Managing Fixed Income & Currency Investment

Course Background What does the future hold for the fixed income and currency asset classes? Where do you invest to maximise your clients’ porfolios? As a result of the GFC, the Asian fixed income market grew substantially in capitalisation size and in coverage (geographic and industry). In addition to learning specifically about this distinct asset class and other industry updates, you will also gain an in-depth understanding of best practice fixed income and currency portfolio management techniques and how they can be used to deliver sustainable returns and to manage risk. The course combines interpretation of key market pricing and risk data with the implementation of effective investment strategies to maximise risk-adjusted returns over the long term. The primary focus is to enable delegates to understand how to create an effective portfolio management strategy as well as to manage the day to day risk exposures and to maximise return. Particular emphasis is placed on the dynamics and inter-relationships within global bond and currency markets and how these affect the optimal construction of portfolios, particularly where constraints exist in terms of return targets and mandate restrictions. The importance of movements in foreign exchange markets cannot be underestimated in the context of portfolio return generation and risk management. This programme provides delegates with key insights into the fundamental structure of global currency markets. It also covers derivatives and structured bond products and their role in contemporary bond portfolio management, thereby enabling participants to determine their suitability to achieve required returns, generate sustainable cash flows and manage risk. Attend this highly practical 5-day training course and learn best practice investment strategies and analysis in order to: Get an up-to-date picture of the global bond and currency markets and understand how macroeconomic events impact these markets Implement effective investment strategies and select the most suitable management style to meet fund objectives Understand and interpret key data relating to bond markets, including hands-on exercises in using key bond pricing and risk metrics Understand the key factors driving FX rate movements Most effectively use interest rate and FX derivatives Better understand credit analysis techniques and relative pricing metrics Use structured bond products to achieve required risk and return outcomes Plus: Enhance your practical skills with computer-based simulations and workshop case studies on bond pricing, optimal portfolio construction and risk analysis Computer-based exercises All delegates should bring their laptops to facilitate in-class studies and exercises. Take Away Simulation Software Delegates will each receive copies of all bond and currency pricing, risk analysis and portfolio optimisation models for their own use after the course. Methodology The training consists of classroom-based teaching combined with computer-based simulations and exercises, using a range of spreadsheet-based software. Pre-requisites The course assumes a working knowledge of bond instruments, interest rate markets and discounted cash flow analysis. Who Should Attend? This course has been specifically designed for: Investment, Portfolio, Asset and Wealth Managers Bond Analysts and Sales Executives Risk Managers Quantitative Analysts Pension Fund Trustees and Sponsors Why not recommend this course to a colleague? FTS Eligible This programme is approved for listing on the Financial Training Scheme (FTS) Programme Directory and is eligible for FTS claims subject to all eligibility criteria being met. Please note that in no way does this represent an endorsement of the quality of the training provider and programme. Participants are advised to assess the suitability of the programme and its relevance to participants’ business activities or job roles. The FTS is available to eligible entities, at a 50% funding level of programme fees subject to all eligibility criteria being met. FTS claims may only be made for programmes listed on the FTS Programme Directory with the specified validity period. Please refer to www.ibf.org.sg for more information. Supporting publication:
Day 1 The objectives of portfolio management Liability funding Total return generation Absolute return driven investment fund products Key challenges facing bond portfolio managers Principal risks and opportunities Case study: Devising a portfolio investment strategy to meet the liabilities of a pension fund Investment landscape Issuers’ requirement for longer term funding Investors’ requirement for longer term assets to match liabilities The principal global bond markets Developed market sovereign Developed market corporate Asset backed bond Emerging sovereign The principal currency blocs Sino/US Eurozone Market operation Primary market: Issuance and market making Secondary market: Trading and liquidity costs Macroeconomics, geopolitical trends and bond and currency portfolio strategy Interest rates Inflation Balance of Payments Economic growth – the business cycle Globalisation Foreign exchange dynamics Demographics Credit conditions Case study: Asian government and corporate debt issuance – demand and supply dynamics Bond pricing and risk analysis Bond prices as a series of cash flows discounted by the bond’s yield Bond duration calculation and use Macaulay’s duration Modified duration Other risk measures, including DV01 Convexity Incorporating optionality Pricing models Effective duration Negative convexity Exercise: Calculation of a bond’s price and duration from first principles. Use duration to predict price changes for given changes in yields and assess the impact of convexity Day 2 Interpreting fixed income market data Treasury yields Theories of the yield curv Liquidity premiu Safe haven premium Inter-bank rates Credit spreads Over Treasurie Over LIBOR Option Adjusted Spreads (OAS) Swap spreads Credit Default Swap (CDS) Premia Measuring market sentiment: The Confidence Index Exercise: Calculation and interpretation of credit spreads and swap spreads and comparison to CDS premia Bond market structure Market segmentation Currency of denominatio Secto Credit qualit Maturity Structure Domestic issue Eurobonds Shari’a compliant Case study: The critical boundary between investment grade and high yield bonds in credit markets for institutional investors Duration targeting Macaulay’s duration as a quasiimmunisation measure Modified duration and portfolio risk management Asset allocation using weighted duration Exercise: Calculating and using weighted duration for asset allocation and relative risk measurement Derivatives Fixed income derivatives Bond futures and options Credit derivatives Swaps Interest rate swaps Cross currency swaps Interest Rate Futures (IRF) Sale and repurchase agreements (“repos”) Structured products Exercise: Using derivatives to hedge interest rate and credit risk and to lock in capital gains in a portfolio context Day 3 Bond portfolio construction - design, liquidity and risk management Benchmark design Benchmark setting in portfolio performance monitoring Risk and return targeting Market return targeting FX exposure management Currency bloc allocations Assessing the net impact of changes to relative interest rates Duration targeting Effective representation of bond markets Optimisation of benchmark portfolio Risk/Return trade-off Correlation factors Incorporating liability-driven constraints into benchmark construction Liquidity management policy Risk management policy setting Managing duration, optionality and convexity Key rate duration analysis Managing call option risk Risk budgeting Setting permitted deviation from benchmark neutral positions Style risk from different factor exposures Active/alpha risk from security selection Structuring cash flow patterns Exercise: Constructing a portfolio to meet specific return objectives whilst complying with mandated restrictions Bond portfolio management Styles Total return Active strategie Interest rate expectatio Valuation base Credit analysis drive Passive strategie Buy and hol Indexing Liability funding strategies Dedicated portfolios and subportfolio Cash flow matchin Domestic currency matchin Horizon base Immunisatio Perfect immunisation through cash flow matchin Approximation using duration analysis The unified approach Strategic and tactical asset allocatio Balancing active management benefits vs. Trading costs Liquidity management and fund solvency Bond portfolio management strategies Market risk factor strategies Bullet, barbell and ladder portfolio structure Flattening yield curv Steepening yield curv Butterfly twist Positive Negative Exercise: Calculating impact on portfolio value for different portfolio structures given different changes to yield curve shape Other risk factor strategies Currency Sector Credit Security structure Risk factor synthesis Understanding inter-relationships amongst risk factors Developing a cohesive and robust investment strategy Security selection Estimating fair market value Deriving the zero coupon curve: Which bonds are at fair market value? Calculating relative value using Z-spreads and Option Adjusted Spreads (OAS) Other factors Diversification potential within portfolio Convexity enhancement Yield enhancement: The “repo” market Exercise: Using the zero curve to analyse relative value of bonds with similar risk profiles Day 4 Credit analysis Sovereign issuers Corporate issuers The role of the credit rating agencies Traditional role Reinvention since sub-prime Credit risk analysis: Analysis of the Firm Industry analysis Industry prognosis Firm’s position within the industry Financial statement analysis Profit and loss Balance sheet Cash flow statement Free cash flow Impact of accounting policies Depreciation Securitisation Off balance sheet items Collateral analysis Fundamental principles Credit risk analysis Expected loss Loss at default Recovery Credit risk factors Term structure of credit risk Default correlation analysis Industry approaches and systems Credit metrics KMV model CreditRisk+ CreditPortfolioView Case study: Worked examples of credit analysis for sovereign and corporate bonds Bond portfolio risk management Risk management methodologies and their limitations Risk factors Short term factors Interest rate risk Duration gap Portfolio structure Credit risk Downgrade Default Medium to long term factors Inflation risk Style drift Liability mismatch Quantifying risk Scenario testing Stress testing Value-at-Risk Risk management tools Diversification Investment restrictions Derivatives Case study: Assessing the effectiveness of risk management techniques in extreme events: The Asian financial crisis 1997-1998, the sub-prime crisis 2007-2008 and the Greek default 2012 Advanced bond portfolio management strategies Convexity maximisation Core-satellite portfolio structuring The role of “Portable Alpha” Contingent liability matching Structured bond products Exercise: MaximiSing portfolio convexity for a given portfolio duration target Day 5 Lessons from the history of Foreign Exchange markets The pivotal role of the US Dollar since the Second World War Bretton Woods Post-Bretton Woods Currency devaluations: Causes and effects Sterling and the Exchange Rate Mechanism Asian financial crisis Fundamentals The role of FX in the global economy FX rates’ role in the fundamental relative pricing of assets, goods and services Impact of FX rates on trade and investment flows Feedback effects The formation of Currency Blocs through trade relationships Surplus countries Deficit countries The principal actors in FX markets Exporters and importers Investor Speculator Governments Types of exchange rate system Fixed Gold standard Currency board pegs Semi fixed Bands Basket pegs Crawling pegs Floating rates Structure of FX markets Spot Forward Other derivatives Market analysis Long term trends Trade-weighted exchange rates Sentiment, e.g. Transparency International rankings Interest rates Economic pressures Political pressures Inflation Domestic, e.g. Low productivity External, e.g. Imported inflation Asian currency markets Key relationships and dynamics Principal trade flows Political factors Fundamental macroeconomic analysis and models Key economic data Balance of payments Relative interest rates Other factors Political Government inflation management policy Stability Transparency Economic diversification Inflation Covered Interest Parity rule Exercise: Using the Covered Interest Parity rule to determine Forward FX rates Purchasing Power Parity Case study: The Economist’s “Big Mac Index” Valuation models and indications of “overshooting” Technical analysis Technical analysis and the efficient market hypothesis Statistical basis: Markov processes Principal technical analysis models for FX markets Mean reversion Momentum Support and resistance Forex instruments Forward FX Currency futures Barrier options Currency swaps Case study: Using currency swaps in conjunction with underlying bond exposures The “Currency overlay” portfolio management approach Active vs. Passive currency management approach Setting target expected FX rates Diversification Correlation analysis using historical dat Common factor analysi Interest rate evolutio Commodity price exposures Implementing investment strategy FX exposure allocation Liquidity management