Interest Rate Derivatives Market Research Articles

Price discovery and volatility spillovers in the interest rate derivatives market

The interest rate derivatives market is an important force in promoting the development of the bond market and is an effective tool to manage interest rate risk. The research on price discovery and volatility spillover of the market can help provide valuable reference information for investors. Based on treasury bond futures and interest rate swaps, the paper aims to discuss the price discovery function and spillover structure of the interest rate derivatives market. The paper establishes the information share model and spillover index model for empirical analysis. The results show that: First, the calculation results of the information share model show that the price discovery of treasury bond futures and interest rate swap markets is stronger than that of the spot market. Second, based on structural break analysis, treasury bond futures and interest rate swaps do not have breakpoints, while the treasury bond spot has three breakpoints. The paper divides the entire sample into four stages based on structural breakpoints and finds that the price discovery ability of the interest rate derivative market dynamically changed. Third, as a net spillover in the market, treasury bond futures have developed relatively stable. Both treasury bond futures and interest rate swaps have spillover effects on the spot market, indicating that China’s interest rate derivatives market can impact the treasury bond spot market.

Implied Market Expectations on Interest Rate Derivatives Market

Implied Market Expectations on Interest Rate Derivatives Market

The Pricing of New Interest Rate Derivative Futures

This paper reviews the development of commercial real estate mortgage-backed securities. In addition, summarizes the relevant pricing formula of futures contracts and commercial real estate mortgage-backed securities. Based on the above research, this paper puts forward a new type of interest rate derivative futures, that is to say CMBS futures. In this paper, both the CIR model and the generalized method of moments are used to deduce the relevant pricing formula of the new financial derivatives, the CMBS futures. At the same time, the 261 real commercial mortgage backed security transaction data from May 3, 2015 to April 26, 2020 in the U.S. stock market are downloaded and used to test the derived pricing formula that derived above, and at last a specific CMBS futures contract is designed in order to provide reference for publishers when they are issuing the CMBS futures products. The research of this paper has certain practical significance for promoting the interest rate marketization, broadening the existing financing channels for investors, promoting the development of interest rate derivatives market and interest rate futures market. It also has certain theoretical significance for the development of financial derivatives and futures market, especially the development of interest rate derivatives and its futures products.

The importance of swap transactions in the evolution of the Polish currency market and the OTC interest rate derivatives market

Objective: The article aims to present the importance of swap transactions in the evolution of the Polish currency market and the OTC interest rate derivatives market. Research Design & Methods: The theoretical considerations in the article were based on a critical analysis of the literature on the subject. In turn, the empirical part of this article was developed using numerical parameters characterizing the studied phenomenon. Findings: It cannot be unequivocally confirmed that swaps, due to their universality and design, are the most frequently used instrument of the Polish currency market and the OTC interest rate derivatives market. This is because, although, on the currency market, the main share in transactions was achieved by currency swaps, in the case of the OTC interest rate market, interest rate swap (IRS) transactions no longer record the largest share. Contribution & Value Added: The issue of swap contracts, according to the authors of the thesis, is the subject of limited interest in the Polish research literature, and this article was to be a response to the need to systematize knowledge about these instruments and a synthetic presentation of their development.

The centrally cleared interest rate derivatives market: how are clients changing the risk perspective?

The centrally cleared interest rate derivatives market: how are clients changing the risk perspective?

Profitability patterns in the interest rate derivatives market

This study identifies profitability patterns and their determinants in the global interest rate derivatives market. Although this market is the world’s largest financial market in terms of nominal value, there has been basically no academic research on profitability owing to missing data. To address this problem, a new analytical method has been developed. Using this new method, the study shows that interest rate derivatives have been a substantial source of profitability that have netted a total average annual profit of more than USD 82 billion for banks since 2009. Furthermore, the study shows that counterparty type, market position (i.e. being one of the Top 5 banks), and trade currency are determinants of the profitability of a trade. For other features of a trade, such as duration or notional amount, no correlation with profitability is found. Finally, the impact of changes of the market structure on profitability driven by regulatory initiatives is discussed qualitatively.

Networks of Counterparties in the Centrally Cleared Eu-Wide Interest Rate Derivatives Market

We perform a network analysis of the centrally cleared interest rate derivatives market in the European Union, by looking at counterparty relations within both direct (house) clearing and client clearing. Since the majority of the gross notional is transferred within central counterparties and their clearing members, client clearing is often neglected in the literature, despite its significance in terms of net exposures. We find that the client clearing structure is very strongly interconnected and contains on the order of 90% of the counterparty relations in the interest rate derivatives market. Moreover, it is more diverse in terms of geography and sectors of the financial market the counterparties are associated with. Client clearing is also significantly more volatile in time than direct clearing. These findings underline the importance of analysing the structure and stability of both direct and client clearing of the interest rate derivatives market in Europe, to improve understanding of this important market and potential contagion mechanisms within it. JEL Classification: G10, L14, G23

The Evolution of OTC Interest Rate Derivative Market: The FRA Case

Abstract Trading on OTC interest rate derivatives market in developed countries is one of the opportunities that a client of a bank is been offered by the financial market. We asked ourselves which is the dimension of these markets given the fact that in Romania we can find these interest rate derivatives between the products and services offered by the bank but the usual clients of these banks know just a few things about them or they did not heard about it. So, the objective of this paper is to investigate the evolution of the interest rate derivative OTC market. We will focus in the beginning on the evolution of the OTC interest rate market in terms of turnover by instruments, by counterparty and currency on the basis of the data that can be accessed on the site of Bank of International Settlements, the principal international institution who provides data about derivatives generally through its department of statistics. We will insist on the Forward Rate Agreement contract, one of the most transacted interest rate derivatives on the OTC market.

Interest-Rate Derivatives and Bank Lending in China

With interest rate liberalization, China’s commercial banks expose to more interest rate risks and use interest-rate derivatives to manage these risks. This paper develops a theoretical model, capturing the main characteristics of the banking sector in China, to analyze the effect of interest-rate derivatives on bank lending. In our model, banks choose lending activity in a way analogous to Cournot competition commonly described in industrial organization. We find the positive effect of interest-rate derivatives position on the total loan volumes in the credit market under the condition that the von Neumann-Morgenstern utility function of bank using derivatives displays either constant or decreasing absolute risk aversion and the derivatives market is unbiased. In the empirical section, we use Vector Autoregression (VAR) model with China’s monthly data over the period from Jan 2007 to Jun 2014. Based on techniques commonly used in the VAR literature, the main results suggest that the interest-rate derivatives market transaction has bi-directional Granger causality with bank loan growth, and derivatives transaction has a significantly and persistently positive effect on loan growth. Moreover, we find that derivatives transaction accounts for 20 percent of variations in bank loan growth in the long run.

Managing interest rate risk with interest rate futures

Due to the wide impact that interest rate changes have on business performance, it is very important to manage this type of risk. A large number of instruments can be used for protection against interest rate risk. Financial derivatives are a very simple way to minimize interest rate risk and therefore are extremely popular. The value of interest rate derivatives transactions in the world is increasing dramatically. Unfortunately, this is not the case in Serbia. In Serbia, interest rate derivatives market does not exist. Therefore, this paper aims to present to market participants one kind of interest rate derivative instrument - interest rate futures and to show how they can protect themselves against unwanted changes in interest rates with these instruments. .

Financial Aspects of Interest Rate Derivative

An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. These structures are popular for investors with customized cash flow needs or specific views on the interest rate movements (such as volatility movements or simple directional movements) and are therefore usually traded Over The Counter (OTC). The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amounts outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cash flows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options. Modeling of interest rate derivatives is usually done on a time-dependent multi-dimensional Lattice (tree) built for the underlying risk drivers, usually domestic or foreign short rates and foreign exchange market rates, and incorporating delivery- and day-count conventions. Specialized models are also often used. The trading in Interest Rate Futures was launched on the National Stock Exchange of India (NSE) on 31st August 2009 and will be launched shortly on MCX Stock Exchange (MCX-SX).

Valuing Interest Rate Swaps UsingOvernight Indexed Swap (OIS) Discounting

The role of LIBOR in interest rate swaps and other financial derivatives is to be the effective “riskless” rate, based on the premise that while banks that could borrow in the market at LIBOR flat were not completely risk-free, the rate corresponded to a high credit quality, approximately AA. The 2008 financial crisis left most banks financial weakened, including the largest banks, which provide the quotes from which LIBOR is computed. LIBOR spiked upward following the Lehman bankruptcy and was well above other “riskless” rates, notably the overnight indexed swap (OIS) rate. Since that time, much of the over-the-counter (OTC) interest rate derivatives market has shifted over to discounting at OIS rates. Since these are lower than LIBOR, one result is that when the floating leg of a LIBOR-based swap is repriced, it will not be valued at par with OIS discounting. This issue is becoming increasingly important, as swaps and other interest rate derivatives are transitioning to central clearing. In this article, Smith clarifies the issues and works through some examples to illustrate the size of the effects involved. <b>TOPICS:</b>Interest-rate and currency swaps, financial crises and financial market history

An Analysis of OTC Interest Rate Derivatives Transactions: Implications for Public Reporting

This paper examines the over-the-counter (OTC) interest rate derivatives (IRD) market in order to inform the design of post-trade price reporting. Our analysis uses a novel transaction-level data set to examine trading activity, the composition of market participants, levels of product standardization, and market-making behavior. We fi nd that trading activity in the IRD market is dispersed across a broad array of product types, currency denominations, and maturities, leading to more than 10,500 observed unique product combinations. While a select group of standard instruments trade with relative frequency and may provide timely and pertinent price information for market participants, many other IRD instruments trade infrequently and with diverse contract terms, limiting the impact on price formation from the reporting of those transactions. Nonetheless, we fievidence of dealers hedging rapidly after large interest rate swap trades, suggesting that, for this product, a price-reporting regime could be designed in a manner that does not disrupt market-making activity.

Dynamic Interest Rate Derivative Strategies in the Presence of Unspanned Stochastic Volatility

When the fixed income market exhibits unspanned stochastic volatility, interest rate options play a unique role in dynamic portfolio strategies. They expand the investment opportunity set and provide ways of hedging variations in investment opportunities. To quantify these effects, we estimate a dynamic term structure model featuring unspanned stochastic volatility using a panel data set of interest rates and cap prices. We then solve the dynamic portfolio choice problem for a long term bond investor with and without access to interest rate derivatives and find substantial welfare gains from participation in the interest rate derivatives market.

Implied interest rate pricing models

We show how market prices for standard interest rate products can be used, under the assumption of a one-factor model, to imply the joint distribution of zero coupon bonds of differing maturities at a fixed date \(T\) in the future. We relate these results to the solution of an optimisation problem arising in the pricing of amortising swaptions. Finally, we apply these ideas to price (and hedge) products of importance in the interest rate derivatives market.