Advanced Swaps

Course overview By the middle of 2011, the size of the global swap market was in excess of US$600 trillion (in terms of notional principal), made up predominantly of interest rate swaps. Despite the recent banking crisis, with the exception of credit default swaps, the market had grown by nearly 20% in the last six months. Why? Because organisations continue to use it to manage their exposures to the financial markets, such as interest and FX rates, equity and commodity, inflation, volatility, credit, etc. During this time, the swap market has evolved to provide a wide range of innovative structures designed to meet the precise requirements of end-users. The Course Director and Euromoney have offered this advanced swaps course for market participants for over ten years. It has been continually updated to include the latest practical and theoretical developments in the structuring, pricing and hedging of swaps and related transactions. Summary of course content: Construct and price off a futures strip, including the convexity effect Blend information from different markets together efficiently Price collateralised swaps off an OIS curve Price and hedge a wide range of non-generic swap structures Adjust for the convexity of a swap Transfer credit risk through the CDS market Value foreign assets correctly Decompose structures with embedded options into their basic components Understand how to swap complex structured products using numerical models and Monte-Carlo simulations Apply modern risk management to swap portfolios Estimate default and migration counterparty credit risk Measure expected shortfall using extreme value theory - NEW Methodology There are a wide range of computer-based exercises, which may be taken away after the course, to reinforce the learning and to ensure that delegates are ready to apply the course as soon as they return to their institutions. Computer-based exercises All delegates should bring their laptops to facilitate in-class studies and exercises. Who should attend? Experienced members of swap desks and other structuring teams Senior risk managers Experienced marketers, responsible for providing risk management, financial structuring, and treasury services to end-users End-users themselves, to understand how banks are pricing and hedging swap structures Prerequisite Delegates should be familiar with basic concepts such as: Operations of the cash, FRA, futures and swap markets Use of discount factors to fair price swaps Basic option pricing General interest rate risk management
DAY ONE: Brief revision Pricing off a futures strip Building a discount curve Fair pricing of a short-term swap Demonstrating hedge effectiveness Adjusting for the convexity bias Computer-based exercise: Pricing a swap Relationship between generic swaps and the bond market Swaps as the arbitrage between cash and bond markets Analysis of the swap spread Derivation of zero coupon discount factors and forward rates Brief reminder: Bootstrapping and estimation of forward rates When does bootstrapping breakdown? Practical issues: interpolation, blending and smoothing What represents a "good" curve: An alternative approach Building a curve from a sparse market Demonstrating blending and smoothing algorithms Computer-based exercise: Imply the discount factors from a swap curve IR basis swaps - why are these important? Building and using multiple curves Should your funding cost effect your valuation? Pricing a collateralised swap Overnight indexed swaps (OISs) such as EONIAs and RODS Building a 30-year curve using overnight-indexed swaps Pricing off the curve Pricing a range of non-generic IR swaps Pricing forward start and amortising swaps Yield curve swaps such as constant maturity swaps Risk management characteristics Computer-based exercise: Price a CMS Other forms of non-generic swaps: in-arrears, average-rate, turbo, etc. Building convexity into swap pricing How does convexity manifest itself? Convexity adjustment of normal swaps Convexity adjustment of CMS DAY TWO: Swap applications Asset packaging Creating different packages: premium, par, discount Creating a par maturity package What's really going on? Arbitrage between bond and swap valuation methods: The credit implications Subsidisation effects Including your cost of funding revisited Practical details Computer-based exercise: Create some asset packages Credit default swaps and other structures Total return swaps and the links with asset packaging Complete and contractual transfer of credit risk Single-name CDSs Documentation of a CDS: The current issues? Pricing and hedging of CDSs using alternative approaches Pricing of risky cashflows Replication using FRNs Derivation of forward default curves Computer-based exercise: Price a CDS Simple caps and floors A fundamental knowledge of Black’s model for pricing European-style IR options is assumed. Generic and digital caps Floors, collars, forward swaps and put-call parity Volatility surfaces and smiles Swaps with embedded caps and floors Computer-based exercise: Price a swap with embedded options Taking advantage of the multi-period structure: Barriers, choosers and periodic caps Swaptions Pricing swaptions Swaption smile spaces Compatibility with cap pricing Swaps and embedded swaptions: Pricing extendible and retractable swaps Computer-based exercise: Price an extendible step-up swap DAY THREE: More complex swaps and other applications More complex swaps: Structured securities A brief overview of the structured securities market Classifying structures into the modelling methodology Computer-based exercise: Swapping an analytic structure such as a range accrual An outline of advanced modelling methodologies Numerical modelling: Building an arbitrage-free forward interest rate tree Simulation: Building a BGM simulator Calibrating the simulator Exercise/Demonstration: Swapping a forward structure such as a zero-coupon accreting callable security Demonstration: Swapping a backward structure such as a TARN Demonstration: Swapping a backward-forward structure such as a callable sticky floater Cross-currency swaps CC basis swaps: A building block for CC swaps CCBSs and off-balance loans Outline of pricing CCBSs How to value a foreign asset correctly Incorporating the CCBS curve into the bootstrapping process Swapping a bond issue: Building a tailored CCS Conversion factors Creating a foreign asset package Computer-based exercise: Swapping a foreign bond issue into domestic floating rate Pricing of diff and quanto diff swaps with convexity effects Modelling of power reverse dual structures DAY FOUR: Management of swap portfolios A fundamental knowledge of IR risk management is assumed. How do IR curves behave? Risk management reporting: Construction of a delta and gamma reports for different curve movements The concept of an equivalence Hedging swap portfolios The use of Taylor's theorem Delta hedging Assessing hedge effectiveness using shocks and simulation Construction of a theta report Running a portfolio: Funding and other issues Control frameworks Computer-based exercise: Creating an effective hedge for a transaction An outline of Value-at-Risk Measuring VaR for a single risk factor Extending this to two, and multiple, risk factors Measuring VaR for a swap portfolio using historic simulation and parametric Measuring expected shortfall using extreme value theory How to measure counterparty credit risk Concept of expected positive exposure Use of the regulatory formula for default risk Building a credit valuation adjustment formula for migration risk Simulating the CVA to get migration tail risk