This 5-day Euromoney Training programme has been designed to provide delegates with a thorough understanding of the derivatives market place for both OTC and exchange-traded instruments and in particular how derivatives are used on a day-to-day basis to manage both exposures and to provide solutions. On the first three days of the programme delegates will gain a comprehensive understanding of the major classes of derivatives, how to distinguish between linear and nonlinear derivatives and pricing methodologies. This includes a detailed introduction to derivatives, highlighting trading mechanics and the critical differences between OTC and exchange-traded derivatives. Additional sessions will include practical examples of money market OTC (FRA's) and exchange traded short-term interest rate futures contracts and ad swap instruments.

The final two days of the programme explains, by way of specific examples, the use of options and how institutions use derivatives. With sessions looking at the use of equity options in proprietary trading, the role of swaps in the primary issuance business and the managing of FX exposures. The final day looks at financial engineering and more specifically, at how derivatives can be used to reduce funding cost and how to provide investors with instruments that meet their risk / reward requirements. The Derivatives School is unique both in the breadth of the teaching and practical examples used. Taught by first class course directors, we can assure you will receive a comprehensive overview of the derivatives market with detailed practical examples as how they apply to today's market conditions.

How will this course assist you?

Join us for this 5 day Derivatives School, a complete and intensive immersion into the world of derivatives, pricing, trading and risk management.

Topics include:

• What is a derivative? How and why are they used in practice?
• How do exchange traded derivatives and OTC derivatives differ?
• Clearing procedures for exchange-traded derivatives
• Understanding the principal money market derivatives and how they are used to manage interest rate risk
• Swaps and how banks and other institutions use them
• Prima on options and their application in the management of FX risk
• How derivatives are embedded in common structures to provide investors with attractive risk/reward profiles

who should attend?

• Derivatives traders and sales person's who want to deepen and intensify their derivatives knowledge
• Product Control and Middle Office staff
• Corporate Treasury staff
• Financial Control
• Risk Management
• Fund Managers,
• Private Bankers and Investment Advisors
• Derivatives System Developers

Day 1

Registration commences at 8:30
Programme runs from 9:00–5:00 daily.

Introduction to derivatives and derivative types

Introduction to derivatives

• What is a derivative?
• Why is there a market for derivatives?
• Attributes of derivatives
• Practical uses of derivatives
• Leveraged trading
• Risk management applications
• Creating synthetic positions
• Advantages of derivative instruments over cash instruments
• OTC vs. exchange traded products
• Recent developments
• Calculating the profit and loss on a futures contract
• Understanding the clearing house guarantee and margining system for exchange traded instruments

Case study: delegates will complete a margining return over a period of time for a small portfolio.

Linear derivatives: money market derivatives

• Concept of a forward contract
• Forward/forward interest rates
• Forward rate agreements [FRA’s]
• Locking-in a forward interest rate
• Exchange traded version: short-term interest rate [STIR] futures contracts

Case study: delegates will complete a number of exercises based on FRA’s and STIR’s.

Multi-period linear interest rate derivatives: swaps

• The interest rate swap (IRS) market
• Types of swap
• Interest rate swaps
• Currency swaps
• Basis swaps
• Market structure
• Inter-bank vs. customer market
• Broker quotes in the inter-bank market
• Why the market exists: reducing funding costs by using swaps

Case study: delegates will derive a market swap bid and offer rates consistent with the actual and target borrow rates of two institutions.

 

Day 2

 

A valuation framework for forwards, futures and swaps

A framework for marking-to-market OTC derivative positions (I)

• Approaches to forward valuation:
• Arbitrage-free pricing
• Cash flow pricing
• Deriving the forward FX rate using market rates
• Marking-to-market a forward FX contract

Case study: using the bootstrapping approach, delegates will derive the inter-bank discount function.

A framework for marking-to-market OTC derivative positions (II)

• Building the discount function
• What instruments to use
• “Bootstrapping” the swaps curve
• Marking-to-market an IRS

Case study: using the discount function derived earlier, delegates will mark-to-market a number of swap positions.

Day 3

 

Introduction to options

An options primer

• What is an option?
• Option terminology and exercise types
• Option “moneyness” vs. intrinsic time value
• Understanding the payoff profiles

Introduction to option pricing and risk measures

• The importance of correct valuation
• Intrinsic vs. time value
• What drives the price of the option: understanding the model inputs
• Approaches to option valuation: hedge approach vs. probabilistic approach
• Breaking-down the Black Scholes option pricing model
• Option risk measures: the “Greeks”
• Problem in market making

Case study: delegates will use the option greeks to estimate the new price following a change in market variables.

Guest speaker: Credit derivatives and their application in structured credit products and market regulation

• Understanding the credit default swap (CDS)
• The CDO market
• The evolution of the market
• Application of CDS in synthetic structures
• What caused the model to break and can it be repaired?
• Market derivatives regulation: looking back and forward

Day 4

 

Applications of derivatives (I)


Proprietary trading with equity options

• Understanding how to construct payoff profiles for combinations of options and the underlying
• Understanding the relationship between puts and call
• Identifying common directional and volatility trading strategies

Case study: delegates will explore the payoff profiles of a number of trading strategies.

Delivering customer solutions (I): using swaps in primary bond issuance

• Understanding the motivation for swapping from fixed financing to a floating liability
• Calculating the “all-in” funding cost as a spread over libor

Case study: delegates will compare funding alternatives for a company.

Delivering customer solutions (II): providing tailored hedge programmes for customers’ FX exposures

• The problem with “forward only” cover
• Using currency options to retain the up-side
• Creating zero premium products
• Introducing more innovative solutions: using exotic options

Case study: delegates will propose a suitable hedging strategy for a corporate with FX exposures.

 

Day 5

Applications of derivatives (II)
 
Practical exam: see how much you have learnt and test your skills with the morning’s practical exam.

• Financial engineering with derivatives
• Primary motivations for structuring
• Securing cheaper funding
• Providing attractive risk / reward profiles for investors
• Earning fee income
• The structuring process

Delivering cheaper funding: inverse floating rate notes

• Investor perspective
• Understanding the structure
• Variations on a theme
• Deferral period
• Adding a minimum rate
• Step-ups
• Adding leverage
• Pricing and valuation
• Hedging the issuer exposure
• “Super-floater” FRN’s

Case study: delegates will construct a deferred reverse floating rate note, identifying appropriate parameters, and identifying the “hedge” required by the issuer to ensure libor based financing.

 Targeting the retail market: capital guaranteed notes and high income products

• Understanding the process and distribution channel
• Who takes the risk
• Constructing a capital guaranteed note
• Introducing a cap and other common variations
• Commodity-linked notes
• Credit-linked notes
• High income products
• Selling puts to increase income
• The listed certificate market

Case study: delegates will critically analyse a recent world bank equity-linked note from the perspective of issuer and investor.

Course summary and close

• Paul Kitching

  Before becoming a freelance training consultant, Paul Kitching was the Strategic Development Manager at the London International Financial Futures Exchange (LIFFE), where he was responsible for the research and definition of new specialist swap and risk transfer contracts. Prior to this, he was Head of Interest Rate Product Development with responsibility for the maintenance of the existing product range and the development of new products.
  
  Paul began his career with Ernst & Young and Grant Thornton as a tax specialist, before moving into corporate treasury management at Consignia where he was project leader for a treasury and risk management group. In this role he developed risk management protocols and procedures for the use of derivative products. He was responsible for recommending the optimal combination of product types and features for a wide range of situations.
  
  Following the completion of a quantitative finance masters degree, Paul became senior lecturer in Corporate Finance and Taxation at the University of Greenwich. He is a visiting lecturer to Cass Business School, lecturing on their Executive MBA programme. He is a panel member for the Securities Institute, and is a Member of the Association of Corporate Treasurers and associate of the Institute of Taxation.

  Courses run by this instructor

  • School of Bonds & Fixed Income Products

London School of Derivatives

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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