By Moorad Choudhry
Each new bankruptcy of the Second Edition covers a side of the fastened source of revenue industry that has turn into appropriate to traders yet isn't really coated at a sophisticated point in present textbooks. this can be fabric that's pertinent to the funding judgements yet isn't freely to be had to these now not originating the goods. Professor Choudhry’s strategy is to put rules into contexts so as to retain them from turning into too theoretical. whereas the extent of mathematical sophistication is either excessive and really good, he features a short creation to the major mathematical concepts. it is a ebook at the monetary markets, now not arithmetic, and he presents few derivations and less proofs. He attracts on either his own adventure in addition to his personal examine to compile topics of sensible value to bond industry traders and analysts.
- Presents practitioner-level theories and functions, by no means on hand in textbooks
- Focuses on monetary markets, no longer mathematics
- Covers relative worth making an investment, returns research, and possibility estimation
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Additional resources for Advanced Fixed Income Analysis
What this section has introduced is the concept of relative value for individual securities, and how the simple duration/yield analysis can be extended to assess other determinants of a bond's yield. We now look at the issues involved in putting on a spread trade. 3 Yield spread trades In the earlier section on futures trading, we introduced the concept of spread trading, which are not market directional trades but rather the expression of a viewpoint on the shape of a yield curve, or more specifically the spread between two particular points on the yield curve.
Again, disciplined trading suggests the profit should be taken. 5 basis points the trade should be unwound, this `stop-loss' being at the half-way point of the original profit target. The financing of the trade in the repo markets is an important aspect of the trade, and will set the trade's break-even level. If the bond being shorted (in our example, the two-year bond) is special, this will have an adverse impact on the financing of the trade. The repo considerations are reviewed in Choudhry (2002).
It is a matter of individual judgement. An historical analysis requires that the trader identify some part of the yield curve within which he expects to observe a flattening or steepening. It is of course entirely possible that one segment of the curve will flatten while another segment is steepening, in fact this phenomenon is quite common. This reflects the fact that different segments respond to news and other occurrences in different ways. A more exotic type of yield curve spread is a curvature trade.