Fixed Income Relative Value Trading


This online workshop comprises a video recording of trainer Christian Schaller delivering our 3-day Fixed Income Relative Value Trading course in London. The course provides a comprehensive overview of the models and tools required for relative value trading in the fixed income markets. Practical exercises and case studies are used throughout the course, enabling participants to translate theory into effective trading strategies.

Familiarity with common fixed income instruments is an advantage although in-depth mathematical knowledge is not required.

Our online workshop is designed to give you everything you need to get started and includes:

  • Video recording (18 hours)
  • Direct access to trainer for assistance

Duration: 18 Hours
Location: Online
Trainer: Christian Schaller
Course Fee: £1490 + VAT
How to Book: Register here


DAY 1: Statistical Relative Value Models

Introduction to Fixed Income Relative Value (RV) Analysis

  • Concept of RV analysis
  • Sources of RV opportunities
  • The insights from RV analysis
  • Applications of RV analysis: Trading, hedging, asset selection, creating alpha
  • RV models: Statistical and financial models and their interaction

Principal Component Analysis (PCA): Theory

  • What is PCA and how does it help us?
  • PCA versus other factor models
  • Mathematics of PCA
  • Gaining insights into market mechanisms through interpretation of the PCA results
  • Decomposing a market into directional (beta) and non-directional (alpha) factors
  • Using PCA to screen the market for trading opportunities
  • Using PCA for asset selection
  • Combining all these elements into a step-by-step guide for PCA-based analysis and trading

Principal Component Analysis: Practice

  • Using PCA for yield curve analysis
  • Using PCA for swaption analysis
  • Using PCA for hedging and asset selection
  • Using PCA in other markets: Stocks, FX, commodities

Mean Reversion: Theory

  • What is mean reversion and how does it help us?
  • Mathematics and model selection
  • Calculating conditional expectations and probability densities
  • Calculating Sharpe ratios
  • Calculating first passage times

Mean Reversion: Practice

  • Which performance is likely over which horizon?
  • Setting performance targets
  • Setting stop loss levels

Practical Case Study: Applying Statistical RV Models in a Trading Context

  • Perform a PCA on the yield curve and find trading opportunities
  • Run a mean reversion model to assess the performance potential and speed of these trades

Day 2: Asset Swaps, Basis Swaps, Default Swaps, and their Combinations

Asset swap spreads (ASW)

  • Model approach: Link between ASW and LIBOR-repo spreads
  • A model for pricing ASW
  • Driving factors of ASW
  • Making the pricing model for ASW work in practice
  • ASW as rich/cheap indicator for bonds: Problems and better alternatives

Basis swaps (BSW)

  • Intra-currency basis swaps
  • Cross-currency basis swaps
  • Swapping bonds into a different currency
  • Assessing the relative value between bonds in different currencies
  • The mutual influences between ASW and BSW

Credit Default Swaps (CDS) for Government Bonds

  • FX component and other pricing issues
  • The “arbitrage inequality” between ASW, BSW and CDS
  • Trading this “arbitrage inequality” in practice

Practical Case Studies

  • Practical case study 1: The mutual influences of ASW, BSW and CDS in the JGB market
  • Practical case study 2: Building a model for EMU sovereign bond yields

Day 3: Futures and Options

Bond futures and their delivery option

  • The importance of the delivery option
  • Usual approach to price the delivery option and its problems
  • A better approach to price the delivery option
  • Applications: Basis trades and calendar spreads/rolls

Swaption trading strategies

  • Brief review of option pricing theory
  • Classification of option trades
  • Different exposures and goals of the different option trades

 Swaption trading strategy 1: Conditional curve trades

  • Single underlying: Breakeven analysis, breakeven curves, link to macro models
  • Multiple underlyings: Conditional steepeners and butterflies

Swaption trading strategy 2: Implied versus realized volatility

  • Single underlying: Delta hedging, calculation of realized volatility
  • Multiple underlyings: Implied vol curve versus realized vol curve

Swaption trading strategy 3: Implied versus implied volatility

  • Factor model for the swaption vol surface
  • Practical pitfalls

Practical case study: Finding, classifying and analysing swaption trades on the USD vol surface

Frequently Asked Questions

You will receive a hard drive with the video recording. You can use this whenever you like, though please note it is for your personal use and not for distribution. You will also receive an electronic copy of the manual.

The video recording was taken over 3 training days. Students can take things at their own pace, but we expect most people to take no longer than a week to complete the course.

The trainer is happy to help you out in case you need assistance. Questions can be asked directly by email or, by arrangement, through an online webinar. The number and type of questions should be kept within reason and within the scope of the training course.