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.
Who should attend
The course will be of value to professionals in the following areas:
- 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
Introduction to Derivative Instruments and Markets
- What are derivative instruments?
- Defining key properties of derivatives.
- Linear and non-linear derivatives.
- Single period (futures, forwards) and multi-period (swap) derivatives.
- Listed and OTC derivative markets.
- Key characteristics of listed derivatives (futures, options on futures).
- Key characteristics of OTC derivative markets.
- Impact of recent regulatory changes on derivative markets.
- What are the benefits of derivatives: uses and applications of derivatives.
- Risk management.
- Trading and investment applications.
- How has the financial crisis affected derivative markets?
- Liquidity risks and funding costs.
- Regulatory changes: The impact of Dodd-Frank and Basel III.
Simple Derivatives: Forward and Futures Markets
- Forward contracts.
- Definitions and nomenclature - market practices.
- Generic characteristics of forward contracts.
- Pricing principles of forward/futures contracts.
- Arbitrage-free pricing.
- Backwardations and the breakdown of arbitrage-free valuation.
- Credit risk exposure and forward contracts.
- Futures contracts.
- The mechanics of futures contracts and futures markets.
- The role of the clearing house.
- Margining: definition and operation.
- Credit risk and futures contracts.
- Interest rate forward contracts and futures.
- Forward Rate Agreements (FRAs).
- Short term interest-rate futures (STIRs).
- Bond futures.
- Applications of futures and forwards in trading and interest rate risk management.
Case Study 1: Pricing and valuation of Forwards – Application to interest rate risk management.
FX derivatives
Forward foreign exchange
- Outrights and FX swaps.
- Pricing using interest rate differentials.
- Quotation conventions.
- Calculating outright forward FX rates.
- Cross rate forwards.
- Determination of synthetic interest rates using forwards.
- Applications of forward FX in hedging transaction and translation exposure.
- Non-deliverable forwards (NDFs).
- Uses and benefits of NDFs.
Day 2
Swaps markets
- Evolution and development of the swaps market.
- Swaps market dynamics.
- Swaps market participants and roles.
- Business drivers – applications of swaps to trading, portfolio risk management and funding (ALM).
- Generic characteristics of swap contracts.
- Interest rate, currency & basis swaps.
- Equity swaps, commodity swaps.
- Swaps documentation and legal issues.
- Termination, assignment by novation.
- Netting agreements.
- Legal enforceability of netting arrangements.
Interest rate and currency swaps
- Generic swap structures.
- Par interest rate swaps.
- Basis swaps.
- Generic and non-generic swaps – a classification of types.
- Cross-currency swaps.
- Cross currency basis swaps.
- Principal exchanges – implications for removal of initial and/or final amounts.
- Swaps market conventions and practices.
- Nomenclature, terminology and market quotation conventions.
- Interest rate accrual and payment conventions.
- Stub interest calculation periods (long/short).
- Off-market contract terms and margins.
Pricing and valuation of interest rate swaps
- Basic foundations of swap valuation - nil value of par swaps.
- Discounted cash flow (DCF) methodology.
- Yield curve construction.
- Pricing and valuation techniques.
- Practical pricing and valuation applications.
- Mark to market - swap portfolio valuation.
- Swap terminations and assignments - fee estimation.
- Off-market swap structures - margin and fixed coupon calculation.
Non-linear Derivatives: Options
- Option characteristics, terminology and market conventions.
- Put and call options – European, American, Asian and Bermudan option styles.
- Intrinsic and time value.
- Put-call parity.
- Global option markets.
- Exchange traded and OTC option markets.
- FX options; interest rate options; equity options; equity index options; warrants.
- Pay-off profiles and their interpretation.
Day 3
Understanding Option Valuation - Option Pricing Models
- Intuitive approach to understanding option valuation and value drivers.
- Option valuation: intrinsic value, time value and ‘moneyness’.
- Option pricing models.
- Volatility estimation.
- Option Risks.
Interest Rate Options
- Caps, floors, bond options and swaptions.
- Pricing techniques: Black Vs. term structure models.
- Cap/floor market conventions, terminology, Price quotation basis.
- European and American style swap options.
- Swap option market conventions, terminology, Price quotation basis.
Currency Options
- Market conventions, terminology, price quotation basis.
- Puts, Calls; European, American styles.
- Hybrid structures: Collars, Range forwards, Participating Forwards, Knock-In Forwards.
- Hedging transaction and economic exposure using FX forwards and options.
- Applications to currency exposure management.
Applications of Derivatives: Managing Interest Rate Risk
- Applications of interest rate derivatives to client risk management strategies.
- Hedging interest rate exposure using:
- Interest rate forwards and futures.
- Short term interest rate futures.
- Bond futures.
- Interest rate swaps.
- Hedging fixed and floating interest rate assets and liabilities.
- Applications of swaps and options in asset and liability management.
- Creating ‘synthetic’ assets and liabilities.
- Asset swaps.
- Exposure management - identifying client risk profiles.
- Selection of appropriate risk management strategies.
- OTC versus listed futures: Basis risk.
- Trading Strategies using interest rate derivatives.
- Bond futures and interest rate swaps as a substitute for fixed income bond trading.
- Implementing directional and relative value strategies using interest rate derivatives.
- Managing interest rate risk with options.
- Hedging interest rate risk with caps, floors.
- Using swap options in interest rate risk management.
- Option trading strategies.
- Directional trading strategies.
- Yield enhancement strategies.
- Costs and benefits of using derivatives in trading and portfolio management strategies.
- Outright hedges (swaps, Futures) versus Option-based hedges.
- Comparative analysis of risk management strategies.
- Advantages/shortcomings of risk management solutions; opportunity gains and losses.
- Tailoring interest rate options to client interest rate risk management strategies.
- The use of options in hedging contingent liabilities.
Case Study 3: Corporate exposure management with interest rate derivatives.
Swap Risks – Market Risk and Counterparty Credit Risk.
- Measurement of swap risks.
- DV01, Delta measures of interest rate risk.
- PV01, Delta.
- Hedging a swap transaction with bonds, futures.
- Counterparty Credit Risk Exposure.
- Credit risk mitigation via Collateral agreement (CSA).
- Credit and regulatory capital requirements.
Day 4
Currency Exposure and Risk Management
- Currency exposure – types of currency risk.
- Transaction exposures.
- Translation exposures.
- Impact of translation FX risk on bank capital ratios.
- Economic exposures.
- Approaches to currency risk management.
- Hedging currency risk with forward FX.
- Rationale for hedging FX risk.
- Difficulties in managing translation risk exposure.
Applications of FX options in currency risk management and trading strategies
- Hedging: Corporate exposure management strategies.
- Collars/Cylinders and Range Forwards.
- Zero cost strategies.
- Trading strategies.
- Volatility strategies.
- Straddles, Strangles and Butterflies.
- Yield enhancement and cost reduction strategies.
- Covered option strategies.
- When and where to use covered option strategies.
Commodity Derivatives
- An overview of commodity markets.
- Livestock, Agricultural and soft commodities.
- Base and precious metals.
- Energy and Alternatives.
- Pricing of commodity derivatives.
- Backwardations and contangos.
- Convenience yields.
- Commodity futures and forward contracts.
- Commodities as an asset class.
- Commodity linked structured products.
Equity Derivatives – Managing Equity Market Risks
- Equity derivatives:
- Futures, forwards and swaps.
- Options.
- Single stock and index derivatives.
- Applications in portfolio management.
- Asset allocation using equity derivatives.
- Hedging strategies using options.
- Portfolio strategies using options.
Credit Derivatives – Managing Credit Risk
- Types and sources of credit risk exposure.
- Default and credit spread risk.
- Concentration risk.
- Sources of credit risk.
- Credit portfolios.
- Derivatives counterparty risk.
- Credit Derivative instruments: Credit Default Swaps (CDS).
- Operational and settlement mechanisms.
- Credit indices (iTRAXX).
- Single name and index (iTRAXX) CDS.
- Using credit derivatives in credit risk management.
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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.
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