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SAM risk-free rate workshop Swaps versus bonds

SAM risk-free rate workshop Swaps versus bonds. Lindy Schmaman. Swap curve versus Bond curve. Source: Bond Exchange of South Africa. Bonds curve | Swap curve | NCD curve. NCD: Contains credit and liquidity risk.

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SAM risk-free rate workshop Swaps versus bonds

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  1. SAM risk-free rate workshopSwaps versus bonds Lindy Schmaman

  2. Swap curve versus Bond curve Source: Bond Exchange of South Africa

  3. Bonds curve | Swap curve | NCD curve NCD: Contains credit and liquidity risk Source: Bond Exchange of South Africa overlayed with Deloitte bootsrtrapped NCD curve

  4. Criteria for deriving the risk-free curve       

  5. Criteria for deriving the risk-free curve - continued    

  6. Swap spreads over government bonds (2006 – 2012)

  7. Equilibrium swap pricing Swaps - supply and demand Demand (investors) • Receive fixed, pay floating • Demand increases with higher swap yields (earn more) • Invest in corporate bonds / offset the swap • Supply increases with lower swap yields (earn a higher margin) Supply (banks) Equilibrium • Swap based strategies attractive despite low yields • Good hedge for swap-based discounting => stable profit • - Easier portfolio rebalancing Source: ‘Swap spreads – why have they become negative?’ Deloitte CMG, 2008

  8. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence. This publication is for internal distribution and use only among personnel of Deloitte Touche Tohmatsu Limited, its member firms, and their related entities (collectively, the “Deloitte Network”). None of the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

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