Class Schedule: Interest Rate Modeling. Spring, 2015

Weeks 1 and 2

• The Orange County Case (Appendices at the end of Chapters 2, 3, and 4 in Veronesi).
• Accompanying Spreadsheet.
  • This reviews material from 542:
    • ``Bootstrapping'' the yield curve from coupon bonds.
    • Bond and portfolio duration.
    • Principal Components Analysis.
  • And introduces a new instrument:
    • Inverse Floater.
  • And a new model to fill out a yield curve:
    • The Nelson-Siegel Model.
  • Spreadsheet with PCA analysis of the Orange County Case.

Week 3

• Forwards and Swaps
  • Chapter 5 in Veronesi. Including the PiVe Case.
  • Accompanying Spreadsheet.

Week 4

• Futures and Options
  • Chapter 6 in Veronesi.
  • Chapter 6 in Hull.
  • Spreadsheet with Bloomberg Cheapest-to-Deliver screen and all computations. (Also includes a VBA macro to compute a note's conversion factor.)
  • CME page on computing notes' conversion factors.

Week 5

• Residential Mortgage Backed Securities
  • Chapter 8 in Veronesi.
  • Fabozzi Chapter 10 Mortgage-Backed Sector of the Bond Market
  • SEC report on the Mortgage-Backed Security Industry.
  • Spreadsheet Mortgage, Passthrough and Basic CMO Examples.
  • Introductory Slides.
  • Bloomberg - Related Slides.
  • Prospectus of the CMO deal discussed in the slides.

Week 6

• Term Structure Models--Binomial Trees
  • Chapters 9 and 10 in Veronesi.
    • Spreadsheet to accompany Chapter 9.

Weeks 7 and 8

• Term Structure Models--Binomial Trees
  • Chapter 11 in Veronesi:
  • Includes:
  • The Ho-Lee Model.
  • Black Derman, and Toy Model calibrated to caplet (i.e., forward) vols.
  • Black, Derman, and Toy Model.--Calibrated to Bond vols.
  • A recent interview with Emanuel Derman.
  • A more recent interview with Professor Derman: In a combined format.
  • Problems and a study guide.
  • Options, Caplets, Caps, Floorlets, Floors, & Collars in BDT Spreadsheet.
  • Slides with Bloomberg screens on Option Valuation.
  • Spreadsheet with BDT solutions and examples of a caps / floors problem.

Week 9

• Free Boundary Problems: Applications of American Options
  • Chapter 12 in Veronesi
    • Corresponding Spreadsheet.

Week 10

• Continuous-time Models of Interest Rates
  • Chapter 14 in Veronesi
  • Vasicek Spreadsheet.
    • Closed-form solution for Bond Prices.
    • Note that Bond Prices depend on three things:
      1. Convexity.
      2. Expectations (about future short-rates).
      3. Risk

Week 11

• Cox, Ingersoll, and Ross Model
  • The short-rate process and how this differs from Vasicek.
  • ---->Time-varying volatility.
  • Bond Prices in the CIR Model.
    • CIR 1 factor Spreadsheet.
  • Two-Factor CIR Model.
    • Understand the limitations of the 1-factor model.
    • The enhanced flexibility of additional factors.
      • CIR 2 factor Spreadsheet.

Week 12

• Implications of No Arbitrage for Term Structure Modeling
  • Chapter 15 in Veronesi

Week 13

• Dynamic Hedging and Relative Value Trades
  • Chapter 16 in Veronesi
    • Spreadsheet working through the Case Study 16.8 on using the Vasicek model to execute a relative value trade.

Week 14

• Relative value trade and hedging with a 2-factor model.
  • Spreadsheet based on Case Study 16.8, using the 2-factor CIR model to execute a relative value trade.
  • Worksheet with formulae for the general CIR Model.

Week 15

• The Ho-Lee Model in Continuous-time.
  • Chapter 19 in Veronesi
  • Spreadsheet working through Examples 19.2 and 19.3
  • Black's Model -- how it relates to other models.
  • Black's Model Spreadsheet.

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