ZERO SUM GAME

PAYABLE LEG
SPECULATION: BULLISH ON LIBOR
CO. ABC
NOTIONAL$1,000,000 LOAN CO. ABC WILL PAY A FIXED RATE OF 4.25% T
FROM CITIBANK NY
FLOATING RATE - LIBOR + 35 BPS
QUATERLY BASIS LOAN PAYMENT CO. DEF WILL PAY A FLOATING RATE OF LIBO
Q1
LIBOR RATE - 4% BOOKS OF CO. ABC
INT. RATE - 4.35% Q1 $ 43,500.00 TO CITIBANK NY
LOAN PAY USD 43,500 $ 42,500.00 TO CO. DEFCASH FLOWS
$ 42,000.00 FROM CO. CASH FLOWS
Q2 $ 44,000.00 NET EFFECT
LIBOR RATE - 6% $ -500.00 PAID EXTRA
INT. RATE - 6.35%
LOAN PAY USD 63,500 Q2 $ 63,500.00 TO CITIBANK NY
$ 42,500.00 TO CO. DEFCASH FLOWS
Q3 $ 62,000.00 FROM CO. CASH FLOWS
LIBOR RATE - 3% $ 44,000.00 NET EFFECT
INT. RATE - 3.35% $ 19,500.00 SAVED
LOAN PAY USD 33,500
Q3 $ 33,500.00 TO CITIBANK NY
Q4 $ 42,500.00 TO CO. DEFCASH FLOWS
LIBOR RATE - 2.35% $ 32,000.00 FROM CO. CASH FLOWS
INT. RATE - 2.70% $ 44,000.00 NET EFFECT
LONA PAY USD 27,000 $ -10,500.00 PAID EXTRA

CITIBANK NY
Q4 $ 27,000.00 TO CITIBANK NY
$ 42,500.00 TO CO. DEFCASH FLOWS
$ 25,500.00 FROM CO. CASH FLOWS
$ 44,000.00 NET EFFECT
$ -17,000.00 PAID EXTRA

CO. ABC MOVED FROM A FLOATING RATE PAYMENT TO A FIXED R

CO. DEF MOVED FROM A FIXED RATE PAYMENT TO A FLOATING R

WHAT IS THE END RESULT OF ENTERING INTO AN IRS CONTRACT?

 YOU HEDGE YOURSELF AGAINST INTEREST RATE RISK AND YOU RE

IRS SWAP CONTRACTS START WITH A NOTIONAL VALUE OF USD 5

THEIR TENURE IS FROM 5 YEARS - 15 YEARS

2 HOMEWORK - PRACTICE IRS - 10 TIMES - 5 TIMES VANILIA AND 5 T

1 HOMEWORK - FIND OUT THE VARIOUS BENCHMAR RATES IN THE

SATURDAY EVENING 9.00 PM - DEADLINE FOR SWAPS (IRS)

FRIDAY EVENING 9.00 PM - DEADLINE FOR OPTIONS

RUSSELL - 6M LIBOR
RAKSHITH - 12M LIBOR
 INVESTMENT BANK
GSNY - BROKER
STRUCTURE THE IRS CONTRACT
BETWEEN BOTH THE PARTIES

VANILIA - FIXED VS. FLOATING

CO. ABC WILL PAY A FIXED RATE OF 4.25% TO CO. DEF NOTIONAL

CO. DEF WILL PAY A FLOATING RATE OF LIBOR + 20 BPS TO CO. ABC

BOOKS OF CO. DEF

Q1 $ 45,000.00 TO JPMC NY
$ 42,000.00 TO CO. AB CASH FLOWS
$ 42,500.00 FROM CO. CASH FLOWS
$ 44,500.00 NET EFFECT
$ 500.00 SAVED

Q2 $ 45,000.00 TO JPMC NY
$ 62,000.00 TO CO. AB CASH FLOWS
$ 42,500.00 FROM CO. CASH FLOWS
$ 64,500.00 NET EFFECT
$ -19,500.00 PAID EXTRA

Q3 $ 45,000.00 TO JPMC NY
$ 32,000.00 TO CO. AB CASH FLOWS
$ 42,500.00 FROM CO. CASH FLOWS
$ 34,500.00 NET EFFECT
$ 10,500.00 SAVED

Q4 $ 45,000.00 TO JPMC NY
$ 25,500.00 TO CO. AB CASH FLOWS
$ 42,500.00 FROM CO. CASH FLOWS
$ 28,000.00 NET EFFECT
$ 17,000.00 SAVED

OM A FLOATING RATE PAYMENT TO A FIXED RATE PAYMENT

OM A FIXED RATE PAYMENT TO A FLOATING RATE PAYMENT

ESULT OF ENTERING INTO AN IRS CONTRACT?

LF AGAINST INTEREST RATE RISK AND YOU REDUCE YOUR COST OF BORROWING

TS START WITH A NOTIONAL VALUE OF USD 5M GOES UPTO USD 100M DOLLARS
OM 5 YEARS - 15 YEARS

TICE IRS - 10 TIMES - 5 TIMES VANILIA AND 5 TIMES BASIS SWAPS.

OUT THE VARIOUS BENCHMAR RATES IN THE WORLD.

9.00 PM - DEADLINE FOR SWAPS (IRS)

0 PM - DEADLINE FOR OPTIONS

6M LIBOR RATE GOING UP BULLISH BEARISH - RAKSHITH ON THE 6M LIBOR RATE

12M LIBOR RATE GOING UP BULLISH BEARISH - RUSSLE ON THE 12M LIBOR RATE
RECEVING LEG
SPECULATION: BEARISH ON LIBOR
CO. DEF
$1,000,000 LOAN
FROM JPMC NY
FIXED RATE - 4.5%
QUATERLY BASIS LOAN PAYMENT
Q1

INT. RATE - 4.5%

LOAN AMT.USD 45,000

Q2

INT. RATE - 4.5%

LOAN AMT.USD 45,000

Q3

INT. RATE - 4.5%

LOAN AMT.USD 45,000

Q4

INT. RATE - 4.5%

LOAN AMT.USD 45,000

JPMC NY
 EQS IS AN OTC DERIV. CONTRACT THAT EXCHA
BASED ON THE PERFORMANCE OF AN EQUITY
ONE LEG OF THE SWAP CONTRACT HAS TO BE
EQ VS EQ, EQ VS INDEX, INDEX VS INDEX, EQ V
EQUITY SWAPS

INVESTMNET BANK
BARCLAYS NY
EQUITY SWAP CONTRACT

HEDGE FUND
ALPHA FUND
$1,000,000 POSITIVE PERFORMANCE ON MICRO
MICROSOFT SHARES
SPECULATION: BEARISH ON MICROSOFT
NEGATIVE PERFORMANCE ON MICR

3 YEAR EQS CONTRACT MARCH 09, 20222

ALPHA FUND BOOKS MICROSOFT SHR PRICE
USD

MARCH 09, 2023

USD
RATE OF CHANGE
NEW VALUE - OLD VALUE / OLD VALUE * 100

MARCH 09, 2024

USD
ALPHA FUND WILL PAY BETA FUND

RATE OF CHANGE
NEW VALUE - OLD VALUE / OLD VALUE * 100

ROC 31.25 %
NOTIONAL 1000000
CASH FLO 312,500.00 USD TO BETA FUND
 MARCH 009, 2025
USD

HOMEWORK - 5 TIMES EACH

EQ VS. EQ, EQ. VS INDEX

MICROSOFT VS. MICROSOFT

APPLE VS. MICROSOFT

EQ. VS. INDEX

RELIANCE NIFTY50
SPECULATION: SPECULATION RELIANCE VS. NIFTY50
RELIANCE POSITIVE PER NIFTY50 POSITIVE PE
NIFTY50 NEGATIVE PER RELIANCE NEGATVE PERFORM

NIFTY50 VS. SENSEX30

EQ VS. LIBOR

INDEX VS. LIBOR

EQ. VS. BOND

INDEX VS. BOND

DEADLINE - MONDAY 9.00 PM

V. CONTRACT THAT EXCHANGES CASH FLOWS
ORMANCE OF AN EQUITY OR AN INDEX.
AP CONTRACT HAS TO BE AN EQUITY OR AN INDEX
EX, INDEX VS INDEX, EQ VS FLO. RATE

ESTMNET BANK
BARCLAYS NY
Y SWAP CONTRACT

INST. INVESTOR
BETA FUND
PERFORMANCE ON MICROSOFT $1,000,000
MICROSOFT SHARES
SPECULATION: BULLISH ON MICROSOFT
E PERFORMANCE ON MICROSOFT

MARCH 09, 20222

MICROSOFT SHR PRICE BETA FUND BOOKS
275.00

MARCH 09, 2023

240.00
BETA FUND WILL PAY ALPHA FUND
NV OV \ OV * 100
240 275 \ 275 * 100

ROC -12.73 %
NOTIONAL 1000000
CASH FLO 127,300.00 USD TO ALPHA FUND

MARCH 09, 2024

315
MARCH 009, 2025
294.5

BETA FUND WILL PAY ALPHA FUND RATE OF CHANGE

NEW VALUE - OLD VALUE / OLD VALUE * 100

ROC -6.51 %
NOTIONAL 1000000
CASH FLOW 65,100.00 USD TO ALPHA FUND

2 SETS OF SPECULATION
1 APPLE BULLISIH AND MICROSFT BEARISH
2 APPLE BEARISH AND MICOROSIFT BULLISH
D VALUE * 100
CREDIT DEFAULT SWAPS

CREDIT - WHAT FIN. INSTRUMENT? - DEBT INSTRUMENTS/FIXED INCOME SECURITIES (BONDS, MBS, ABS)
DEFAULT - THE COMPANY DEFAULTS IN PAYING THE PRINCIAL AND OR COUPON
SWAP - EXCHANGE (RISK OF DEFAULT)

CAN EQUITY BE THE U/L ASSET OF A CDS? - NO!!!! - BECAUSE YOU HAVE
OWNERSHIP AND HAVE AGREED TO TAKE THAT RISK...

DEFINTION OF CDS

IT IS AN AGGREMENT TO BUY PROTECTION AGAINST -

A CREDIT EVENT ON A FIXED INCOME UNDERLYER.

U/L ASSET OF A CDS - FIXED INCOME SECS.

PROTECTION BUYER

HEDGE FUND - ALPHA FUND

INVEST - USD 10M IN PAY A PREMIUM TO ENTER INTO A CDS CONTRACT
JUNK RATED CO. BOND
PAY AN AGREED AMOUNT IF A CREDIT EVENT OCCURS

USD 10 M COUPON PAYMENT

IN CO. ABC 7%
AT MATURITY
PRINCIPAL WILL BE RETURNED BACK
REFERENCE OBLIGATION
REFERENCE ENTITY $1000
CO. ABC - ISSUE - USD 10M 7%
IN BONDS - JUNK RATED
10 YEARS
SURVIVAL RATE - THE PROBABLITY THAT THE COMPANY MIGHT DEFAULT IN THE MARKET
RECOVERY RATE - THE AMOUNT YOU WILL RECOVER IN CASE THE COMPANY DEFAULTS
PREMIUM - THE AMOUNT YOU PAY TO ENTER INTO THE CONTRACT

HOW IS PREMIUM DECIDED ON A CDS CONTRACT?

SURVIVAL RATE RECOVERY RATE PREMIUM

(30%) (LOW) (70%) (HIGH) (HIGH) - 60 BUYING A HEALTH INURANCE POLICY
(70%) (HIGH) (30%) (LOW) (LOW) - 21 YEAR OLD BUYING A HEALTH INSURANCE POLICY

70% OF $1,000 IS WHAT WILL BE PAID TO THE PROTECTION BUYER - SR IS LOW

30% OF $1,000 IS WHAT WILL BE PAID TO THE PROTECTION BUYER - SR IS HIGH

WHEN WILL YOU EXERCISE A CDS CONTRACT?

CREDIT EVENT
A. BANKRUPT
B. MORATORIUM (DELAY IN PAYMENT OF THE COUPONS AND OR PRINCIPAL)
C. RESTRUCTURING

TYPES OF CDS -
SINGLE CDS - CONSIDERS THE DEBT OBLIGATION OF ONLY ONE COMPANY AS IT
BASKET CDS - CONSIDERS THE DEBT OBLIGATION OF MORE THAN ONE COMPA
NAKED CDS - DOES NOT CONSDER THE DEBT OBLIGATION OF ANY COMPANY. -

MBS - HOME LOANS - U/L PHYSICAL ASSET - HOUSE/LAND/PROPERTY

MORGATGE BACKED SECURITIES
ABS - OTHER TYPES OF LOANS - EDUCATION, PERSONAL, CREDIT CARD, VECHILE LOANS ETC.
ASSET BACKED SECURITIES
BONDS - GOV'T BONDS - CORPORATE BONDS

MBS/CDO ETC. - U/L ASSETS

12 PEOPLE / CO.'S SPECULATED THAT THE HOUSING MARKET WOULD CRASH
A.I.G. - AMERICAN INSURANCE GROUP
THEY BOUGHT CDS CONTRACTS FROM THE
WORTH BILLIONS OF DOLLARS - S,B,N CDS
 (BONDS, MBS, ABS)

PROTECTION SELLER

GOLDMAN SACHS - NY

ENTER INTO A CDS CONTRACT

OUNT IF A CREDIT EVENT OCCURS

TRANCHE 1
TRANCE 2

RETURNED BACK CO. GOES BANKRUPT

REFERENCE OBLIGATION TAXES TRANCHE 3
SECURED DEBT
ANNUAL UNSECURED DEBT
PREF. SHRS.
EQUITY
NSURANCE POLICY

THE COUPONS AND OR PRINCIPAL)

ATION OF ONLY ONE COMPANY AS ITS REFERENCE OBLIGATION. - 1 BOND (HEDGEING)

GATION OF MORE THAN ONE COMPANY AS ITS REFERENCE OBLIGATION. MULTIPLE BONDS (HEDGEING)
BT OBLIGATION OF ANY COMPANY. - NO BONDS (SPECULATING)
T CARD, VECHILE LOANS ETC.

OULD CRASH
TRANCHE 1

TRANCHE 3
FX SWAPS

A FX SWAP IS A SIMULTANEOUS PURCHASE AND SALE OF ONE CURRENCY FOR ANOTHER

WITH THE SAME TRADE DATE AND DIFFERENT SETTLEMENT DATES.

SPECULATING ON THE FX RATES - YOU ENTER INTO A CONTACT TDOAY BUT SETTLE SOMETIME IN THE FUTURE

TRADE DATE = THE DAY YOU ENTER INTO A CONTRACT

SETTLMENT DATE = THE DAY YOU SETTLE A CONTRACT

FX DEALS - VARIOUS TYPES OF FX DEALS

CASH DEAL = TD = SD TD 10/03/2022 = SD 10/03/2022

TOM DEAL = TD +1 TD 10/03/2022 = SD 11/03/2022
SPOT DEAL = TD + 2 TD 10/03/2022 = SD 14/03/2022
FORWARD DEAL = TD+2> - ANY TRADE GREATER THAN 2 DAYS IS CALLED AS A FORWARD DEAL

FX SWAPS - IT IS A COMBINATION OF THE ABOVE DEALS

CASH + TOM, CASH + SPOT, CASH + FORWARD
TOM + SPOT, TOM + FOR,
SPOT + FOR, FOR + FOR TREASURY DEPARTMENT - THEY ACT AS A BANK FOR TH
MANAGE THE LIQUIDITY OF THE COMPANY AND MAKE
CASH MGT. SYSTEM
BARCLAYS
DATE
10-Mar 11-Mar 14-Mar 15-Mar
BEFORE AFTER BEFORE AFTER
EUR -10 1 15 1
USD 11 1 -18 1
THE FUTURE

Y ACT AS A BANK FOR THE BANK

E COMPANY AND MAKE ON THEIR PAYMENT OBLIGATIONS

16-Mar

FX SWAP
1 DEAL
TD - 10/03
CASH DEAL
TD=SD
SELL USD - 10 TO YOU
BUY EUR - 11 FROM YOU

2 DEAL
TD - 10-03
SPOT DEAL
SELL EUR - 14 TO YOU
BUY USD - 19 FROM YOU