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Mapping Zero-coupon Bonds to Risk Factors

We earlier learned that VaR calculation of a complex portfolio can be simplified by decomposing the instruments into building blocks, or primitive instruments, which are further mapped to a small set of risk factors. Zero-coupon bonds are one such primitive instrument apart from spot FX positions, equity positions, and futures/forwards. In this article we will

Forward Contracts on Zero-coupon and Coupon Bonds

The forward contracts on bonds are similar to equity forward contracts except that they have bonds as the underlying asset. The forward contracts can be written on both zero-coupon bonds (such as T-bills in the US) and coupon paying bonds. Since bonds have a maturity date, the forward contracts on these bonds must also settle