Deutsche Bank Forward Rate Bias

Dimatrix · Post by **Dimatrix** » Fri Jan 18, 2008 1:13 pm

I think the strategy is well known in the FI market. It has been around for a while. Bloomberg ticker DBFRUBHU Index. A termsheet can be found here although it doesn't explain the strategy.

Does anyone know of a Europe based, bank independent company, which has the expertise to price such a (rather komplex) structure? I'm looking for a company, which already has some experience with it. I know some names which do standard FI stuff, but the pricing of this note seems to be more complex. The feedback was rather negative. Maybe someone knows of a shop, where they're already working on a risk analysis/pricing or can give me some other hints.

Thanks a lot everyone

Scotty · Post by **Scotty** » Sun Jan 20, 2008 2:23 pm

Why do you want to know?

monkeyA · Post by **monkeyA** » Sun Jan 20, 2008 2:50 pm

Ignoring any quanto effect, I think that index is probably unfunded, i.e. expected return of zero and flat forwards

Then you are just pricing a set of leveraged ATM call options on the index with different maturities and with some constant implied vol

If you are looking to buy it, DB should be able to give you a spreadsheet that clearly shows the pricing.

ig0r · Post by **ig0r** » Sun Jan 20, 2008 5:35 pm

Does anyone have the post-2003 returns (after rate cuts stopped) on the index handy? Would be interesting to see

Dimatrix · Post by **Dimatrix** » Sun Jan 20, 2008 6:51 pm

Scotty, I need a risk analysis for a customer. Well, DB won't give you the pricing sheet, most of the time its even hard to get a secondary market price. A critical remark can be found here . Looking for some option quotes at bloomberg sometimes gives you a constant price for 6 months. Pricing seems to be more involved, since they've said once, that the options are down due to a decrease in swaption vols. So I think the option prices are obtained with an interest rate model. The EUR/USD index performed pretty poor in the last years, but came back when the subloan problem came up. here is a chart.

monkeyA · Post by **monkeyA** » Sun Jan 20, 2008 8:58 pm

yeah most of those FRB indices haven't performed well recently, but have been sucessful products.

Some people are long these products out to 10,20,30 years exposure to the FRB mechanism

Its possible they have a more involved model, but i doubt it - they probably mark their index vol to some simple function of swaption vols, if that.

Dimatrix · Post by **Dimatrix** » Mon Jan 21, 2008 8:50 am

thanks Mr. Ass. So you're assuming, that they're pricing the options like options on a simple index, e.g. a GBM driven model, and plug in an implied vol which somehow depends on swaptions? I've seen a delta analysis of the options with respect to a shift in the yield curve once, and it had a sensitivity with respect to the 12m and the 15m rate. As expected. But this again sounds like they're calibrating to the yield curve, a simple GBM model wouldn't give us this type of sensitivities. No?

ColdBloodedOldTimes · Mon Jan 21, 2008 11:22 am

Dimatrix - check your mail