The most professional and industry relatable text currently available for linear interest rate derivatives.

Written by a practicing derivatives portfolio manager with almost twenty years of fixed income trading experience, this book focuses on core trading concepts; pricing, curve building (single and multi-currency), risk, credit and CSAs, regulations, VaR and PCA, volatility, cross-gamma, trade strategy analysis and market moving influences.

The book's focus is interest rate swaps and cross-currency swaps, updated for a risk free rate (RFR, such as SOFR and ESTR) framework as opposed to LIBOR. Topics are presented from that perspective, outlining the importance of regulations in an IRD capacity, with volatility and swaptions taught from a practical point of view rather than an overly cumbersome academic one.

This third edition (2022) markedly expands the second (2017), by not only providing extensive analysis but also building up a modern codebase, step-by-step, in Python. It constructs and solves interest rate curves and goes on to implement risk and cross-gamma calculations, demonstrating the implementation of automatic differentiation for superior efficiency. Read more at https: //github.com/attack68/book_irds3.

The treatment of risk is expansive and deep. Formal analysis of market-maker techniques to accurately predict PnL, and implement multiple models to view all details of risks.

Almost everything included here is compulsory knowledge for a modern, successful, swaps trader or interest rate risk portfolio manager. Certainly this book sets the benchmark for the level of expertise that swaps traders should strive for, and the style is aimed at the novice and professional alike.

Table of Contents

1) Mathematical Review: calculus, linear algebra, statistics and optimisation.
2) Interest Rates: definitions and common nomenclature.
3) Basics of Interest Rate Derivatives: product specifications and trading mechanics.
4) Users of Interest Rate Derivatives: market context.
5) Cash, Collateral and Credit: underpinning necessities for pricing and valuation.
6) Single Currency Curve Modelling: general curveset construction principles.
7) Multi-Currency Curve Modelling: necessary components to construct curves across currencies.
8) Term Structure of Interest Rate Curves: different real world factors that drive the shapes of curves.
9) Delta and Basis Risk: definitions of financial sensitivity to market movements.
10) Risk Models: different perspectives of risks and transformations between them.
11) Quant Library and Automatic Differentiation: an introduction to coding Swaps, Curves and Solvers using AD.
12) Advanced Curve Building: using flexible parameter sets to construct curves around market effects.
13) Multi-currency Risk: how to view risks across currencies arising from different effects.
14) Value At Risk: what is VaR and how to calculate and use it.
15) Principal Component Analysis: what is PCA and how to calculate and use it.
16) Customised Risk Management: how market makers allocate risks in their portfolio for ease of management.
17) Regulatory Capital, Leverage and Liquidity: a summary of regulations that shape the IRD market.
18) Market-making and Price-Taking: an overview of the market making process including margin considerations.
19) Electronic Trading: issues involved with latency and transforming subjective processes to algorithms.
20) Swaptions and Volatility: a summary of swaptions including quoting conventions and general considerations.
21) Gamma and Cross-Gamma risks: analysis of the second or risks of linear IRDs.
22) Analytic Cross-Gamma: mathematical extension of 21)
23) Constructing Trade Strategies: directionality hedges, carry and roll-down analysis and Sharpe ratio.
24) Reset Risk: how to manage daily fixing risk e.g. for Euribor, Stibor, etc. or Term-RFRs.