TRX.II.AAA.1 Primer: Structure, Cashflow & Breakeven Analysis Figure 4 Figure 5 TRX.II Cashflow Description Hypothetical TRX.II.AAA.1.Dec11 Trade Payments Long Position (Floating Rate Payer) Short Position (Fixed Rate Payer) Initial Trade Details Initial Upfront Payment -If the Traded Spread is less than -If the Traded Spread is greater Notional Amount: $10,000,000 Spread Return Amount: Reset Date Spread (the “Com- than Reset Date Spread (the Trade Date: November 15th, 2011 =(Commencing Index Spread – mencing Index Spread”), the “Commencing Index Spread”), Traded Spread) * Factor * Avg $ Floating Rate Payer pays the the Fixed Rate Payer pays upfront Initial Payment Duration * Notional upfront amount calculated from amount calculated from spread Date: November 18th, 2011 =(.0172 - .0160) * 1 * 7.79 * spread differential and average differential and average dollar Last Reset 10,000,000 dollar duration during the period. duration during the period. Date: October 31st, 2011 = $91,766.20 -The Floating Rate Payer pays ac- -The Fixed Rate Payer receives Effective Date: November 1, 2011 Interest Amount crued interest from the last Reset accrued interest from prior Reset Previous Close: 162.3 bps =(Commencing Index Spread 30/360 day count and Com- on 30/360 day count and Com- Traded Spread: 160 bps * Factor*(day count 30/360) * NotionalDate up until Trade Date based Date to the Trade Date based on mencing Index Spread. mencing index Spread. Commencing -If the Ending Index Spread is -If the Ending Index Spread is less Index Spread: 171.78 bps = 6,680.33= .0172 *14 / 360 * 10,000,000 *1 greater than Commencing Index than Commencing Index Spread, Avg $ Duration: 7.79 pays the product of the spread product of the spread differential =Interest Amount + Spread Return1Factor:the Fixed Rate Payer pays theCarry Amount Spread, the Floating Rate Payer differential and average dollar and average dollar duration for Amount duration for the calculation period. the calculation period. = $98,446.53 -The Fixed Rate Payer pays the full month’s accrued interest based Source: RBS, Markit upon prior Commencing Index Spread and 30/360 day count. If the TRX.II.AAA.1.Dec11 spread subsequently declines to 150 bps on the December 31st maturity date, the Fixed Rate Payer Source: RBS, Markit would be required to make a $198,949.60 settlement payment to the Floating Rate Payer (Figure 6). The Floating rate payer makes Hypothetical TRX.II.AAA.1.Dec11 Trade Example a net profit of $100,503.074 (ignoring any margin impact) because Consider the hypothetical trade below where a market participant the market value of the TRX.II.AAA.1.Dec11 index increase as goes long the TRX.II.AAA.1.Dec11 contract on November 15th spreads tightened from the traded spread of 160 bps (the “Previous at the offer side of 160bps. The Floating Rate Payer (the long) is Close”) to 150 bps in addition to receiving net 45-days of accrued required to make a $98,446.53 upfront payment to the Fixed Rate interest at a coupon of 171.78 bps. Payer (the short) (Figure 5). This is because the traded Spread (160bps) is less than the Commencing Index Spread (171.78) resulting in a positive “Spread Return Amount” in addition to 14- days of accrued interest (the “Interest Amount”). CRE Finance World Winter 2012 46

CRE Finance World, Winter 2012

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