Advanced Interest Rate Derivatives

This is an advanced level programme that assumes that delegates will be familiar with basic concepts of derivatives and more specifically swaps markets. Whilst the programme agenda is not based upon detailed theoretical or mathematical approach does require basic mathematical fluency. This is your chance to learn about: Pricing and valuation of advanced swap structures Understanding theory and practice in swap pricing Interest rate term structure modelling Swap portfolio management 2nd generation swaps and options Interest rate linked structured products Trading and risk management applications of swaps The training will comprise a combination of classroom-based teaching combined with computer based (Excel™ based) simulations and exercises, to gain practical exposure to key principles and concepts. Delegates will each receive copies of all spreadsheet software for their own use after the programme. Who Should Attend The course will be of value to professionals in the following areas: Experienced swap traders, marketers and structurers Market and Counterparty Risk managers Quantitative analysts, researchers Fixed income portfolio managers Corporate treasury and other end-users Course Background This four-day intensive programme provides delegates with a comprehensive exposure to a range of advanced swap topics, including pricing and valuation in the presence of funding and liquidity risk, 2nd generation swaps and interest rate option derivatives. Delegates will also be exposed to state of the art techniques employed in measuring and managing risk within swap and option portfolios, including both ‘traditional’ and value-at-risk methodologies. The programme provides a comprehensive examination of the ways that swaps are employed in a wide range of trading strategies, and why swaps are increasingly used within the fixed income arena. Finally, the programme provides delegates with an introduction to financial engineering and the use of embedded interest rate derivatives in the creation of structured debt instruments. Delegates will gain exposure to the processes employed in structured product design and creation, as well as in product decomposition, pricing and risk analysis – reverse engineering. Overall the programme seeks to impart a detailed and practical understanding of a range of complex interest rate derivative instruments, of growing importance and significance within the marketplace, in such a manner that such knowledge can be immediately applied within the contexts of trading, structuring and pricing, and risk management.
Day 1 A review: pricing and valuation of interest rate swaps In this first session we review the methodology for pricing and valuation of generic and simple non-generic swaps, and examine the practical steps of constructing swap discount curves. A knowledge of the contractual structure and mechanics of interest rate swaps is assumed. Review of theoretical basis of swap pricing Fair value = cost of replication Modelling the deterministic discount curve Blending different market data sources: Cash rates, Swap rates and Bond yield data Interest rate futures data Adjusting for convexity bias in futures data ‘Bootstrapping’ market data to generate a deterministic discount function Practical challenges in deriving benchmark curves in illiquid markets Interpolation methods – different methods; advantages and shortcomings Curve fitting and smoothing techniques Practical pricing and valuation applications: Mark to market - swap portfolio valuation Swap terminations and assignments Fee estimation Recent developments in swap pricing Swap pricing incorporating funding risk Adjusting pricing to incorporate non-LIBOR funding LIBOR – OIS spread: funding risk premium Collateral agreements (CSAs) Impact of CSA on counterparty risk Adjusting discount curves for swap pricing: Non-CSA CSA curve 'Cash out’ and ‘cash in’ curves CDS adjusted Non-CSA curves Incorporation of counterparty risk in pricing Computing DCA (Derivative Credit Adjustment) from CDS premia Workshop:Pricing and valuation of generic swaps Non-generic swaps – structuring, pricing & applications Forward start swaps - structures and pricing – Amortising and Roller coaster swaps – Deferred coupon, stepped coupon and zero coupon swaps – Adapting the pricing framework to non-generic structures – Pricing adjustments for funding and counterparty risk Day 2 Asset swaps Structuring and pricing methodologies for asset swaps Par/par asset swap Yield/yield asset swap Market value accrued (MVA) asset swap Yield curve shift (YCS) – Z-spread analysis Pricing adjustments for funding and counterparty risk Advantages and shortcomings of different methodologies Using asset swaps in asset restructuring Using asset swap pricing in RV analysis Credit Default Swaps (CDS) Over of CDS contract mechanics, market conventions Pricing CDS Arbitrage based approach i.e. replication using asset swap Understanding the relationship between CDS premia and Asset swap spreads Determinants of the (Asset swap - CDS) basis Workshop:Identifying asset swap opportunities; Structuring and pricing and asset swaps Overnight Index Swaps (OIS) Mechanics of overnight index swaps Calculating the overnight index rate – actual funding rates Conventions of different OIS markets (EONIA, SONIA etc.) Computing the compounded average overnight rate leg Constructing the OIS curve Pricing and valuation of OIS Convexity effects in pricing Basis swaps Floating – floating index swaps Tenor basis swaps Alternative reference indices (CP, Prime, Fed Funds etc.) Uses and applications in asset-liability management Theoretical framework for pricing basis swaps Rationalising (tenor) basis swap margins Supply-demand drivers Counterparty risk of mis-matched payment cycles Liquidity/funding risk Incorporating actual funding rates into pricing Pricing and valuation of cross currency swaps Generic and non-generic cross currency swaps Cross currency coupon swaps Basis point conversion factors Cross-currency basis swaps Theoretical framework for pricing CC basis swaps Rationalising CC basis swap margins Supply-demand drivers Liquidity/funding risk Recognition of actual funding rates in pricing Skewness of FX forwards; impact on pricing Hedging cross currency basis swaps Accounting for cross currency basis swaps Building adjusted swap curves for valuation of cross currency swaps Workshop: Identifying arbitrage opportunities; structuring a new issue driven cross currency swap Day 3 Interest rate options: caps and floors Generic interest rate caps and floors Conventional pricing methods: Black (1976) model Why do markets use this model? Advantages and disadvantages Calibration to a volatility surface Put-call parity relationships: Caps, Floors and Forward swaps Hybrid structures and combinations: Interest rate Collars / Participating swaps Collared swaps; embedded caps and floors More complex structures: Mid-curve caps; periodic caps; barriers Interest rate options: swaptions European and Bermudan style swap options Pricing: Black vs.. Term structure models Calibration of swaption volatility surfaces Compatability and consistency with Cap pricing Option Embedded Swaps Extendible and cancellable swaps (European, Bermudan styles) Structured (callable, puttable) bonds; call monetisation Balance guarantee swaps, index amortising swaps (IAS) Advanced interest rate modelling Stochastic term structure models Numerical methods Single-factor models(BDT, HW) Calibrating arbitrage-free bimonial, trinomial models Multi-factor models BGM (LIBOR) market model Model implementation by simulation Calibration to cap/swaption volatility surfaces Specifying the forward rate correlation matrix Workshop: Calibration of term structure pricing model; pricing and valuation of complex interest rate derivatives Constant maturity swaps CMS structures; market conventions Pricing and valuation of CMS swaps Determination of convexity bias Risk management: managing Delta, Vega and Gamma risks Using swaptions for pricing and replication Arrears swaps LIBOR-in-arrears swaps Arrears Coupon and Basis swaps Pricing and valuation of Arrears swaps Convexity bias in pricing arrears and other mis-match structures Estimation of convexity adjustment Inflation swaps Index linked securities; structure and mechanics Rationale for investors and issuers Inflation derivatives Inflation swaps (fixed rate, basis swaps [CPI/HICP]) Caps and floors Market development Inflation swaps: basic mechanics and structure Pricing and valuation of Inflation Swaps Constructing the forward inflation curve Pricing and valuation of inflation swaps Pricing inflation – LIBOR swaps Differential (Quanto) swaps Structures and applications Pricing and valuation considerations Volatility and Correlation effects Dynamic risk management of quanto structures Day 4 Swap portfolio risk management Interest rate risk measures: Delta (DV01), Gamma and Vega Linear risk analysis: Constructing a Delta vector risk report Yield curve risk analysis; parallel and non-parallel shifts Risk reporting: creating a replicating portfolio (futures, bond, swap) equivalents Hedging swap portfolios: Basis risks in portfolio hedging Non-linear instruments and risks: Gamma and Vega risks Constructing Vega and Gamma risk matrices Dynamic hedging of Vega and Gamma risks Value at Risk A VaR based approach to analysing and managing swap portfolio risk Workshop: Hedging a swap transaction; Risk analysis of swap portfolio; Delta risk measurement and replicating portfolio construction. Interest rate linked structured products The objectives of this session are to, with the aid of example transaction term sheets, illustrate key product types, and to understand in greater detail how to break down such instruments into their component derivatives, and to price and value such instruments. The primary focus will be to focus upon the quantitative basis of pricing and valuation, and measurement of product market risk exposures, as well as the understanding the operational mechanics and implications of different product types, and investor motivations and risks. Structured notes; securities with embedded options and other derivatives Use and applications of embedded derivatives Rationale for issuers and investors Yield enhancement – creating new asset structures Range notes Guaranteed returns; principal protection Risks of structured debt instruments: Market risks Structured interest rate linked products: European / Bermudan callable bonds Range Accrual LIBOR CMS-linked Capped, floored FRNs Inverse FRNs TARN structured notes Case study: Analysing a reverse floater with embedded options Case study: Pricing a cancellable swap; Bermudan step-up Callable bond Case study: Pricing CMS – linked note Course summary and close