Bond Trading & Portfolio Management Workshop

Course description This 5-day programme provides participants with a highly practical context to enhance their understanding of bonds, bond pricing, risks, yield curve modelling, with a particular focus on bond trading techniques and the day to day activities involved in fixed income trading and portfolio management. Participants are provided with a suite of models (Excel based) to install and utilise during the programme, and which they are free to retain for their own use after the course conclusion. Course structure The programme agenda is comprised of two parts: Classroom based teaching complemented by extensive use of case studies and Excel based exercises, which are designed to enable participants to master a practical understanding of all aspects of the course agenda, and in addition a real-time fixed income trading simulation, during which participants manage a portfolio of fixed income securities and derivatives within pre-determined objectives and constraints. Why this course is timely The global corporate and government bond markets have experienced a renewal of substantial rates of growth in issuance since the global financial crisis, the result of a variety of factors ? increased government budget deficits and debt issuance post-credit crisis, and corporate bond issuance resulting from the need for balance sheet repair, low interest rate levels and the need to diversify funding sources in an environment of reduced bank loan origination capacity. Furthermore, investor appetite for bonds relative to equity investment has increased in the current volatile market environment. In addition, the bond markets become ever more closely linked to the interest rate and credit derivatives markets, markets that have ever increasing importance in their usage within fixed income trading, hedging and bond portfolio management. Bond Trading: Active Management Trading Simulation Each day, throughout the course duration, course participants will actively take part in a real-time fixed income trading simulation. In this practical exercise, participants each adopt the role of fixed income portfolio manager, responsible for the active management of a global bond portfolio, using real-time market price/rate data, and within a set of constrained risk parameters. Participants have access to a range of financial instruments (bonds, derivatives, FX), with the aim of actively managing the portfolio in order to outperform a specified benchmark index over the 5 day course duration. Each morning during the programme, in a 2 hour session, participants have the opportunity to revalue their portfolios, monitor absolute and relative performance, analyse and implement a range of active strategies subject to risk constraints. On the final day of the programme, overallperformance is calculated and prizes awarded to the leading candidate. The overall objectives of the fixed income trading simulation workshop are to provide a practical and realistic context to understand the key characteristics of fixed income securities and derivatives, their relationship to the prevailing market environment, and to enhance understanding of the key processes, objectives and constraints in trading and managing bond portfolios. Who should attend The course will be of value to professionals in the following areas: Fund Managers Portfolio Managers Fixed Income Analysts Traders Fixed Income Trading and Sales Personne Pension Fund and Insurance Fund Managers Sovereign Wealth Fund Managers Central Bank Reserves Asset Managers Hedge Fund Managers and Analysts Performance and Investment Analysts Risk Controllers Risk Managers and Analysts Middle and Back Office Operations and Settlement Personnel Derivatives Trading and Sales Personnel
Day 1 Introduction - Overview of Bond Trading and Portfolio Management Why invest in bonds? The role of fixed income securities in investment management. Fundamental characteristics of bonds. - Risk and return characteristics; comparison to other asset classes. Bond types - Government and Agency bonds - Corporate bonds - Domestic and offshore bonds - Case study: the development of the offshore RMB bond market Bond structures - Fixed and floating rate bonds. - Inflation linked bonds. - Option embedded bonds (callable, puttable, convertible). - Asset backed securities (RMBS, CMBS, CDOs). Bond trading and portfolio management - Overview of institutional investment management. - Investor types and investment objectives - Pension funds. - Insurance Cos. (Property and Casualty, Life) - Investment Cos. - Mutual funds and Investment Trusts. - Hedge Funds. Investment management strategy. - Strategic and tactical asset allocation. - Active and passive investment strategies. Bond Fundamentals Bond pricing and measures of return - Pricing fixed and floating rate bonds. - Discounted cash flow analysis. - Yield to Maturity (YTM) as a measure of return. - Assumptions and shortcomings of YTM as a standard measure of return. - Alternative measures of return. - Simple yield, running yield. - Total return, yield to call/put. - Portfolio return. Estimation of bond portfolio yield Bond risk characteristics. - Measures of interest rate risk. - Duration, Modified Duration, DV01 – measures of price risk. - Differentiating price risk and re-investment risk. - Duration properties of fixed and floating rate bonds. - Option embedded bonds; calculating ‘effective’ duration. Applications of duration: - Measuring position and portfolio risk. - Hedging – calculating hedge ratios. - Calculation of position ratios for relative value strategies. Duration in bond portfolio management - Calculation of portfolio duration (absolute and benchmark relative). - Key rate duration. - Weighted duration as a measure of risk allocation within a portfolio/benchmark. - Duration as a measure of active risk allocation; application in performance attribution. The role of duration in active and passive management: - Passive management; index replication. - Active management: Duration and duration-neutral strategies. - Immunisation: Using duration in asset-liability management. Limitations of duration: Assumptions and shortcomings. Convexity - Calculating and interpreting convexity for option-free and option-embedded bonds. - Estimating the value of convexity and the relationship to interest rate volatility. - Positive and negative convexity: impact on bond values and yields. - Convexity in active portfolio management. - Calculating portfolio convexity (absolute and benchmark relative). - Convexity as a measure of yield curve risk. Active Management Trading Simulation – Session 1 1.30 – 3.30 p.m. Introduction and orientation. Simulation objectives: Benchmark outperformance – Alpha generation. Setting risk constraints. Implementing strategy: Execution of active strategies. Fixed Income Benchmark Indices Fixed income market benchmarks. Benchmark providers (e.g. Markit iBoxx, FTSE, Morningstar, Barclays etc.) Benchmark types. - Government and Sovereign bond indices. - Corporate indices. - ABS/MBS indices. - Emerging market bond indices. Benchmark risk dimensions - Currency (hedged and unhedged). - Interest rate risk (Duration). - Maturity profile (short/medium/long). - Credit. - Security type (fixed/floating/inflation-linked/callable). Index construction (weighting/re-investment and index changes) The role of benchmarks in fixed income portfolio management Benchmarks and asset-liability management (ALM) Benchmark selection for different investor types – optimising benchmark choice Case study: Pension funds, insurance cos. Day 2 Active Management Trading Simulation – Session 2 09.00 – 11.00 a.m. Real-time market data portfolio revaluation. Performance analysis. Market analysis. Trading: Retention or adjustment of active strategies within portfolio risk constraints. Currency hedged and unhedged strategies; active FX overlay strategies. Fixed Income Trading and Investment Strategies Passive and active investment strategies. Passive management – Indexation. - Portfolio construction methods: - Replication. - Optimised sampling. - Minimisation of tracking error. - Rationale for passive management; advantages and disadvantages. Active management. - Alpha – generating active (excess) returns. - The active management decision set for fixed income portfolios. - Interest rates. - Yield curve. - Cross country. - Credit. - Sector and security selection. - FX. - Active currency overlays. Macro and relative value strategies. Bond swaps and switches. Market timing strategies. Strategy formulation. - Fundamental value. - Macroeconomic environment. - Market sentiment. Strategy execution. Cash and derivative based strategies. Selection of appropriate instruments for implementing strategy. - Strategy types. - Basis risk considerations. - Mandate restrictions. Horizon analysis in active strategies. - ‘Rolling down the yield curve’. - Carry: impact on trading strategies. Structured portfolio strategies. ALM and Liability driven investment strategies. Absolute return strategies. Immunisation. Risks in immunisation. ‘Horizon matching’ strategies. Using Interest Rate Derivatives in Fixed Income Portfolio Management Interest Rate Derivatives - Listed Vs. OTC derivatives. - Bond futures. - Interest rate swaps and basis swaps. Bond Futures - Operational mechanics of trading bond futures. - The role of the clearing house; margin (initial, variation, netting facilities). - Bond futures contract types and specifications. - Pricing bond futures; relationship to cash markets; conversion factors; CTD; basis. - Interest rate risk: calculating interest rate risk for bond futures. Interest rate and Currency Swaps - Swap mechanics. - Nomenclature, terminology and market quotation and execution methods. - Pricing and valuation of interest rate swaps. - Risk characteristics (DV01, Duration). - Execution, clearing and settlement mechanics. - Documentation and legal issues. Applications of interest rate derivatives in bond portfolio management - Hedging interest rate risk - Duration management using interest rate derivatives - Basis risks Active Interest Rate Strategies Using Swaps and Bond Futures - Interest rate swaps/bond futures as a substitute for fixed income bond investment - Macro rates and relative value strategies - Benefits of separating liquidity from interest rate risk management - Limitations and constraints on implementation in long only portfolios - Costs and benefits of derivatives in implementing active management strategies Day 3 Active Management Trading Simulation – Session 3 09.00 – 11.00 a.m. Real-time market data portfolio revaluation. Performance analysis. Market analysis. Trading: Retention or adjustment of active strategies within portfolio risk constraints. Using interest rate derivatives in implementation of active strategies. Portfolio Construction and Risk Budgeting Setting portfolio objectives and constraints. - Capital preservation. - Concentration limits. - Liquidity requirements. Portfolio risk measurement. - Value at risk (VaR). - Modelling techniques and assumptions. - Investment horizon and confidence level. - Tracking Error (TE). - Calculation of tracking error for the active portfolio. - Tracking error as a measure of active risk (alpha). - Using tracking error as a portfolio risk budget. - Allocation of tracking error to portfolio risks (e.g. rates, FX, credit). - Using mean variance analysis to optimise portfolio construction. - The fundamental law of active management (Grinhold, Kahn). Credit Markets Corporate bond markets. Credit risk. - Default and recovery risks. - Spread risk. - Collateral and Covenant structure of credit markets. Pricing credit - Credit spreads - Default probability and Hazard rates - Recovery rates Measures of credit risk - Spread duration, DV01. - Calculating spread duration for positions and bond portfolios. - Duration Times Spread (DTS). - DTS as an improved measure of portfolio credit risk. Credit Benchmarks - Government bond (default-free) yield curves. - Swap yield curve; corporate bond yield curves. - Use of asset swap spreads (ASW) and credit default swaps (CDS) in credit pricing. Drivers of credit pricing - Default risk and recovery expectations. - Credit pricing and the economic cycle. - Supply/demand forces. - Liquidity risk premia. Credit ratings and the rating process - Classification of rating types. - Rating agency methodologies. Credit Derivatives Credit Default Swaps (CDS). Definitions, nomenclature and market conventions. Credit Events definitions. Settlement mechanisms. Single asset and basket swaps. Credit indices (iTRAXX, CDX). Index CDS. Standardised contract terms. Transaction and settlement mechanics. Pricing and valuation of credit default swaps. CDS risk characteristics. - Calculating spread risk of credit default swaps (Spread duration, DV01). - Counterparty credit risk. - Operational risks. Applications of Credit Derivatives in Fixed Income Portfolio Management Hedging portfolio credit risk exposure - Basis risks between CDS and corporate bonds. - Reduction of concentration risk. Credit risk diversification. Active credit trading strategies using credit derivatives. - Directional and relative value trading strategies - Sector selection - Securities selection - Curve trades - Constraints and limitations on implementation in ‘long only’ portfolios - Leverage - Creating synthetic ‘long’ and ‘short’ credit risk exposure Day 4 Active Management Trading Simulation – Session 4 09.00 – 11.00 a.m. Real-time market data portfolio revaluation. Performance analysis. Market analysis. Trading: Retention or adjustment of active strategies within portfolio risk constraints. Using credit derivatives in implementation of active strategies. Yield Curves – Modelling, Analysis and Forecasting Par, spot and forward rate curves. Understanding and interpreting yield curves. Yield curve theories. - Expectations theory and alternative theories The relationship of yield curves to the global macro-economic environment. - Economic activity. - Inflationary pressures. - Fiscal and monetary policy. Interpretation and forecasting yield curve movements - Parallel yield curve shifts. - Non-parallel curve shifts (steepening/flattening/barbell). - Econometric forecasting models. Benchmark yield curves - Swap and government (risk-free) yield curves Yield curve modelling and construction - Constructing spot rate (zero coupon) yield curves - Curve fitting and smoothing algorithms - How do we select and construct a stable benchmark curve? - Yield curves and fundamental value - Using yield curves for bond pricing and relative value analysis - Identifying ‘cheap’ and ‘expensive’ securities; trade identification Implied forward rates - Deriving the term structure of implied forward rates - Interpretation and applications of implied forward rates - Using forward rates to identify trading opportunities - Using forward rates in horizon analysis - Understanding and profiting from forward rate bias Inflation Linked Bonds Mechanics of inflation linked bonds - Market conventions - Yield and price calculations - Inflation indices - Deflation floors Government inflation linked bonds: - US Treasury Inflation Indexed Securities (TIPS) - Eurozone Government inflation linked bonds Corporate inflation linked bonds Why invest in Inflation Linked bonds? - Real versus nominal returns - Relative value analysis: break-even inflation analysis - Portfolio diversification using inflation linked bonds - The rationale for inflation linked bonds in Asset Liability management - Case study: Pension funds; Liability driven investment strategie Inflation Derivatives Inflation Swaps - Mechanics of inflation swaps Pricing and valuation of inflation swaps - Constructing the inflation swap curve - Adjustment for seasonality Inflation Swap applications in fixed income portfolio management - Using inflation swaps to hedge inflation risk - Using inflation swaps in Asset liability management - Active trading strategies using inflation linked bonds and swaps - Breakeven trading strategies - Real rate trading strategies - Directional and relative value strategies Day 5 Active Management Trading Simulation – Session 5 09.00 – 10.30 a.m. Simulation workshop results Performance and attribution analysis of portfolios Review and debrief Presentation and award of prizes Performance Measurement and Attribution Performance measurement - Measurement of returns - Standardised performance calculation, presentation and reporting standards - Summary of Global Investment Performance Standards (GIPS) (2010) Absolute returns - Relative (active) returns: Beta and alpha - Selection of appropriate benchmarks for comparison (index, risk-free rate) - Calculation of benchmark relative returns (excess returns) Performance Attribution Analysis - Evaluating the sources of performance; decomposition of active returns - Parallel and non-parallel yield curve movements - Sector and security selection - FX Performance attribution methodologies - Calculation of risk adjusted performance measures: - Information ratio - Sharpe ratio, Sortino ratio Asset Backed Securities and Covered Bonds Fundamental components of Securitisation Rationale for investors and issuers Structural features in securitisation Credit enhancement techniques Credit Rating Agencies – Ratings methodologies Mortgage backed securities: RMBS, CMBS - Agency and non-agency conduits - US MBS - Prime, Sub-prime and Alt-A - Jumbo (non-agency) MBS - European RMBS Non real estate ABS - Credit card ABS - Other asset classes (future flow receivables; whole business securitisation) Collateralised Debt Obligations (CBOs and CLOs) Covered Bonds Key characteristics of covered bonds Comparing Covered Bonds to Senior Unsecured Bank debt Rating Agency methodologies for Covered Bonds