There are two ways to model a repo:
There are two ways to model a CFD:
Financing cash flows are not easily calculated but likely to be negligible over time so they can be ignored.
Model an ABS floater as an "Amortizing Bond" with a Prepayment PSA % or a Pay-Down Schedule. One way to handle ABS floaters is to use a hypothetical original Notional assuming the same PSA Prepayment speed.
All ABS prepayment schedules are difficult to predict.The ABS floater is just an ABS with a floating rate coupon. Alternatively, you could use the "Generic Bond" model with a sinking fund schedule to model an ABS because you can proxy Fixed to Float, Step Coupons etc.
Bloomberg includes a "Bulk Wizard" function. If you enter the ISIN of that ABS in Excel and use the Bulk Wizard -> Analytics -> Projected Cash Flows then it will display all future cashflows and the amortizing schedule. This can be used in the sinking fund schedule and is probably the best we have when it comes to these ABS.
There are 3 options to model a defaulted corporate bond (listed below in order of preference):
Create a very narrow bull spread with a very extreme payoff equal to the digital amount. For instance, if the strike price is 100 and the digital rebate is 600,000, create two instruments: A long Equity Option (call) at 99.99 A short "Equity Option" (call) at 100 The payoff will be 100 - 99.99 = .01 times the notional amount, so put $60 million in the Notional field (60,000,000*.01=600,000).
For a digital put, you would create the analogous bear spread (i.e. a long "Equity Option" (put) at X and a short Equity Option (put) at X + .01). How should I model an option on an FRN? The payoff on a putable bond is max(B,x) at every node, where B is the value of the bond, and x is the strike price. If we subtract the value of a zero-coupon bond (a cashflow) with notional equal to strike price x, then the payoff is: Max(B,x) - x = Max (B-x,0) = value of a call option on a bond Max(B,x) - x = Max (B-x,0) = value of a call option on a bond.
Therefore, an option on an FRN can be modelled as a combination of two instruments: a long, putable FRN plus a short zero-coupon with notional X equals a call option on a bond.
Model an inverse floater as a "Generic Bond" position. A general formula for the coupon rate for an inverse floater is Float Offset - Float Multiple * Reference Rate. Suppose the coupon rate is given by 8% - 3 month LIBOR. In this case, you would set the following parameters in the "Generic Bond" model for the float coupon terms:
RiskManager does not receive individual futures contracts. It uses bootstrapped constant-maturity points to create curves for each future. You have two choices: Model the future as a Commodity Future built on the FUTURES.CBOT.TY (10 Year U.S. Treasury Note) curve. The disadvantage to approach: no linkage exists between the Commodity Future model and the interest rate: shifting interest rates do not directly affect the value of the underlying commodity (the model is agnostic as to whether the underlying commodity is hog bellies, oil, or interest rates). VaR will be accurate because RiskManger uses the standard deviation of the traded contract. Model the future as a Bond Future. This has the following disadvantage: you must supply the terms (maturity date, coupon, conversion ratio, etc) on the cheapest-to-deliver bond. The advantage to this approach: a hard-and-fast linkage exists between interest rates movements and the pricing model for the Bond Future. This enables you to create stress tests by interest rate movement, and view VaR broken out by RiskType. If all you need to report is VaR, use the first option because it is more accurate and far easier to input. But if you need stress tests, or if you want to run VaR broken out by Risk Type (e.g. interest rate risk vs. equity risk vs. commodity risk etc.) then the second option may be preferable. However, this requires that you provide the underlying bond terms and conditions and the conversion factor, as well as the bond price and the future price.
Model it as an Interest Rate Future. RiskManager doesn't create a Fed Funds discount curve but it does include a term structure for repo general collateral. Alternatively, model it as a Commodity Futures and reference FUTURES.CBOT.FF. This method generates no interest rate risk, however it does produce "commodity risk"; which may be undesirable. How should I model a Quanto Equity Swap? A Quanto Equity Swap is an equity swap in a foreign currency, where the holder does not bear the FX risk. A Quanto is sometimes also called an Equity-Linked Forward. If the Quanto is an exchange-traded future, like the Nikkei 225 swap traded on the Chicago Merc in USD, then you can simply enter it as a Commodity Future. If the Quanto is over-the-counter, you can use an "Equity Swap" position and select the "Ignore FX Risk" option; or by selecting the option in the appropriate field when loading the position file.
The "Fixed/Floating Swap" can be modeled as an Interest Rate Swap in RiskManager. The Coupon Frequency should be lunar-bimonthly. This is because payments occur every 28 days because the floating leg is based on the Mexican Interbank TIIE. This translates into 13 months a year and 65 months for a 5 year swap. The floating leg should reference the Mexican Swap curve with a reference term of 28 days. The fixed leg is based off the MPSW5E swap rate. You should also enter this as lunar-bimonthly. How should I model an FX Digital Option if the payout is in a third currency? Use a regular "FX Digital Option" position but update the Cash Pay Out field on a daily basis. The payout is in terms of a third currency, but the "FX Digital Option" position requires it be specified in terms of the Settlement Currency. To account for the true payoff, the Payout field must be kept up-to-date to reflect the current relationship between the Payoff Currency and the Settle Currency.