School of Derivative Instruments

The course will provide delegates with a thorough understanding of: What are derivatives? How and why are they used? The regulatory environment for derivatives – a changing landscape Exchange traded and over-the-counter (OTC) derivative markets Simple interest rate and FX derivatives: Futures and forwards The use of non-deliverable forwards in emerging markets Managing FX, interest rate and commodity exposures with derivatives Interest rate and currency swaps Introduction to option pricing, risks and applications Equity derivatives and their role in portfolio management Using currency options to express trading views Managing credit risk exposure with credit derivatives Plus: participants will receive a free CD-ROM containing a suite of derivatives pricing and risk management software Who should attend? Money market traders and dealers Bond and equity sales and traders Corporate banking relationship managers Credit risk managers Treasury managers Risk managers Corporate treasury management Auditors & financial controllers Product control and middle office personnel Methodology 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 Numerous realistic and practical examples are used within the programme agenda to ensure that delegates gain a thorough and intuitive understanding of the key concepts Delegates will each receive copies of all pricing and simulation software for their own use after the programme. Course Outline Over 90% of the world’s largest corporations and all major financial institutions use derivatives to manage their business and financial risks. As the markets continue to grow and spread to developing economies, organisation of derivative markets is undergoing significant changes. Constant innovation evolves new products, pricing and risk management techniques which enable users to generate or manage risk exposures with greater precision and flexibility. This 4 day programme through case study analysis, practical examples and PC workshops, provides an ideal platform for you to rapidly enhance your knowledge of derivative instruments and markets. It will additionally prepare you to meet the challenge of developments in derivative products and markets, enabling you to profit from the opportunities available and to maintain your knowledge at the forefront of financial markets. This programme provides delegates with a comprehensive and practical introduction to interest rate, FX, credit and equity derivatives, enabling delegates to understand the nature and characteristics of both exchange traded and over-the-counter (OTC) derivative instruments, distinguishing between outright and option based derivatives, and their key differences. The programme then progresses to look in more specific detail at Forwards and Futures, Swaps, followed by Options, providing an overview of their individual product mechanics, and market conventions. The programme also provides delegates with guidance to understanding the pricing and risk characteristics of both outright and option derivatives, and an overview of applications of derivatives in risk management and trading strategies.
Day 1 The instruments Session 1: Introduction What is a derivative? Uses of derivatives Advantages OTC v exchange traded products The clearing process Session 2: Basics of forward instruments & swaps Concept of a forward contract Forward / forward rates Forward rate agreements Short-term interest futures Futures on government bonds The swaps market Interest rate swaps Currency swaps Basis swaps Relationship between swaps and forwards Market structure Session 3: Basics of options Definition of an option Types available Option terminology Understanding payoff profiles Uses of options Day 2 Principles of valuation Session 1: Principles of valuing forwards & swaps (1) Nature of cash flow analysis Decompounding the swap into a bond and a FRN Equating the value of the fixed and floating legs Where do the discount factors come from? Bootstrapping the yield curve to create zero-coupon discount factors Session 2: Principles of valuting forwards and swaps (2) Marking-to-market an interest rate swap Marking-to-market a currency rate swap Session 3: Principles of valuing futures Valuation principles for futures contracts Cost of carry and carry return Forward/forwards versus futures Arbitrage bounds on futures Cash and carry with bond futures Session 4: Principles of valuing options Intuitive approach to option pricing Put-call parity Time value v intrinsic value Option pricing models Day 3 Applications of derivatives Hedging principles & risk management (1) Session 1: Managing interest rate risk (1) Hedging principles with forwards, futures & swaps Nature of hedging Hedging exposures with forwards and swaps Integrating swaps & fixed income products Using swaps to aid asset/liability management New issue arbitrage using currency swaps Structuring a synthetic FRN: asset swaps Hedging principles with bond futures Dealing with basis risk Characteristics of different futures hedges Designing hedging programmes Session 2: Managing interest rate risk (2) Using interest rate options: caps, collars & floors The one-period instrument: Interest rate guarantee (IRG) Using IRG’s to control interest rate risk and evaluating their performance Caps as a collection of forward start options Using caps and floors Reducing the cost: collar strategies Creating structures solutions: participating forward instruments Swaptions and how they are used in interest rate risk management Comparing alternative risk management strategies Day 4 Applications of derivatives Hedging principles & risk management (2) Session 1: Managing FX risk hedging currency Exposures with derivatives Types of exposure Defining hedging objectives and measuring hedge efficiency Managing exposures with linear instruments Managing exposures with options Basic option hedges Selling options in a hedging programme Packaged solutions Collars, range-forwards, cylinders, corridors Participating forwards and ratio forwards Break-forwards, FOX’s, forward reversing options Session 2: Managing credit risks: credit derivative instruments Management of concentration risk What is concentration risk and why is it a problem? Traditional means of limiting concentration risk How credit derivatives are used to manage concentration risks Understanding the instruments Total return swaps Credit default swaps Credit-linked notes Session 3: Mixed portfolio management Portfolio swaps and trading strategies Yield enhancement techniques Exposure reduction possibilities Course summary and close