Interest Rate Risk Management

This 3 day training seminar is geared to familiarize participants with the market quotations, trading mechanics, valuation principles and hedging strategies of fixed income cash and derivative markets. While the first two days address the practices linked to capital markets operations, the third day specifically addresses the operations inherent in managing inherent interest rate risk in treasury banking books. The seminar is tailored to practitioners in fixed income, treasury and risk departments and follows an applications oriented (as opposed to theoretical) framework. Excel based practical exercises (for pricing and hedging cases) complement the traditional course presentations as shown in the detailed outline. Attend this intensive 3-day course and gain a comprehensive and detailed analysis of: The mathematical underpinnings of fixed income risk management Products: cash and derivatives markets Duration, Convexity, PV01, DV01, Sensitivity Matrices Liquidity and repricing gaps – banking books risk management VaR and expected shortfall/ CVAR – pitfalls and advantages Who should attend? This course has been specifically designed for the benefit of: Fixed Income Cash Security Traders and Sales Professionals Fixed Income Derivative Sales/ Traders Market Risk Managers for Fixed Income Divisions Corporate Treasurers and Liquidity Managers Internal/ External Auditors
Day 1 Fundamentals and Pricing Models The Black Scholes Merton options pricing framework Adapted Processes, filtrations and Martingales Risk Neutral Pricing – a consequence of hedging Brownian Motion – quadratic variation: a measure of volatility Markov processes and the Feynman Kac Formula -The Black-Scholes option model -The Vasicek term structure model (and other equilibrium models) -The Cox Igersoll Ross term structure model -No arbitrage models -Girasnov´s Theorem The construction of a risk neutral measure -Pricing via risk-neutral measure -The Martingale Representation Theorem -The Fundamental theorem of asset pricing -No arbitrage and the existence of a risk neutral measure -Hedging and the uniqueness of the risk neutral measure The Heath Jarrow Morton model -No arbitrage condition -Implementation in practice The Change of Numeraire -Numeraires and the Risk Neutral Measures -FX models -Foreign and domestic risk neutral measures -The Gaman Kolhagen pricing formula -Call-Put duality Equilibrium models -The Vasicek Model -The “Log-Normal” model -The Cox Ingersol Ross model No arbitrage models -The Ho-Leee model -The Hull & White model -The Heath Jarrow Morton (“HJM”) model Forward measures -The Merton Option pricing formula -Brace Gatarek Musiela (LIBOR Market) family of models -Application for a Caplet Pricing -The Black Caplet formula Local volatility models Stochastic volatility models -Specifying the Instantaneous volatility of forward rates -Applications Day 2 Products and Trading Conventions Cash products -Bond markets and trading conventions -Securitized debt markets -Mortgage markets and ABS products -Syndicated loan markets Derivative products -Linear products: IR futures and forwards -IR swaps – trading mechanics -FX & cross currency swaps -IR futures markets – eurodollar futures -Applications – linear hedging strategies -Excel case studies: -Hedging a bond with an interest rate swap -Quantifying the convexity effect -Hedging a swap with a eurodollar futures contract -Hedging a swap in arrears with eurodollar futures contract – evaluation of basis risk -Nonlinear products -Caps, floors, collars -Exotic IR options -Swaptions and Spreadlocks -Spread options -Applications -Hedge parameters -Excel case studies: -Pricing a simple cap/ collar structure -Pricing a swaption with a constant volatility model -Pricing IR options with CEV volatility models -Pricing and hedging exotic IR options Day 3 Treasury Applications The treasury business remit The treasury “Banking Books”: net interest income generation (with / without customer margin) Liquidity risk (internal lender of last resort) Definition of liquidity Funding liquidity vs. market liquidity Dovetailing into the enterprise risk management framework Re-pricing risk (interest rates, FX) Maturity mismatch risk and the dynamics of liquidity gaps -Case Study: US Mortgage Bank ST (MT & LT) funding and securing of contingent funding / liquidity sources Regulatory compliance & rating safeguarding Residual risks in treasury operations Counterparty default and settlement risks Operational risks Treasury operational models FTP Fundamentals: -The cost of funds method -The net funding method -The pooled funding method -The matched maturity levels Determining the market implied liquidity premium Case Study: the optimal funding decision Measures of interest rate risks – the “traditional methods” Duration -Convexity Properties of portfolio duration and convexity DV01, PV01, CV01 Nonlinear sensitivities – “the Greeks” Interest rate gaps and applications Practical problems and constraints – best practices of bridging the “gaps” Systematic risk hedges -Hedging non-linear interest rate risks in treasury banking books -Measuring and managing residual risks -Measuring and managing counterparty risks Hedge accounting principles: IFRS 9 and hedge effectiveness testing -Single hedges -Portfolio hedges Discussion and conclusions