An Introduction to Repo Markets by Moorad Choudhry

By Moorad Choudhry

The Repo markets have grown dramatically long ago few years as a result of have to hedge brief positions within the capital and derivatives markets. almost all significant forex markets on this planet now have a longtime repo marketplace, the power is additionally more and more getting used in constructing foreign money markets in addition.

This ebook is a pragmatic creation that specializes in the tools, functions and possibility administration suggestions crucial for this quickly evolving industry. absolutely up to date to mirror the adjustments in those markets, the ebook additionally contains labored examples and case stories, and new sections on basket and based finance repo.

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Interest is paid on maturity except for CDs lasting longer than 1 year, where interest is paid annually. If the current market price of the CD including accrued interest is P and the current yield is r, the yield can be calculated given the price using:  &  ! 0  ! Nim Nsm P¼MÂ 1þd 1þr 365 365 0  ! Nsm ¼F 1þr 365 ð2:7Þ 26 AN INTRODUCTION TO REPO MARKETS where M ¼ Face value of the CD; F ¼ Maturity value of the CD; Nim ¼ Number of days between issue and maturity; Nsm ¼ Number of days between settlement and maturity; Nis ¼ Number of days between issue and settlement.

The three yield curves most frequently encountered are the YTM curve, par yield curve and spot yield curve: . YTM yield curve – the most common yield curve is that constructed from the measure for the YTM, or gross redemption yield. 3. Par yield curve – this is a plot of the YTM against term to maturity for bonds priced at par. The par yield is therefore equal to the coupon rate for bonds priced at or near par. The curve is used to determine the required coupon on a new bonds that is to be issued at par.

The segmentation or preferred habitat theory argues that the bond market is segmented by maturity range and that there are no spillover effects between each market segment. The yield curve is therefore determined by supply and demand conditions in each market segment – for example, demand at the short end by banks and building societies and demand at the long end by insurance companies and pension funds. This would explain ‘humped’ yield curve shapes. Bond price/yield relationship The bond price equation has illustrated the relationship between a bond’s price and discount rate (the yield measure).

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