Understanding the Economic Functions of Repo
Financing long positions/lending bonds for yield enhancement; financing short positions/collateralising a cash investment; Central Bank open market operations; Supply and demand effects on repo rates; general, specific and 'special' collateral.
| Case Study Part I
Participants examine a number of repo transactions and identify the motivations of all players.
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Essential Financial Arithmetic
Time value of money; market calculation conventions; the money market: instruments and pricing; the bond markets: price/yield relationship.
The Mechanics of Repo: Alternative Structures
Classic repo; buy/sell backs; tri-party repo, Bonds borrowed; Initial margin (haircuts) and marking to market/repricing. Delivery repo, hold-in-custody and safekeeping repo.
Exercise: Pricing and Buy/Sell Back
Risks and Documentation
Counterparty risk; collateral risk; issuer risk; recharacterisation risk; market risk. Documentation: key clauses in the PSA/ISMA Global Master Repurchase Agreement.
Total Return Swaps
An In-Depth Look at Electronic Trading
Overview of electronic trading platforms, inter-dealer systems, straight-through processing of transactions, on-line trading capability, price engines.
Case Study Part II
Participants are given a typical trading scenario of positions to manage. They will trade the positions with a view to maximising repo profits, and examine their virtual P/L using Personal Martini TM
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Trading and Hedging Strategies Supported by Repo
The central role of the repo desk on the trading floor: Supporting the fixed income sales desk; hedging new issues, swap books, option positions; financing long and short positions of bond traders involved in: creating a tail, short hedge and long hedge, yield spread arbitrage. Matched book trading.
Exercise: Repo and Spread Trading
The Implied Rate: Basis Trading
Bond futures: notional bond, conversion factors, cheapest to deliver, carrying costs and the implied repo rate, gross and net basis; cash and carry arbitrage.
Exercise: Cash and Carry Arbitrage
Repo Clearing and Netting
Overview of central clearing and netting; Forms of netting, the benefits of central clearing, the mechanics; Risk management and margining in clearing; the major service providers.
Repo and the Yield Curve
The effect of repo on value along the yield curve: understanding the break-even forward yield curve; forward pricing and repo; "when issued" bonds and related repo strategies; Using repo to enhance returns: total returns of individual issues and outperformance against a benchmark.
Exercises: - Repo and the Yield Curve / Repo
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