wilmott.com

Can somebody explain these?

T-lockA Treasury lock is an over-the-counter agreement to fix the yield rate on a future transaction in the Treasury bond market. An agreement is made setting the yield of a specific Treasury bond at a specified future time - the agreed upon rate is called the lock rate. When that time arrives, the then-current yield of the Treasury bond is compared to the lock rate, and a cash settlement is made based on the difference.Treasury rate locks are very similar to forward bond agreements, but differ in that forward bond agreements are quoted in terms of bond price and often settle via physical exchange of the specified bond, whereas Treasury locks are yield-based and generally cash settled. Because of the difference in terms of quotation one has to remember that, because of the inverse relationship between price and yield, one reverses the position when switching between the two. For example, a forward bond sale is equivalent to buying a Treasury rate lock, and vice versa.SpreadlockThe fixed rate on a swap can be broken down into two additive components – the underlying benchmark Treasury bond yield and the swap spread. A spreadlock is an over-the-counter agreement to fix the swap spread component of a future transaction in an interest rate swap at or within a specified period of time. When that time arrives, the fixed swap rate is set at the then-current benchmark Treasury bond yield plus the spreadlock rate.

Thanks

David:In a Tlock, does one use "bond math" to determine the relationship between the difference in prices and the differences in yield? Or is the TLock payoff linear in the difference between the contract rate and the rate setting?Thanks.And what about a spread lock?

Pat,Forward bond agreements tend to marketed by bond honks (those yield-to-maturity guys), are price-based and use the cash-and-carry no arbitrage formula for computing the forward bond price/yield, which essentially models the forward price as the spot price plus the "cost of carry". In the simple case where the bond pays no coupon over the forward period, the relationship is:forward_clean_price = (spot_clean_price + spot_accrued)(1 + repo_rate*forward_days/year_basis) - forward_accruedIf the bond pays a coupon over the forward period, add the future value (to the forward date) of the coupon payment.T-lock agreements tend to be marked by swap desks and are yield-based. The payoff is the difference between the future spot bond yield and the contract rate times the value of a basis point.Spreadlock rates are typically priced using forward rates derived using zero coupon methods. There was a decent explanation in the Derivatives Week "Learning Curve" some while back.Hope this enough to stimulate your thinking.D-

sorry guys, still something i don't understand. say now the 2yr swap sprd is 50bps, and I lock it at 53bps. do i settle this in 2 years? how do i settle,e.g. how to calculate my profit/loss? could you guys pls gimme an example?thanks a bunch

QuoteOriginally posted by: rambo900sorry guys, still something i don't understand. say now the 2yr swap sprd is 50bps, and I lock it at 53bps. do i settle this in 2 years? how do i settle,e.g. how to calculate my profit/loss? could you guys pls gimme an example?thanks a bunch1) The settlement term can be anything that is agreed by the two parties to the agreement. The settlement date on a 2 year spreadlock can be anything from 1 day to 30 years. For example, on March 15, 2007, I could enter into a spreadlock on the 2-year swap that settles on October 20, 2015.2) On the settlement date, the two sides would determine the spread of the 2-year spot starting swap3) If the spread is above 53 bp, you would receive money from the counterparty; if the spread is below 53 bp you would owe the counterparty money4) The amount owed would be calculated via a formula such as NotionalAmount * PV01 of 2 year spot starting swap * (SwapSpread-53)5) Notional Amount = 100MM, PV01 for $1MM = $180, SwapSpread = 60 --> 100*180*(60-53) = $126,000

thanks a lot!

I still don't understand about the payoff of the treasury lock. Can I get an example on the payout of the treasury lock? I take it this type of agreement is usually used to hedge a upcoming bond issue, so would the cash settlement from the t-lock looks something like (P_t - P_lock)*PV01*Princ?Maybe I'm confused with some of the structures described on the web. I also notice that those agreements tend to have a early cancel provision by the T-lock buyer. Does that matter as in incorporate into the lock rate?

Correct me if I am wrong. As the DV01 of the Treasury changes throughout the live of the bond, the settlement formula (Changes in Yield * DV01) is only an approximation of the cash settlement, right?. In reality the client receives the price at what he sold and bought back, right?thanks

Where does the fixing come from?QuoteOriginally posted by: ReallyOldQuoteOriginally posted by: rambo900sorry guys, still something i don't understand. say now the 2yr swap sprd is 50bps, and I lock it at 53bps. do i settle this in 2 years? how do i settle,e.g. how to calculate my profit/loss? could you guys pls gimme an example?thanks a bunch1) The settlement term can be anything that is agreed by the two parties to the agreement. The settlement date on a 2 year spreadlock can be anything from 1 day to 30 years. For example, on March 15, 2007, I could enter into a spreadlock on the 2-year swap that settles on October 20, 2015.2) On the settlement date, the two sides would determine the spread of the 2-year spot starting swap3) If the spread is above 53 bp, you would receive money from the counterparty; if the spread is below 53 bp you would owe the counterparty money4) The amount owed would be calculated via a formula such as NotionalAmount * PV01 of 2 year spot starting swap * (SwapSpread-53)5) Notional Amount = 100MM, PV01 for $1MM = $180, SwapSpread = 60 --> 100*180*(60-53) = $126,000

Come to think of it, how do you agree the PV01? Does it assume a cash collateralisation approach for discounting? I assume the style of interpolation may also impact this (maybe not much)?QuoteOriginally posted by: ReallyOldQuoteOriginally posted by: rambo900sorry guys, still something i don't understand. say now the 2yr swap sprd is 50bps, and I lock it at 53bps. do i settle this in 2 years? how do i settle,e.g. how to calculate my profit/loss? could you guys pls gimme an example?thanks a bunch1) The settlement term can be anything that is agreed by the two parties to the agreement. The settlement date on a 2 year spreadlock can be anything from 1 day to 30 years. For example, on March 15, 2007, I could enter into a spreadlock on the 2-year swap that settles on October 20, 2015.2) On the settlement date, the two sides would determine the spread of the 2-year spot starting swap3) If the spread is above 53 bp, you would receive money from the counterparty; if the spread is below 53 bp you would owe the counterparty money4) The amount owed would be calculated via a formula such as NotionalAmount * PV01 of 2 year spot starting swap * (SwapSpread-53)5) Notional Amount = 100MM, PV01 for $1MM = $180, SwapSpread = 60 --> 100*180*(60-53) = $126,000

At 204,000 views plus, this topic deserves a bump!