Migration plan of Risky Total Return Swap to Bond Return Swap

University essay from KTH/Matematisk statistik

Abstract: Since the 2008 crisis, the hedging instruments have gained popularity with financial institutions. This is the case of the total return swap that is used today by major institutions like Goldman Sachs or J.P. Morgan. Murex is a software provider for financial institutions. The company already had a total return swap product, the RTRS (for Risky Total Return Swap), but with the growing demand Murex decided to develop a new product, the BRS (Bond Return Swap). So now they have two bond total return swaps. This master thesis aims to analyze total return swap and highlight the improvement of the BRS. After a theoretical analysis of the total return swap, a test campaign is realized. For different types of bond and different configurations of total return swap, formulas are derived to be compared to the returned values. The results given by the RTRS are good on basic bonds. If the bond is more complex, for instance a bond with credit risk or an amortized bond, the values returned by the RTRS are not reliable if not wrong. On the other hand, the BRS performs well in every situation and positions itself as the best total return swap proposed by Murex.

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