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Treasury Finance and Development Banking - Biagio Mazzi

Year 2013

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AcknowledgmentsIntroductionI.1 TREASURY, FUNDING, AND THE REASDNS REHIND THIS BOOKI.2 FUNDING ISSUES AS CREDIT AND PRICING ISSUESI.3 TREASURY FINANCE AND DEVELOPMENT BANKINGI.4 THE STRUCTURE OF THE ROOKCHAPTER 1. An Introductory View to Banking, Development Banking, and Treasury1.1 A REPRESENTATION OF THE CAPITAL FLOW IN A FINANCIAL INSTITUTION1.2 LENDING1.3 BORROWING1.4 INVESTING AND ALM1.5 THE BASIC STRUCTURE OF A TRADITIONAL FINANCIAL INSTITUTION1.5.1 Private and Public Sides1.5.2 Sales and Trading Desks1.5.3 The Treasury Desk1.6 DEVELOPMENT BANKING1.6.1 The Different Types of Development Institutions1.6.2 The Structure of a Development BankCHAPTER 2. Curve Construction2.1 WHAT DO WE MEAN BY CURVE CONSTRUCTION?2.2 THE INSTRUMENTS AVAILABLE FOR CURVE CONSTRUCTION2.2.1 Discount Bonds and Cash Deposits2.2.2 Interest Rate Futures and Forward Rate Agreements2.2.3 FX Forwards2.2.4 Interest Rate Swaps2.2.5 Basis Swaps2.2.5.1 Tenor Basis Swaps2.2.5.2 Cross Currency Basis Swaps2.3 USING MULTIPLE INSTRUMENTS TO BUILD A CURVE2.4 COLLATERALIZED CURVE CONSTRUCTION2.4.1 The Evolution of the Perception of Counterparty Credit Risk2.4.1.1 Overnight Index Swaps2.4.2 Discounting in the Presence of Collateral2.4.2.1 Collateral in a Foreign Currency2.4.3 Clearing, the Evolution of a Price, and the Impact of Discounting2.4.4 The Special Case of AAA-Rated Institutions2.5 NUMERICAL EXAMPLE: BOOTSTRAPPING AN INTEREST RATE CURVE2.5.1 The Short End of the Curve: Deposits and FRAs2.5.2 The Long End of the Curve: Interest Rate Swaps2.5.3 Interpolation and ExtrapolationCHAPTER 3. Credit and the Fair Valuing of Loans3.1 CREDIT AS AN ASSET CLASS3.1.1 The Underlyings3.1.2 Credit Default Swaps3.2 A BRIEF OVERVIEW OF CREDIT MODELING3.2.1 Hazard Rates and a Spread-Based Modeling of Credit3.2.2 The Bootstrapping of a Hazard Rate Curve3.2.3 Different Quotations and Different Currencies3.3 FAIR VALUE OF LOANS AND THE SPECIAL CASE OF DEVELOPMENT INSTITUTIONS3.3.1 The Argument around the Fair Valuing of Loans3.3.2 Prepayment Option and the Case of Development Institutions3.4 NUMERICAL EXAMPLE: CALCULATING THE FAIR VALUE UF A LOANCHAPTER 4. Emerging Markets and Liquidity4.1 THE DEFINITIORI OF EMERGING MARKETS4.2 THE MAIN ISSUES WITH EMERGING MARKETS4.2.1 Liquidity4.2.2 Maturity4.2.3 Credit4.2.4 Capital Control4.3 EMERGING MARKETS AND DEVELOPMENT RANKING4.3.1 Borrowing4.3.2 Lending4.4 CASE STUDIES OF DEVELOPMENT PROJECTS4.4.1 Rural Development in X4.4.2 Development of Textile Exports in YCHAPTER 5. Bond Pricing5.1 WHAT IS A BOND?5.2 A FEW FUNDAMENTAL CONCEPTS OF THE BOND WORLD5.2.1 Par5.2.2 Yield5.2.3 Duration5.3 EXPRESSING CREDIT EXPLICITLY WHEN PRICING A BOND5.3.1 Benchmarks and z-Spreads5.3.2 Asset Swaps5.3.3 Constructing a CDS-Implied Credit Framework for Bond Pricing5.4 ILLIQUID BONDS5.4.1 Pricing at Recovery5.4.2 Case Study: The Default of Greece5.4.3 Building Proxies5.4.3.1 The Case of Missing Maturities5.4.3.2 The Case of Quasi Government Entities5.4.3.3 Similar Countries6.4.3.4 Similar Companies5.5 NUMERICAL EXAMPLE: ESTIMATING THE COUPON OF AN EMERGING MARKET DEBT INSTRUMENTCHAPTER 6. Treasury Revisited6.1 FUNDING AS AIM ASSET SWAP STRUCTURE6.1.1 Asset Swaps Revisited6.1.2 The Impact of Discounting on Asset Swap Levels6.2 FUNDING LEVEL TARGETS6.2.1 The Objective of Even-Smaller Funding Levels6.2.2 Different Funding Levels for Different Types of Debt6.3 THE FUNDAMENTAL DIFFERENCES DETWEEN INVESTMENT RANKING AND DEVELOPMENT RANKING6.4 BENCHMARKS FOR BORROWING ANR INVESTING6.4.1 Borrowing6.4.2 Investing6.4.3 Case Study: A Note on the LIBOR ScandalCHAPTER 7. Risk and Asset Liability Management7.1 THE ISSUE OF LEVERAGE7.2 HEDGING7.2.1 Risk Neutrality and the Meaning of Hedging7.2.2 Static and Dynamic Hedging7.2.3 Valuation in the Absence of Dynamic Hedging7.3 MANAGING RISK RELATED TO FINANCIAL ORSERVARLES7.3.1 Interest Rate and FX Risk7.3.1.1 Hedging a Fixed or Structured Bond7.3.1.2 The Unhedgeable Nature of the Discount Spread Ф7.3.1.3 Hedging a Fixed-Rate Loan7.3.1.4 Hedging a Foreign Currency Bond or Loan7.3.1.5 Hedging a Credit-Linked Instrument Such as an Asset-Backed Security7.3.1.6 Hedging an Equity Position7.3.1.7 Locking an Interest Rate Position7.3.2 Credit Risk7.4 FUNDING RISK7.4.1 Funding Gap Risk7.4.2 Refinancing Risk7.4.2.1 The Case of Constant Funding Level7.4.2.2 The Case of Funding Level Lower Than Expected7.4.2.3 The Case of Funding Level Higher Than Expected7.4.3 Numerical Example: Estimating Refinancing Risk7.4.4 Reset Risk7.4.5 Numerical Example: Estimating Reset RiskCHAPTER 8. Conclusion8.1 CREDIT IS EVERYWHERE8.2 THE FUNDAMENTAL STEPS TO BORROWING, LENDING, AND INVESTING: A SUMMARYAPPENDIX A Implying Zero Rates from FX Forward QuotesAPPENDIX B CDS Spreads and Default ProbabilitiesAPPENDIX C Modeling the Credit-Driven Prepayment Option of a LoanAPPENDIX D The Relation between Macaulay and Modified DurationsAPPENDIX E The Impact of Discounting on an Asset Swap SpreadAPPENDIX F Replication Leading to Risk-Neutral ProbabilitiesAbout the Web SiteTHE IMPLEMENTATION OF THE BOOTSTRAPPING OF AN INTEREST RATE CURVETHE IMPLEMENTATION OF THE BOOTSTRAPPING OF A HAZARD RATE CORVE
 
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