BOND Risks

• Interest risk Futures
• Interest rate swaps
• Interest rate options
• Credit risk

SWAPS:

• The duration of a swap (positive or negative) is determined by the relative position assumed in the swap, not by whether you go long or short the swap contract:
• Dswap = Dasset - Dliablity
• Dswap = Dreceive - Dpay
• Take the receive-fixed position to increase the portfolio duration
• Take the receivie-floating position to reduce duration (add negative duration)
• Receive fixed: Dswap = Dfixed - Dfloating > 0
• Receive floating: Dswap = Dfloating - Dfixed < 0

Options:

Credit Risks:

• Default risk (Issuer risk)
• Credit spread risk (sector risk)
• Downgrade risk

Instruments that transfer credit risk

1. Credit options
2. Credit forwards
3. Credit swaps