Question 1

Why does the cheapest-to-deliver bond switch and how should traders model this option?

AcadiFi · Accepted Answer

The cheapest-to-deliver bond minimizes the short's delivery cost. Longer low-coupon bonds dominate above 6% notional; shorter high-coupon bonds below.

Question 2

What margin do I post on a cleared swap vs. an uncleared one?

AcadiFi · Accepted Answer

Cleared swaps require Initial Margin (2-3% of notional via SPAN) plus daily Variation Margin. Harwick Pension posts $180M SIMM-based IM under UMR Phase 6 uncleared rules...

Question 3

How do performance-based vesting conditions affect stock compensation expense?

AcadiFi · Accepted Answer

Performance conditions are non-market conditions tied to company metrics. They affect whether expense is recognized but not the grant-date fair value. Probability estimates update each period.

Question 4

What is basis trading in T-note futures and how do traders profit from it?

AcadiFi · Accepted Answer

Basis trading exploits the difference between the spot price of a deliverable Treasury note and its futures-implied price multiplied by the conversion factor.

Question 5

How is bilateral credit risk measured on an uncleared swap? What are CVA and DVA?

AcadiFi · Accepted Answer

Bilateral risk: V_risky = V_riskfree - CVA + DVA. Brindle Energy's swap with Korvis Bank: CVA of $0.38M offset by DVA of $0.52M produces +$0.14M net adjustment...

Question 6

How does graded vesting differ from cliff vesting for stock-based compensation expense recognition?

AcadiFi · Accepted Answer

Graded vesting means tranches vest separately over time while cliff vesting means the entire grant vests at a single date. The accounting treatment diverges based on how you allocate fair value.

Question 7

How are interest rate futures priced and what drives the futures-spot relationship?

AcadiFi · Accepted Answer

Interest rate futures are priced using a cost-of-carry framework adapted for debt instruments. For a T-bill futures contract, the theoretical price equals the spot price compounded at the repo rate minus any coupon income earned during the carry period.

Question 8

Walk me through the full mark-to-market swap valuation process.

AcadiFi · Accepted Answer

MTM valuation: build OIS curve, project floating CFs, discount both legs, net. Morven's $75M pay-fixed swap shows +$0.53M value posted as variation margin daily...

Question 9

How do I calculate the termination value of an interest rate swap before maturity?

AcadiFi · Accepted Answer

Termination value = PV(remaining fixed leg) - PV(remaining floating leg). Example: Lantara Capital's 3.80% receive-fixed swap unwinds at $1.27M gain when rates fall to 2.90%...

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