Euromoney Audit Training

Course overview

By the end of 2010, the size of the global swap market was in excess of USD500 trillion (in terms of notional principal), made up predominantly of interest rate swaps. Despite the recent banking crisis, with the exception of credit default swaps, the market had recovered its growth. Why? Because organisations continue to use swaps to manage their exposures to the financial markets, such as interest and FX rates,
equity and commodity, inflation, volatility, credit, etc. During this time, the swap market has evolved to provide a wide range of innovative structures designed to meet the precise requirements of end-users.

Dr. Richard Flavell and Euromoney have offered this 'advanced swaps' course for market participants for over 10 years. It has been continually updated to include the latest practical and theoretical developments in the structuring, pricing and hedging of swaps and related transactions.

It is assumed that delegates are familiar with basic concepts such as:

• Operations of the cash, FRA, futures and swap markets
• Use of discount factors to fair price swaps
• Basic option pricing
• General interest rate risk management

Summary of course content:

• Construct and price off a futures strip
• Blend information from different markets together efficiently
• Price and hedge a wide range of non-generic swap structures
• Transfer credit risk through the CDS market
• Value foreign assets correctly
• Swap complex structured products using numerical models and Monte-Carlo simulations
• Decompose structures with embedded options into their basic components
• Apply modern risk management to swap portfolios

Methodology

This course is very interactive, combining formal lectures with practical sessions, discussions and
a wide range of computer-based exercises which can be taken away after the course. This will reinforce
your learning and ensure that you apply these new skills as soon as you return to your institution.

Computer-Based Exercises

All delegates are expected to bring their laptops to facilitate in-class studies and exercises.

Who should attend this training course?

• Experienced members of swap desks and other structuring teams
• Senior risk managers
• Experienced marketers, responsible for providing risk management, financial structuring, and treasury
  services to end-users
• End-users themselves, to understand how banks are pricing and hedging swap structures

Supporting publications

   

Day 1: Brief revision

Pricing off a futures strip

• Building a discount curve
• Fair pricing of a short-term swap
• Demonstrating hedge effectiveness
• Adjusting for the convexity bias
  
  Computer-based exercise: Pricing a swap

Relationship between generic swaps and the bond market

• Swaps as the arbitrage between cash and bond markets
• Analysis of the swap spread

Derivation of zero coupon discount factors and forward rates

• Brief reminder: bootstrapping and estimation of forward rates
• When does bootstrapping breakdown?
• Practical issues: interpolation, blending and smoothing
• What represents a “good” curve: an alternative approach
• Building a curve from a sparse market
• Demonstrating blending and smoothing algorithms
  
  Computer-based exercise: Imply the discount factors from a swap curve
  
• IR basis swaps - why are these important?
• Building and using multiple curves
• Should your funding cost effect your valuation?
• Pricing a collateralised swap
• Overnight indexed swaps (OISs) such as EONIAs and RODS
• Building a 30-year curve using overnight-indexed swaps
• Pricing off the curve

Pricing a range of non-generic IR swaps

• Pricing forward start and amortising swaps
• Yield curve swaps such as constant maturity swaps
• Risk management characteristics

Computer-based exercise: price a CMS

• Other forms of non-generic swaps: in-arrears, average-rate, turbo, etc.

Building convexity into swap pricing

• How does convexity manifest itself?
• Convexity adjustment of normal swaps
• Convexity adjustment of CMS

Day 2: Swap applications

Asset packaging

• Creating different packages: premium, par, discount
• Creating a par maturity package
• What’s really going on?
• Arbitrage between bond and swap valuation methods: the credit implications
• Subsidisation effects
• Including your cost of funding revisited
• Practical details
  
  Computer-based exercise: Create some asset packages

Credit default swaps and other structures

• Total return swaps and the links with asset packaging
• Complete and contractual transfer of credit risk
• Single-name CDSs
• Documentation of a CDS: the current issues?
• Pricing and hedging of CDSs using alternative approaches
• Pricing of risky cashflows
• Replication using FRNs
• Derivation of forward default curves

Computer-based exercise: Price a CDS

Simple caps and floors

A fundamental knowledge of Black’s model for pricing European-style IR options is assumed.

• Generic and digital caps
• Floors, collars, forward swaps and put-call parity
• Volatility surfaces and smiles
• Swaps with embedded caps and floors
  
  Computer-based exercise: Price a swap with embedded options
  
• Taking advantage of the multi-period structure: barriers, choosers and periodic caps

Swaptions

• Pricing swaptions
• Swaption smile spaces
• Compatibility with cap pricing
• Swaps and embedded swaptions: pricing extendible and retractible swaps
  
  Computer-based exercise: Price an extendible step-up swap

Day 3: More complex swaps and other applications

More complex swaps: structured securities

• A brief overview of the structured securities market
• Classifying structures into the modelling methodology
  
  Computer-based exercise: Swapping an analytic structure such as a range accrual

An outline of advanced modelling methodologies

• Numerical modelling: building an arbitrage-free forward interest rate tree
• Simulation: building a BGM simulator
• Calibrating the simulator

Exercise/demonstration: Swapping a forward structure such as a zero-coupon accreting callable security

Demonstration: Swapping a backward structure such as a TARN

Demonstration: Swapping a backward-forward structure such as a callable sticky floater

Cross-currency swaps

• CC basis swaps: a building block for CC swaps
• CCBSs and off-balance loans
• Outline of pricing CCBSs
• How to value a foreign asset correctly
• Incorporating the CCBS curve into the bootstrapping process
• Swapping a bond issue: building a tailored CCS
• Conversion factors
• Creating a foreign asset package
  
  Computer-based exercise: Swapping a foreign bond issue into domestic floating rate
  
• Pricing of diff and quanto diff swaps with convexity effects
• Modelling of power reverse dual structures

Day 4: Management of swap portfolios

A fundamental knowledge of IR risk management is assumed.

How do IR curves behave?

Risk management reporting:

• Construction of a delta and gamma reports for different curve movements

Hedging swap portfolios

• The use of Taylor’s theorem to build a hedge
• Delta hedging
• The concept of an equivalence
• Assessing hedge effectiveness using shocks and simulation
• Construction of a theta report
• Running a portfolio: funding and other issues
• Control frameworks
  
  Computer-based exercise: Creating an effective hedge for a transaction

An outline of Value-at-Risk

• Measuring VaR for a swap portfolio using historic simulation
• Introducing the parametric method, and comparing the results

How to measure counterparty credit risk

• Concept of expected positive exposure
• Use of the regulatory formula for default risk
• Building a credit valuation adjustment formula for migration risk
• Simulating the CVA to get migration tail risk

Summary of course

• Dr. Richard Flavell

  Richard Flavell

  Dr Richard Flavell is a consultant in the financial services industry. Until recently, he was Director of Financial Engineering at Lombard Risk Systems, one of the leading providers of derivative trading systems around the world. In this role he led a team responsible for the mathematical development of Lombard’s derivative trading and risk management systems. At the same time, he also undertook extensive client/product training and consultancy projects.

  Prior to his role at Lombard Risk, Dr Flavell was Head of Financial Engineering at ANZ Merchant Bank in London, and was Reader in Finance at The Management School, Imperial College, which is part of the University of London. He has worked with many banks and financial institutions around the world, advising them on their derivative and risk management activities. Dr Flavell has an international reputation for his expertise in swaps, other derivatives and risk management.

  Dr Flavell has also published widely in both academic and professional literature, his most recent book on Swaps and other Derivatives was published in December 2009, and he is currently writing a book on bank risk management. His approach to training is structured and practical. He has extensive experience and success in teaching both recent entrants to the derivatives markets and risk management, as well as highly experienced technical experts and market participants.

  Courses run by this instructor

  • Interest Rate Derivatives and Currency Swaps
  • Bank Risk Management School
  • Basel III and New Bank Capital Rules

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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