaps.kob)
>Go to Model
REUTERS 3000 XTRA
Benefits
• Data display model for different currencies
• Both institutions and broker contributions
• Clients can see all related instruments
• Eg. Swaptions, Basis Swap, ISDA FIXING, Treasury Swap Spread…….
• Display benchmark yield curve and zero curve
• Display related news
REUTERS 3000 XTRA
IRS Pricing (Interest Rate Swap)
>Go to Model
REUTERS 3000 XTRA
Benefits
• It can calculate specific structure and conventions, including amortization
• Cash flow for the fixed and floating leg
• Client can choose Reuters zero curve or their own zero curve
• Use hyperlinks to access relevant quotes
REUTERS 3000 XTRA
Asset Swaps (Asset Swap.xls)
REUTERS 3000 XTRA
Purpose of the model
• Swapping a Fixed Asset for a Floating Asset
• (eg, 5 Years US Treasury for Libor)
• Achieve cheap funding
• Limited only to the same currency
• Client can choose Reuters zero curve or their own zero curve
• >Go to Model
REUTERS 3000 XTRA
Zero Coupon Builder (ZeroBuilder.xls)
REUTERS 3000 XTRA
Benefits
• It allows you to calculate a real-time zero coupon yield curve from deposits, futures, swap and bond rates.
• It can use either real-time update rates or input rates
• Save the setup for a curve and re-use it either in this worksheet or other model
• >Go to Model
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Parameters
• Deposits (D)
• You can enter deposits, but not pre-spot deposits (eg ON or TN)
•
• Futures (F)
• If you include futures, you must include the 3 month deposit rate in the preceding instrument codes.
• You may use any RICs, but best are continuation RICs or cm for contract month
• You must enter futures contracts in one strip, with no more than one contract missing from the strip.
•
• Interest Rate Swaps (S)
• In the Structure field enter the Adfin structure code to determine the nature of the cashflows (see Settings/Style Management/IRS Styles)
•
• Bonds (B)
• In the Structure field add the Adfin structure code to determine the nature of the cashflows (see Settings/Style Management/Bond Styles)
•
• Ins/Del buttons allow you to insert or delete rows in your instrument table (highlight the instrument to act on first)
