FI is more complex than eq / FX / commodities, largely due to the time dimension.

There's a maturity in Every fixed income contract.

There's a maturity in Every derivative contract. For clarity Let's use the alternative term "expiration".

There're 2 distinct maturities in a typical Fixed Income derivative contract.

Do eq/FX/comm spot trades have a time dimension? I don't know many. FX spot trades have valuation dates, typically T+2, but T+1 for CAD...

Now, every derivative contract has an expiry date. This time-dimension factor interacts with maturity, in a way that's unique to Fixed Income instruments.

The time dimension is critical

- because prices change over *time*.

- because volatility changes over *time*. Roughly half of all derivatives involve vol/optionality.

- because interest rate and credit spread change over *time*, but more slowly

- because many investors borrow money to trade, at an interest.

- because of time value of money. Money received in the future is worth less than money received today, and the difference is mathematics.

- because interest rate has a term structure

- because der contracts are often held open for longer timeframe than cash positions. Reason?

** der is often used to hedge away risk;

** many contracts can't be transferred or closed out early.

## Sunday, October 9, 2011

### Fixed Income -more complex due to time dimension

Labels: FixedIncom, original_content

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