This is an advanced level programme that assumes that delegates will be familiar with basic concepts of derivatives and more specifically swaps markets. Whilst the programme agenda is not based upon detailed theoretical or mathematical approach it does require basic mathematical fluency. This is your chance to learn about:
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Pricing and valuation of advanced swap structures
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Understanding theory and practice in swap pricing
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Interest rate term structure modelling
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Swap portfolio management
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2nd generation swaps and options
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Interest rate linked structured products
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Trading and risk management applications of swaps
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. Delegates will each receive copies of all spreadsheet software for their own use after the programme.
Course Background
Over 90% of the world's largest corporations, and all major financial institutions use derivatives, mainly interest and currency related derivatives, to manage their business and financial risks. As the markets continue to develop, constant innovation evolves new products, pricing and risk management techniques – to enable users to generate or manage risk exposures with greater precision and flexibility.
This four day intensive programme provides delegates with a comprehensive exposure to a range of advanced swap topics, including pricing and valuation in the presence of funding and liquidity risk, 2nd generation swaps and interest rate option derivatives. Delegates will also be exposed to state of the art techniques employed in measuring and managing risk within swap and option portfolios, including both 'traditional' and value-at-risk methodologies.
The programme provides a comprehensive examination of the ways that swaps are employed in a wide range of trading strategies, and why swaps are increasingly used within the fixed income arena. Finally, the programme provides delegates with an introduction to financial engineering and the use of embedded interest rate derivatives in the creation of structured debt instruments. Delegates will gain exposure to the processes employed in structured product design and creation, as well as in product decomposition, pricing and risk analysis – reverse engineering. Overall the programme seeks to impart a detailed and practical understanding of a range of complex interest rate derivative instruments, of growing importance and significance within the marketplace, in such a manner that such knowledge can be immediately applied within the contexts of trading, structuring and pricing, and risk management.
Who should attend?
The course will be of value to professionals in the following areas:
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Experienced swap traders, marketers and structurers
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Market and Counterparty Risk managers
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Quantitative analysts, researchers
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Fixed income portfolio managers
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Corporate treasury and other end-users
Day 1
A review: pricing and valuation of interest rate swaps
In this first session we review the methodology for pricing and valuation of generic and simple non-generic swaps, and examine the practical steps of constructing swap discount curves. A knowledge of the contractual structure and mechanics of interest rate swaps is assumed.
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Review of theoretical basis of swap pricing
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Fair value = cost of replication
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Modelling the deterministic discount curve
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Blending different market data sources:
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Cash rates, Swap rates and Bond yield data
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Interest rate futures data
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Adjusting for convexity bias in futures data
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‘Bootstrapping’ market data to generate a deterministic discount function
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Practical challenges in deriving benchmark curves in illiquid markets
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Interpolation methods – different methods; advantages and shortcomings
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Curve fitting and smoothing techniques
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Practical pricing and valuation applications:
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Mark to market - swap portfolio valuation
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Swap terminations and assignments - fee estimation
Recent developments in swap pricing
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Swap pricing incorporating funding risk
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Collateral agreements (CSAs)
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Adjusting discount curves for swap pricing:
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CDS adjusted Non-CSA curves
Workshop: Pricing and valuation of generic swaps
Non-generic swaps – structuring, pricing & applications
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Forward start swaps - structures and pricing
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Amortising and Roller coaster swaps
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Deferred coupon, stepped coupon and zero coupon swaps
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Adapting the pricing framework to non-generic structures
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Pricing adjustments for funding and counterparty risk
Day 2
Asset swaps
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Structuring and pricing methodologies for asset swaps
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Par/par asset swap
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Yield/yield asset swap
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Market value accrued (MVA) asset swap
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Yield curve shift (YCS) – Z-spread analysis
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Pricing adjustments for funding and counterparty risk
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Advantages and shortcomings of different methodologies
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Using asset swaps in asset restructuring
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Using asset swap pricing in RV analysis
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Credit Default Swaps (CDS)
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Over of CDS contract mechanics, market conventions
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Pricing CDS
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Arbitrage based approach i.e. replication using asset swap
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Understanding the relationship between CDS premia and Asset swap spreads
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Determinants of the (Asset swap - CDS) basis
Workshop: Identifying asset swap opportunities; Structuring and pricing and asset swaps
Overnight Index Swaps (OIS)
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Mechanics of overnight index swaps
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Calculating the overnight index rate – actual funding rates
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Conventions of different OIS markets (EONIA, SONIA etc.)
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Computing the compounded average overnight rate leg
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Constructing the OIS curve
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Pricing and valuation of OIS
- Convexity effects in pricing
Basis swaps
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Floating – floating index swaps
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Tenor basis swaps
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Alternative reference indices (CP, Prime, Fed Funds etc.)
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Uses and applications in asset-liability management
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Rationalising (tenor) basis swap margins
Pricing and valuation of cross currency swaps
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Generic and non-generic cross currency swaps
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Cross currency coupon swaps
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Basis point conversion factors
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Cross-currency basis swaps
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Rationalising CC basis swap margins
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Hedging cross currency basis swaps
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Accounting for cross currency basis swaps
Workshop: Identifying arbitrage opportunities; structuring a new issue driven cross currency swap.
Day 3
Interest rate options: caps and floors
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Generic interest rate caps and floors
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Conventional pricing methods: Black (1976) model
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Why do markets use this model? Advantages and disadvantages
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Calibration to a volatility surface
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Put-call parity relationships: Caps, Floors and Forward swaps
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Hybrid structures and combinations:
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More complex structures: Mid-curve caps; periodic caps; barriers
Interest rate options: swaptions
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European and Bermudan style swap options
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Pricing: Black Vs. Term structure models
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Calibration of swaption volatility surfaces
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Compatability and consistency with Cap pricing
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Option Embedded Swaps
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Extendible and cancellable swaps (European, Bermudan styles)
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Structured (callable, puttable) bonds; call monetisation
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Balance guarantee swaps, index amortising swaps (IAS)
Advanced interest rate modelling
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Stochastic term structure models
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Numerical methods
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Single-factor models(BDT, HW)
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Calibrating arbitrage-free bimonial, trinomial models
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Multi-factor models
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BGM (LIBOR) market model
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Model implementation by simulation
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Calibration to cap/swaption volatility surfaces
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Specifying the forward rate correlation matrix
Workshop: Calibration of term structure pricing model; pricing and valuation of complex interest rate derivatives
Constant maturity swaps
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CMS structures; market conventions
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Pricing and valuation of CMS swaps
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Determination of convexity bias
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Risk management: managing Delta,
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Vega and Gamma risks
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Using swaptions for pricing and replication
Arrears swaps
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LIBOR-in-arrears swaps
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Arrears Coupon and Basis swaps
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Pricing and valuation of Arrears swaps
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Convexity bias in pricing arrears and other mis-match structures
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Estimation of convexity adjustment
Inflation swaps
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Index linked securities; structure and mechanics
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Rationale for investors and issuers
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Inflation derivatives
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Inflation swaps: basic mechanics and structure
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Pricing and valuation of Inflation Swaps
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Constructing the forward inflation curve
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Pricing and valuation of inflation swaps
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Pricing inflation – LIBOR swaps
Differential (Quanto) swaps
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Structures and applications
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Pricing and valuation considerations
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Volatility and Correlation effects
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Dynamic risk management of quanto structures
Day 4
Swap portfolio risk management
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Interest rate risk measures: Delta (DV01), Gamma and Vega
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Linear risk analysis: Constructing a Delta vector risk report
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Yield curve risk analysis; parallel and non-parallel shifts
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Risk reporting: creating a replicating portfolio (futures, bond, swap) equivalents
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Hedging swap portfolios: Basis risks in portfolio hedging
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Non-linear instruments and risks:
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Gamma and Vega risks
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Constructing Vega and Gamma risk matrices
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Dynamic hedging of Vega and Gamma risks
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Value at Risk
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A VaR based approach to analysing and managing swap portfolio risk
Workshop: Hedging a swap transaction; Risk analysis of swap portfolio; Delta risk measurement and replicating portfolio construction.
Interest rate linked structured products
The objectives of this session are to, with the aid of example transaction term sheets, illustrate key product types, and to understand in greater detail how to break down such instruments into their component derivatives, and to price and value such instruments. The primary focus will be to focus upon the quantitative basis of pricing and valuation, and measurement of product market risk exposures, as well as the understanding the operational mechanics and implications of different product types, and investor motivations and risks.
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Structured notes; securities with embedded options and other derivatives
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Use and applications of embedded derivatives
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Rationale for issuers and investors
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Yield enhancement – creating new asset structures
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Range notes
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Guaranteed returns; principal protection
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Risks of structured debt instruments:
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Market risks
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Structured interest rate linked products:
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European / Bermudan callable bonds
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Range Accrual
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LIBOR
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CMS-linked
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Capped, floored FRNs
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Inverse FRNs
- TARN structured notes
Case study: Analysing a reverse floater with embedded options
Case study: Pricing a cancellable swap; Bermudan step-up Callable bond
Case study: Pricing CMS – linked note.
Review and close
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Graham Dudlyke
Graham Dudlyke is a highly experienced derivatives consultant who has held senior positions in a number of major financial institutions in London and New York. As Vice President of the Arbitrage Trading Group at Chemical Bank, Graham was responsible for management and marketing of interest rate option trading, managing a portfolio of interest rate caps, floors and swap options. As an Associate Director of Mitsubishi Finance, London, he gained considerable experience in trading portfolios of swaps and options, and in risk management and financial engineering, including structuring new issues of debt and creating structured assets.
As Manager of SE Banken's Global Derivatives Trading Group, he held overall responsibility for swaps, options and fixed income portfolio trading and risk management, new product development, and corporate and institutional marketing of structured debt products. Graham lectures internationally on all aspects of derivatives and fixed income and is highly respected for his practical market approach to product structuring and applications. Graham holds an MBA from Imperial College, London and an MA in Chemistry from Oxford University.
Courses run by this instructor
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