| Investment Knowledge |
 |
 |
 |
 |
|
Interest Rate Market
Interest Rate Market Instruments Swap with Better-of Cliquet Option A model is developed for pricing a swap with better of cliquet option. The floating amount payer makes semi-annual payments based on USD-LIBOR-BBA minus a spread. The fixed rate payer makes a single payment at swap maturity based on the arithmetic average of the S&P 500 Index price over certain pre-specified windows of ten consecutive trading days. Mortgage Corporation Swap A model is developed for valuing a swap1 between party A and party B. Here party A receives a fixed amount and makes a single variable payment at swap maturity. The payment amount can be modeled as the value of a European discrete Asian call option on a basket of indices. Here the basket price consists of an arithmetic average of various stock and bond indices. The call option payoff at maturity is equal to maximum of zero and an arithmetic average of basket values at certain points in time prior to option expiry less a fixed strike. DGV VaR The Delta Gamma Vega (DGV) methodology is developed to estimate Value-at-Risk (VaR) for portfolios of equities and equity options in order to comply, in regard to market risk measurement. The model can accurately estimates over-night VaR for portfolios with non-zero convexity or linear risk. MC Short Rate Model The Monte Carlo Multi-factor Short Rate Mode has been used extensively in pricing a variety of interest rate derivative securities. The model assumes that short rates at reset times are lognormally distributed. Probability of Hitting Barrier A model is developed for evaluating the conditional probability of hitting an upper barrier before a lower barrier, and vice versa, for a tied down geometric Brownian motion with drift. The method produces an analytical value for this probability, assuming that the barrier levels are constant and continuously monitored. Partial Barrier Option A model is presented for pricing certain types of European, continuously monitored partial barrier options. The method is based on certain analytical formulas, for pricing such options. Lookback Call Option A model is presented for pricing a European lookback call option on a stock index with guaranteed exchange rate (LBCGER). Trinomial Tree Construction A trinomial tree based method is presented for pricing exotic options. The model is based on a combination of techniques. that is, a tree generation technique and an appropriate backward induction pricing technique. Tree Algorithm for Barrier Option A trinomial tree can be used for pricing particular types of barrier options. We consider particular types of single barrier and double barrier options. The single barrier options include certain types Mortgage Cash Flow We model the closed monthly cash flows from a pool of mortgage. Here cash flows consist of principal and interest payments. Principal payments arise from the regular amortization of principal, as well as from scheduled and unscheduled principal pre-payments. Mortgage Transfer Coupon With respect to a closed commercial mortgage certificate, the transfer coupon rate is defined as an annualized, monthly compounded interest rate, such that the fair value of the closed mortgage certificate, from Treasury’s point of view, is par. Seller Swap One party sells mortgage pools on its balance sheet and pays the bond interest by entering into a pay-fixed swap with CHT, and receives the interest from MBS pool sold to CHT. This is a seller swap. The fixed leg is semi annual, and the float leg, MBS coupons, is monthly. In addition, the MBS sold to the trust generates principal cash flows. CHT buys new-pooled mortgages from the party with this principal flows every month until the maturity of the swap. Mortgage Pool A model is presented for the calculation of the fair value and the hedge ratios, Delta, Vega and Gamma, with respect to pools of Canadian commercial and residential mortgages. Commercial mortgages are closed and either insured or not insured, while residential mortgages are separated into MBS Liquidation Rate We calculate the price of an MBS based on future cashflows that are assumed to be deterministic. One of the factors affecting future cashflows is a liquidation rate. In its current implementation the user has two options for specifying a liquidation rate, that is, it can be assumed to be constant or vary deterministically according to a Standard Vector prepayment model. For the Standard Vector model, the liquidation rate is calculated as Prepayment Neural Net A model of mortgage prepayment rates based on the neural net approach is proposed. The model for insured, closed, five-year term mortgages has been developed. Mortgage prepayment rate is affected by a large number of economic, social and demographic factors and is to a significant degree a random variable. We have identified six principal determinants of the prepayment rate and built a neural network that uses these determinants as input parameters. Given these inputs the model is supposed to predict the corresponding prepayment rate. Mutual Fund Cash Flow A model for the balance between the expenses to pay back amortizing notes and the income from fees generated by mutual funds is presented. We provide two basic models, one static and the other dynamic, for the performance of the mutual fund fees. The static model assumes that the Net Asset Value (NAV) of the mutual fund grows at a predetermined rate. The alternative model assumes that the growth rate of the NAV varies either. The fund manager pays outright commissions to the broker who buys units of the mutual fund to his customers, while the customers do not pay anything at the time of purchase. The fund unit holders, however, pay fees to the fund management annually. The fund sells these future cash flows to one party and uses the proceeds to pay the broker commissions. To finance the purchase of the future cash flows, the party issues amortizing notes. Variable Rate MBS In the simplest sense an MBS is valued according to the current value of an expected series of cash flows for the pool of mortgages that underlie the security. However, predicting the expected cash flows must take into account the characteristics of the underlying mortgages that could alter the cash flows and predict what those changes would be. The calculator used for MBS valuation of FRM assesses the expected cash flows from the mortgages while considering the potential for not earning those cash flows due to early return of principal from prepayments and mortgage refinancing, and determines the appropriate fixed coupon for the MBS accordingly. However, VRM have different characteristics that determine the cash flow behaviour in particular a changing interest rate and the possibility for conversion to a new FRM. Credit Risk Calculator The purpose of the credit risk calculator is to ensure that the expected loss that can occur from the guarantor’s (CMHC’s) perspective is covered by the guarantee fee. From CMHC’s perspective, the risk of loss will occur if an AAA/AA swap counterparty fails instantaneously without any rating migration to a lower state (i.e., AA to A). Under a normal rating migration, the swap counterparty to the Trust would have to collateralize its exposure. Trigger Swap A European trigger swap is a swap that is triggered by the level of an index. For example, for a call type trigger swap, if the index is above the strike at the expiry, one counterparty receives the prescribed fixed rate. Other wise, the party receives spot swap rates. Cross Currency Swaption A Cross Currency European Swaption gives the holder the option to enter into a swap to exchange cash flows in two different currencies. The domestic and foreign swap leg cash flows can be fixed or floating. Average Noon Rate Agreement Foreign Exchange Rate Average Noon Rate Agreement (ANR) is an agreement to buy or sell USD dollars on a future value date at a rate equal to the average rate for a specified period and adjusted by forward points agreed at the inception. |