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Betriebswirtschaftliche Bewertungsmethoden TOPIC
2 Grundlagen der Konstruktion,Bewertung und
des Einsatzes von Zinsfutures und Zinsswaps zur
Steuerun von zins-bedingten Risiken Prof. Dr.
Rainer Stachuletz Corporate Finance
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EURO BUND FUTURES
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Euro-Bund-Future Characteristics
Contract Size 100.000 Settlement 6 German
Federal Bonds with 8,5 to 10,5 years remaining
term upon delivery Delivery day 10th of March,
June, September, December Quotation percentage
at a minimum price movement of 0,01 (10 ).
Seller (short) mustdeliver
Buyer (long) has to bedelivered
Clearing Eurex
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Euro-Bund-Futures Delivery Day/Months
Purchaseat 10th March
Delivery latestat 10th Dec.
10. March
10. June
10. Sept.
10. Dec.
Time to maturity max. 9 month
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Euro-Bund-Future Mechanisms
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Euro-Bund-Futures Pricing
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Short-Future-Position and Margin - Account 5 Days
to Settlement
Futures
-1
-1
-1
-1
0
Interest Rate
8,00
8,50
7,50
7,00
7,00
Future
86,58
83,60
89,70
92,98
92,98
Change
0,00
-2,98
6,10
3,28
0,00
Value
0,00
2.980,00
-6.100,00
-3.280,00
0,00
Margin
2.500,00
2.500,00
5.480,00
2.500,00
2.500,00
Credits/Debits
2.980,00
-6.100,00
-3.280,00
-6.400,00
Current Balance
2.500,00
5.480,00
-620,00
-780,00
0,00
Maintenance
0,00
0,00
3.120,00
3.280,00
Taking a short position would only make sense, if
the future interest rate is expected to rise (see
the profit of 2,980 due to a rise of 50 BP). Only
in that case the Future, contracted at 86,58
could be delivered at lower prices. As this is
not the case, after 4 days the game ends with a
total loss of 6,400 Euro.
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How to Hedge a Bond Portfolio UsingBund Futures
Assume a small bond portfolio, that contains
following positions. Current prices are
calculated at an 8 flat rate
Now you expect the term structure to rise to
10 flat. Due to the rising rates your
devaluation risk is as follows
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How to Hedge a Bond Portfolio UsingBund Futures
Due to the expected future interest rate
scenario, you are exposed to the risk of
devaluation. According to Internationalo
Financial Reporting Standards you will have to
depreciate your bond portfolio. The
depreciation of 2,215 mio is going to worsen
your profit and loss account.
To compensate for this risk, you decide to hedge
using an instrument, that will profit from rising
rates. A short position in Bund Futures, where
the seller has to deliver 100.000 nominal per
contract, will gain from rising rates. A
declining Bund Future price allows for a cheap
delivery.
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How to Hedge a Bond Portfolio UsingBund Futures
Today (flat rate at 8) you may take a short
Bund-Future position at a Future-price of 86.56.
If the interest rates rise to a level of 10, the
Bund Future will be quoted at 78.66.
The short position will gain 7.900 (86,560
78,660) per contract, thus you need to short 280
contracts ( 2,215 mio / 7,900 T), to hedge the
risk of a portfolio devaluation at 2,215 mio .
(In this Ex. 156 K to hedge A and 124 K to hedge
B.)
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How to Hedge a Bond Portfolio UsingBund Futures
After the interest rate has risen to 10, the
total account of your bond and your hedge
(Bund-Future) portfolio looks as follows
The total loss in your bond portfolio (- 2,215
Mio ) is compensated by profits from your hedge
portfolio ( 2,212 Mio ).
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Interest RateSwaps
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Basic Concept Interest Rate Swap

• A swap is an agreement between two parties to
  exchange interest payments within a defined
  period of time, calculated of an agreed contract
  volume. Frequently swaps simply regulate to
  exchange floating rate payments against fixed
  rate payments et vice versa.
• The contract volume will not be exchanged. Also
  interest payments will not be fully exchanged,
  but only the saldo.
• Plain-Vanilla-Swaps are based upon David
  Ricardos Theory of Trade.

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Basic Concept Interest Rate Swap
Fixed Rate
Floating Rate
The party paying the fixed rate is called to be
in a Payer-Swap-position, while the party
receiving fixed rates takes the
Receiver-Swap-position. When the contract is
signed, the N.P.V. of both cash flows, the
variable and the fixed equal zero.
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Plain Vanilla Interest Rate SwapPricing
Banks publish their swap-conditions. Usually the
fixed rates offered referring payer or
receiver-swaps are determined by the current term
structure of interest rates
Term structure (26th Dec. 2005)
WestLB (26th Dec. 2005)
Maturity Average returns
1y 2,65
2y 2,82
3y 2,92
4y 3,01
5y 3,09
6y 3,16
7y 3,23
8y 3,29
9y 3,35
10y 3,41
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Plain-Vanilla Interest Rate Swap
Example Two corporations, A (Rating AAA) and B
(Rating A) are exposed to very different market
conditions
floating rate fixedrate target
A Euribor 5.0 floating
B Euribor 0.50 6.5 fixed
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Plain-Vanilla Interest Rate Swap
1. Step A and B chose financing contracts at
their relatively best positions, i.e. A choses a
fixed rate while B enters a floating rate loan.
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Plain-Vanilla Interest Rate Swap
2. Step A and B sign a swap-arrangement, with A
receiving a fixed rate of 5.5 from B and paying
Euribor to B.
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Plain-Vanilla Interest Rate Swap
Balance of Payment A
Balance of Payment B
FIXED FLOAT.
Bond - 5
Swap 5.5 - Euribor
Total 0.5 - Euribor
FIXED Floating
LOAN - Eur 0.5
Swap - 5.5 Eur
Total - 5.5 - 0.5
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Plain-Vanilla Interest Rate Swap
More realistic A und B contract a Swap
agreement by a financial intermediator (JPSwap).
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Plain-Vanilla Interest Rate Swap
Balance JPSwap
Balance B
Balance A
FIXED FLOAT.
Bond - 5
Swap 5.25 - Euribor
Total 0.25 - Euribor
FIXED FLOAT.
LOAN - Eur 0.5
Swap - 5.75 Eur
Total - 5.75 - 0.5
FIXED FLOAT.
Payer - 5.25 Euribor
Receiver 5.75 - Euribor
Total 0.5
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Example Risk Management with Asset Swaps
Corporation A receives interest revenues
generated by a 100 Mio. bond investment (6y to
maturity, 8 coupon). The bonds have been put on
the assets side at their costs of purchase
(100). The financial management of A forcasts
the interest rates to rise by 1 over the next
year.
Rising rates will lead to declining prices
(deprecia-tions). Secondly, in case of rising
rates, A is not proper-ly invested which may
affect her competetive position.Risk management
may prevent from losses.
years 1 2 3 4 5 6
rcurrent 3,0 4,0 5,0 6,0 7,0 8,0
rin1year 4,0 5,0 6,0 7,0 8,0 9,0
rspot,0 3,0 4,02 5,07 6,16 7,31 8,55
rspot,1 4,0 5,03 6,08 7,2 8,4 9,6
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Example Risk Management with Asset Swaps
To manage the forecasted interest rate related
risk, A enters a 6y Payer-Swap (paying a fixed
rate of 8, receiving a floating rate at
12-m-Euribor. The contract volume mirrors the
nominal value of the risky asset (100 Mio )
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Example Risk Management with Asset Swaps Close
out
If, one year later, the interest rates would have
risen by linearly 1.5, the future cash flows
referring the 100 Mio Swap (which now matures
in 5y !) could be valued using the new spot rates
Value of the swap contract is at 2,038,655 Mio .
To close out, A will be paid the swaps present
value.
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Example Risk Management with Asset Swaps 2nd
Swap
Theoretically, after one year A could enter a
second swap, where she becomes a fixed rate
receiver (5y at 8,5)
The advantage of 0.5 or 500 T over a period of
5 years has a present value of 2.038.655 . A
second swap could be reasonable to ensure the
advantage and to protect from tax payments.
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Example Risk Management with Asset Swaps
Efficiency
If interest rates rise as forcasted, the value of
the 100 Mio. bonds investment will decrease to
97,961 Mio
A necessary depreciation will affect the profit
and loss account by a loss of 2.038.655 (100
Mio purchase price minus 97,961,345 current
market price).
In our case, the swap based risk management has
shown a positive present value of 2,038,655 . A
close out and the close out payment at this
amount would perfectly compensate the loss from
the bonds investment.