Course dates
Advanced Interest Rate Risk Management is a rigorous, intensive course that covers the source and measurement of interest rate risk and the products commonly used to manage that risk, i.e., interest rate futures, forwards, swaps, and options such as caps, collars, floors and swaptions. The course focuses on the ideas that lie behind the pricing and valuation of derivatives, and the practical and innovative applications of the products. The course combines lectures, class discussions, guest speakers, examples and case studies.
COURSE OBJECTIVES:
This practical 4-day course will teach you how to:
- Identify and measure interest rate risk
- Bootstrap and use implied spot and forward rates
- Price interest rate swaps with a convexity-adjusted forward curve
- Examine implications of SFAS 133 and SFAS 159 for interest rate risk management
- Integrate product knowledge of futures, forwards, swaps, and options through practical, comprehensive case studies
- Value bonds, swaps and options using forward binomial interest rate trees
WHO SHOULD ATTEND?
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Derivatives Strategists
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Treasurers
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Finance Directors
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Fixed Income Analysts
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Corporate Finance Managers
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Debt Managers
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Fixed Income Traders
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Internal Auditors
DAY 1:
Overview to Interest Rate Risk Management
- Arbitrage, Speculation and Hedging
- Steps in the Interest Rate Risk Management Decision Process
- Reasons To Hedge Interest Rate Risk
- Reasons Not To Hedge Interest Rate Risk
- Risks and Limitations to Risk Management
Interest Rate Volatility & the Federal Reserve
- A Roadmap to U.S. Monetary Policy
- Bank Reserves, Monetary Aggregates, Velocity
- Fed Funds Rate, Credit Market Conditions
- A History of Jumps and Twists in the Treasury Yield Curve
Interest Rate Risk Identification & Measurement
- Financial vs. Non-Financial Firms
- Maturity Gaps and Time to Re-pricing
- Mathematics of Duration and Convexity
- Macaulay Duration, Modified Duration, EffectivecDuration
- Effective Convexity Statistic
- Interest Rate Risk Immunization Strategies
- Duration as Benchmark for Debt Structures
- Value at Risk Analysis
- Introduction to the “Liability Management at General Motors”
- Harvard Business School Case 293-123 Yield Curve Analysis
- Bootstrapping Implied Spot Rates from Coupon Bonds
- Calculating Implied Forward Rates
- Using Implied Forward Rates in Maturity Decisions
- Does the Forward Curve Indicate Market Expectations? Maybe
- Is the Forward Curve a Good Predictor of Future Rates? No
Interest Rate Futures Contracts
- Characteristics of Over-the-Counter Forward Contracts
- Characteristics of Exchange-Traded Futures Contracts
- Daily Mark-to-Market Valuation and Settlement
- Variation Margin Accounts
- Trade-Offs between Forwards and Futures: Credit and Liquidity Risks
- Design Flexibility, Managerial Oversight and Path-Dependency
- Treasury Note and Bond Futures at the CBT: Conversion Factors
- “Cheapest to Deliver” Bonds, and Implied Repo Rates
- Eurodollar Futures at the CME: the LIBOR Futures Strip
- Fed Funds Futures and the Probability of FOMC Actions
Issues and Applications in Managing Interest Rate Risk with Futures Contracts
- Determining the Optimal Number of Contracts: Basis-Point Values and Duration-Based Hedge Ratios
- Tailing the Hedge to Correct for the Time Value of Money
- Stack vs. Strip Hedging Strategies
DAY 2:
Modeling Interest Rate Volatility
- Calculating Historical Interest Rate Volatility
- Building a Binomial No-Arbitrage Forward Rate Tree
- Valuing Straight and Callable Fixed-Income Bonds Using the Forward Rate Tree
- Estimating Effective Duration and Option- Adjusted Spreads
- Valuing a Straight and Capped Floating Rate Note Using the Forward Rate Tree
Forward Rate Agreements (FRAs)
- FRA Market Characteristics & Quotation
- Settlement Calculations: In Arrears & In Advance
- Pricing and Hedging FRAs with Eurodollar Futures
- The Convexity Bias Adjustment between Forwards and Futures
Understanding Interest Rate Swaps
- Quotation and Settlement Calculations
- Interpreting an Interest Rate Swap as a Series of Off-Market FRAs
- Time Profile of Potential Credit Risk
- Interpreting an Interest Rate Swap as a Pair of Fixed-Rate and Floating-Rate Notes
- The Effective Duration and Convexity of a Swap
- Calculating Mark-To-Market Values of an Interest Rate Swap
- Using the Forward Rate Tree to Value a Swap
- Pricing an Interest Rate Swap Using the Convexity Adjusted LIBOR Forward Curve
Interest Rate Swap Applications and Innovations
- Classic New-Issue Arbitrage Using Interest Rate Swaps
- Balance Sheet Restructuring—Using Swaps to Transform the Average Duration of Financial Assets or Debt Liabilities
- Innovative Swaps: Forward-Start Swaps, Varying Notional Principal Swaps and Off-Market Swaps
DAY 3:
Option Contracts
- Review of Options Terminology and Payoff Diagrams for Puts and Calls
- Put-Call-Forward Parity, Put-Call-Cash Parity
- Basic Option Valuation: Binomial vs. Black- Scholes Models
- Strategies: Portfolio Insurance and Yield Enhancement
Interest Rate Caps, Collars, and Floors
- Quotation and Settlement Calculations
- Amortization Methods of the Cap/Floor Premium
- Interpreting an Interest Rate Swap as a Cap/Floor Combination
- Implications of Cap-Floor-Swap Parity
- Valuing an Interest Rate Cap or Floor Using the Forward Rate Tree
- Interest Rate Collars—Combinations of Caps and Floors
- Choosing between Interest Rate Swaps, Caps, and Collars
Options on Swaps (Swaptions)
- Entry and Exit Options on Swaps
- Payer and Receiver Swaptions
- Cancelable and Extendible Swaps
- Managing Pre-Issuance Interest Rate Risk on Debt Securities
- Call Monetization Strategies: Using Forward Swaps and Swaptions to Manage the Interest Rate Risk in Callable Bonds
Spreads and Straddles
- Bullish Call Spreads and Put Spreads
- Long and Short Straddles
DAY 4:
Accounting for Derivatives under FAS 133
- Embedded Derivatives, Bifurcation
- Fair Value and Cash Flow Hedges
- Effectiveness Testing
Interest Rate Risk Management Cases
- Case 1: Interest Rate Swap Fundamentals
- Case 2: Pricing Innovative Interest Rate Swaps
- Case 3: Transforming the Average Duration of a Fixed-Income Portfolio
- Case 4: Comparing Interest Rate Swaps, Caps and Collars
- Summary Case: “Liability Management at General Motors”
- Harvard Business School Case 293-123
- Case Analysis in Teams
- Class Discussion
New York Hotel, New York, United States
This program takes place on a non-residential basis at a New York hotel. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.
As with all Euromoney Training programmes on-site administrators are with you throughout the programme to ensure smooth administration and group interaction.
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Donald Smith
Don Smith is an Associate Professor of Finance and Economics at the School of Management, Boston University. He received his M.B.A. and Ph.D. degrees in Economic Analysis and Policy at the School of Business Administration, University of California at Berkeley.
Don specializes in teaching Capital Markets and Risk Management courses. He has published widely in academic and trade journals, including the Journal of Finance, Journal of Money, Credit, and Banking, Journal of Fixed Income, Journal of Financial Engineering, Financial Management, Journal of Applied Corporate Finance, Euromoney Corporate Finance, Derivatives Strategy, Derivatives Quarterly, and the Journal of Derivatives. Don has co-authored chapters of the Handbook of Financial Engineering, Interest Rate Swaps, and Cross-Currency Swaps, and two monographs for the Association for Investment Management and Research, Interest Rate and Currency Swaps: ATutorial and Derivatives, Risk Management, and Financial Analysis Under SFAS 133.
Don has been actively involved with executive education for over fifteen years, starting with Manufacturers Hanover Trust Company, where he was Senior Consultant to the Corporate Professional Development Department. He has developed and led training courses for many financial institutions, including Chemical Bank, Chase Manhattan Bank, Lehman Brothers, and the World Bank. He has been teaching Fixed Income and Advanced Interest Rate Risk Management courses with Euromoney for over ten years. While most of his executive training work is in New York, Don has taught courses many times in London and Hong Kong, as well as in Toronto, Mexico City, Caracas, Sao Paulo, Buenos Aires, Quito, Cairo, Bahrain, Tokyo, Seoul, Sydney, Singapore, and Kuala Lumpur.
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