Bloomberg User Manual

School of Economics and Finance

Faculty of Business and Economics
University of Hong Kong

Chapter 6
Pricing and valuation for derivatives

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Kong

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Chapter 6 Pricing and Valuation for
Derivatives
Overview
One of the key strengths of Bloomberg is the advanced pricing platform for all derivatives in the
market. It is very important to drive the trading volume of the derivatives by having a neutral
pricing calculator to generate the mark to market value of the product. Derivatives product has
much higher profit margin than cash product in general. The more complex your product is, the
high the price your clients are willing to pay.

The purpose of this chapter is to achieve the following 3 goals:

1) Able to showcase or locate the market pricing and analysis for derivatives products.
2) Understand the workflow from how a trader generates the terms and price by the
calculator to the actual execution of the trade by electronic confirmation through the
calculator.
3) Able to replicate basic derivative products in the market through Bloomberg.

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6.1 Equity Derivatives Functions
Bloomberg provides a wide range of equity derivative products from exchange traded standard
products to OTC traded products. We will introduce a few monitoring functions for standard
products, such as warrants, options and ELN.

OMON<GO> Option Monitor

WMON<GO> Warrant Monitor

ELN <GO> ELN Market price Monitor

OMON provides real-time pricing, market data, and derived data for exchange-traded call and
put options for a selected underlying security in a customizable screen. You can see options with
the greatest volume and open interest, or highlight discrepancies in put-call parity which enables
you to pinpoint arbitrage opportunities. Standard templates provide variations of option data, but
you can also create multiple templates, tailored to your needs, so you can monitor the market.

Control Panel

Securities Options Pricing Tab

Panel

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You can type OMON<GO> on the command bar to load the function with an equity ticker. E.g.
IBM US Equity OMON<GO>. The function page is divided into 3 major Panels:

a) Control Panel – It allows you to adjust the data parameters of your analysis so that you can
view the number of calls and puts within a specific number or percentage range around the
Center. You can select Calc Mode which allows you to compare your pricing assumptions
against the market to identify and analyze trading opportunities, as well as test scenarios.

b) Securities Panel – It is optional and can be easily hid or expanded through the arrow toolbar.
It allows you to filter the group of securities against which the selected security is benchmarked.
You can also modify the security under analysis and quickly switch the security with underlying
options.

c) Options Pricing Tab- It allows you to display option pricing by strike price and expiry date.
Five standard templates are available to choose and columns with key data can be customized.

WMON provide real-time display information for covered warrants on an underlying equity.
You can customize multiple templates according to the warrant information you need. You can
also filter the warrants according to volume, call/put, and exchange.

Template Setting

Warrant display Tab

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You can type WMON<GO> on the command bar to load the function with an equity ticker. E.g.
IBM US Equity WMON<GO>. The function page is divided into 2 major panels.

a) Template Setting – 95) Templates contains all templates with customize settings which allow
user to have specific settings/ view according to different markets. 96) Templates allow you to
set up templates and customize column settings.

b) Warrant Display Tab- It allows you to display warrant pricing by exchanges with key trading
parameters.

ELN<GO> is a pre-trade price discovery tool for Asian Equity Linked Notes. Equity Linked
Notes (ELNs) are associated with the Hong Kong and Singapore markets. The majority of ELNs
refer to underlying equities and are set to one-month or two-month expiries. Usually, they are
issued at a discount to par and are held by investors until maturity.

Pricing Source

You can type ELN<GO> on the command bar to load the function. You can access to retail
ELN pricing in page for all offerings by 14 contributing banks. This function enhance the pricing
effectiveness in ELN market and commonly used by supplementary tool to predict the market
trend of option market

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Pricing and valuation for an Equity Derivatives

We have two core pricing calculators for equity derivatives, OVME<GO> and OVSN <GO>.
The former is the master calculator for all derivatives from single leg up to ten legs. The later
contains 11 structure derivatives which are commonly traded in the market.

Deal Panel

Greeks Panel

Strategy Menu

Calculation Panel

You can type OVME <GO> on the command line to load up the calculator. You will able to see
the Deal panel and Calculation Panel on the screen. By clicking into 3) Products, you will be
directed to a pop up with all strategies to select to load the standard deal setup. Bloomberg also
offer visualization of strategy with option 10 ) Show Strategy Menu. The deal will show up with
standard figures.

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 Output Panel

Security Panel

Greeks Panel
Structure
Panel

Refresh Icon
Result field

On the setting page, you can change input in any orange columns/boxes, 11) Solver in Output
Panel is the setting to control which field is the result field for all the parameters according to the
term sheet. Greek Panel will show the risk numbers of the deal. Options in Structure Panel can
only change among the option in the dropdown which highly depends on strategy. Fields with
Refresh Icon is live market data which number is drawn when you pull up the deal. You can
click on the icon to refresh the number for accurate calculation. Your pricing will be
automatically shown in Result field after you finish inputting the terms. In order to forecast your
return, you can click into 32) Scenario Graph.

Trade confirmation

Save deal

Request for quote

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After you confirm all parameters are correct for your deal, you can then click into 13) Save on
the toolbar to save the deal. System will ask you to create a Bloomberg ticker which will
represent this custom deal. The ticker starts with “+” sign in order to avoid duplication with
current security ticker. There is room for you to enter notes at the bottom of the screen. Next,
you could send this deal directly to your counterparty for quote by clicking in 15) Trade –
Request for quote and input the counterparty’s name on Bloomberg system. After the
confirmation of deal/price, you can select Send trade recap under 15)Trade for Trade
confirmation. At this point, the completed workflow of how you start from structuring an equity
derivative deal to trading and ending it with settlement confirmation is finished.

Last but not least, you will need to do valuation for the deals that you have traded before. There
are two simple ways to recall your trades.

Click on
the deal

Valuation of the
deal according to
market rate

First, you can simply input the ticker directly with the format of + Ticker Equity OVME<GO>.
Eg +IBM678 Equity OVME<GO>. Second, you can run OVME<GO> on command line, click
into 12) Load for the full list of trades and click into the one that you are looking for. The system
will pull out with latest market valuation directly as show in above graph.

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6.2 FX Derivatives Functions
Bloomberg provides a full package of FX derivative products on top of spot and simple forward
products. In terms of electronic trading community, Bloomberg has been expanding in recent
years with its new product IBD (Instant Bloomberg Dealing). This product is something you
should explore in the future.

FXIP<GO> FX Trading Homepage

FRD <GO> FX Forward Calculator

WVOL <GO> FX World Volatility Matrix

OVDV<GO> FX Volatility Surface

FXIP<GO> provides a comprehensive overview of foreign exchange information so that you

can quickly identify market opportunities and risks. It enables you to access pricing, data, news,
and analytics for countries, regions, and metals. It is organized into markets and tabs which you
can locate market price easily and effectively.

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FRD<GO> is a comprehensive solution for pricing FX forwards that provides you with market-
consensus forward rates for standard settlement dates, custom broken dates, and forward-
forwards.

Control Panel

Forward Setup

Pricing Panel

You can type FRD<GO> to load the function and change the settings by clicking into 2) Settings
under Control Panel. You can then enter the currency pair under Forward Setup and the result for
all tenor will be shown under Pricing Panel.

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Type WVOL <GO> to display a snapshot of volatilities for currencies around the world. You
can quickly ascertain how volatilities are moving on a large scale, as well as access a complete
volatility surface for any of the available currencies.

You can change the setting of Base Currency, Contributor and View under Control Panel. It
displays all major volatilities with different trading strategies E.g. At the money (ATM), Risk
Reversals (RR), Butterfly Spread (BF).

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OVDV<GO> allows you to display the FX volatility surfaces for a specific currency pair. Use
OVDV to customize the set of maturities for any surface and specify points as at-the-money
(ATM) values and absolute call/put values or butterfly (BF)/risk reversal (RR) spreads for the
deltas. You can also use OVDV to determine the price/strike for any maturity, expiry, delta, or
strike for a specific currency pair, and display the conventions used to interpret any point on the
surface.

You can type WVOL<GO> after input of a pair of FX ticker with a format of Currency pair
ticker Crncy OVDV<GO>. Eg.EURHKD Crncy OVDV <GO>. It displays the FX volatility
surface for a specific currency pair or display calculations for maturity/expiry/delta/strike values
under 99) Quick Pricer. The orange data that appear are contributed data. The gray data that
appear are interpolated or extrapolated from contributed data. If the surface that appears is the
default surface for the corresponding currency pair, Default Surface appears in the bottom right
of the screen.

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Pricing and Valuation for a FX & Commodity Derivatives

OVML <GO> allows you to structure and price multi-leg foreign exchange options for a
selected currency pair or selected commodity, using custom pricing assumptions. It supports an
extensive set of option styles and multi-leg trading strategies for pricing options, so you can
manage risk, hedge your positions, and run scenario analyses of actual or implied rates for your
FX option portfolios
Control Panel

Calculation Panel

Deal Panel Greeks Panel

Pricing Panel

You can type OVML <GO> on the command line to load up the calculator. You can enter
specific currency pair in Asset under Deal Panel

Control Panel –You can click on 91) Strategies or 92) Str. Notes for the list of derivative
structure. It supports 4 different assets under 89) Assets including OTC FX, Listed FX, OTC
Commodity and Listed Commodity. The OVML user settings can be located under 94) Data &
Settings

Deal Panel – You can create a trade with one or multiple legs, depending on the style or strategy
you choose. You can select any number of strategies and add/subtract trade legs to test your
assumptions. The spot rate is always the same for all legs. If different legs have different
maturities, the deposit rate, forward points, and forward outrights are quoted separately for each
leg. It also supports models include Black-Scholes and Heston. You can override the calibrated
Heston parameters. If you change the deposit rate or forward rate, OVML assumes a flat term
structure. If you change the volatility, OVML assumes a flat volatility surface.
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Greeks Panel – You can price deals with real-time market data and other FX pricing sources,
including an extensive set of Bloomberg curves as well as custom curves, then calculate the
profit or loss for individual trade legs or the entire deal. Refresh Icon available for more precise
calculation. You can select the sensitivity measures for the individual legs. Prices and Greeks
from individual legs are the same as in the case of a single-leg option

Pricing Panel–Display the pricing and results of the deal in selected currency

After pricing, you will be able to click on Save to upload the deal into the system by setting up
permissions. The calculator offers a Split View option which can enrich the layout of the page.
Matrix allows you to have a good preview on price change and forecast of Greeks. Scenario
Graph can be seen by a simple click on 53) Scenario.

Matrix

Save as ticker

As we mentioned at the beginning for this session, FX/ Commodity electronic trading need
specific enablement so the dropdown option is being disabled under Trade.

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OVML<GO> has a specific mechanism for pulling up saved deals, due to the nature of being
able to support 4 different product category, the custom ticker list is specific to the product that
you have select under 89)Asset..

Control Panel

Click on Load after selecting the right asset on above setting. The system will load up the list and
you can do filtering by different criteria from Control Panel. If you delete the security at Control
Panel, it will default to all securities under the same asset. Next, you will need to check the box
of the security, click on 2) Edit –Load. System will load the security with calculator, all the deal
information will be in blue and preset to save values when the deal is first entered. The solver
result will be in green and all market live data will be updated to calculate the market to market
value for valuation.

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6.3 Interest rate Swap (IRS) Functions
Bloomberg is famous for its interest rate swap pricing calculator. It covers all different type of
deals in the market. IRS has been a fast growing market due to the demand for interest rate
hedging and the volatility of the global benchmark interest rates. Cash flow management is also
getting more common to corporation which drives the development of IRS in banking industry.

IRSB<GO> IRS Homepage

VCUB <GO> Interest rate volatility

SWDF <GO> Swap curve settings

IRDD<GO> IRS Structure Manual

IRSB<GO> displays real-time prices for interest rate swap yields and spreads for a selected
country, so you can compare intraday market data to historical data in a single view. Prices are
generated by the Bloomberg BGN proprietary pricing algorithm for swaps, which reacts very
quickly and accurately to market changes during high liquidity periods, while simultaneously
producing smooth outputs as liquidity drops.

Control Panel

Real time price Historical Analysis

You can select the country by dropdown to top left of the screen after typing IRSB<GO> on
command line. You can select different swap rate by the grey tabs on at the top of the Control

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Panel. Real time pricing monitor take up the left part of the screen and historical data analysis
can help the user to judge the level of the price at the moment.

VCUB<GO> allows you to create a volatility cube, so you can calculate the interest rate
volatility and swaption volatility for the specified combination of strike, option term, and swap
tenor. VCUB captures the volatility smile/skew effect of in-the-money volatilities, at-the-money
volatilities, and out-of-the money volatilities.
Control Panel

7.3.1 Pricing and valuation for an IRS

7.4 Credit default Swap (CDS)

7.4.1 Pricing and valuation for a Credit Default Swap

You need to input the currency after typing VCUB<GO> . It calculates interest rate volatility
cubes with volatilities from ATM Swaptions, OTM caps, and interest rate listed options, if
applicable. The Swap Manager function (SWPM) uses the volatility cubes to price interest rate
options and structured notes.

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SWDF <GO> allows you to customize your swap rates and volatility contributor defaults for a
variety of currencies. The swap rates on the curve are very important to any swap pricing
through SWPM<GO>
Source of
price settings

Pricing Contributors

Select country from

list of options

All interest rate

curves available

After entering the country manual page, each country has different number of swap curves and
basis curves. The curve number will be commonly used in the SWPM<GO>. It allows you to
recognize the discount curve without knowing the full name. The setting SRC is very important
since you need to select 1 pricing format from 8 options. The most flexible one is option 8 which
is recommended. You can then click into curve name and you will able to see the exact rates in
each tenor.

IRDD<GO> displays description of interest rate swaps structures that can be valued in the Swap
Manager function (SWPM). We support up to 70 standard interest rate derivatives. It provides a
sample structure from 1) Structure and a detail document for calculation from 2) More info..

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Pricing and valuation for Interest rate Swap ( IRS)

SWPM<GO> allows you to price a wide range of vanilla and exotic interest rate swaps, interest
rate options, swaptions, interest rate, and hybrid structured notes. You can analyze and update
curves and cash flows, as well as perform risk and scenario or "what if" analyses for the entire
deal or for each leg of the swap. You can also create and share templates and set your default
settings.
Control Panel

Deal Details Deal Details

Curve settings

Bond Calculation Result

You can type SWPM<GO> to get into interest rate swap calculator. Interest rate swap is
basically exchange of 2 cash flows so there are 2 Deal Details tabs. You can click to 91)
Products to select any of the strategies, we have a list more than 70. After that you can enter the
terms on term sheet into Deal Details tab. The effective and maturity date are interlink between 2
tabs. You can then enter the rest of the columns, 61) Details is the link to schedule of accrual
with coupon payment schedule. If you would like to have a preview on the cashflow, you can
click into 5) Cashflow. Next, you will see there is a default Dscnt Curve number on both legs, it
will affect the amount of PV of each leg since it is being used to discount all the future cash flow.
Moving to valuation tab, you need to set the target that you want to calculator to calculation for
you. The market value at bottom left refers to direction of upfront cash flow to enter the deal
between 2 parties instead of P&L numbers.

Example: Creating an amortizing swap (5 year USD Amortizing swap, where you receive a USD
Fixed against paying USD 3M LIBOR.)

An amortizing swap is a type when both counter parties make interest payments based on a
notional that is declining (amortizing) or accreting (increasing) over the life of the trade. They
can be both fixed vs. float or float vs. float. Amortization factors are entered in the leg detail
section. You can enter a simple schedule, security based amortization (FNMA or other mortgage
security) or loan type.
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Step1: Type SWPM –AMT <GO> or go to IRDD<GO> and select amortization swap

Step 2: Enter the terms into the trade

5 Year USD Fixed vs. USD 3M LIBOR Notional USD 10 million Amortizing at 500,000
Amortizing Swap Semi annually
Effective Date 09/10/12 Maturity 09/10/2017
User receives USD 0.800 Fixed p.a. Day Count Act / 360
Pay / Reset frequency quarterly Business days adj. Modified Following
User pays USD 1M LIBOR Reset frequency Monthly
Day Count Act/360 Business days adj. Modified Following

Amortizing at
500,000
Semi annually

Market value is Notional *Premium

Step 3: The calculator will generate a premium with the current deal. The Market value means
that Receiver need to pay 22625.77 upfront to enter to the deal with the counterparty

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Step 4: Click on 32) Save to store the deal information by entering a ticker.
All swap ticker start with /

Step 5: Pull it up again for valuation, you can do so by clicking on 90) Action –Load

Step 6: Clicking into the deal, it will pop up the calculator and you need to make sure the curve
date is today and valuation date is T+2

Step7 : The difference of the market value comparing to the amount when you enter the deal is
the P&L

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6.4 Exercises
1. How can you set up a custom warrant monitor ?
2. How can you price an ELN on bloomberg ?
3. How can you create an equity option with 5 legs?
4. Which calculator should we use for commodity derivatives?
5. How can you price a Risk Riversal in OVML?
6. What might be the reason if your friend input the same parameters in SWPM<GO> but the
market value is different ?
7. How can you locate an document regarding Inflation Zero Coupon Swap

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