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 it 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.

Richard Flavell and Euromoney have offered an intermediary-level swaps programme for market participants for over ten 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. The programme is aimed at delegates that are familiar with the broad financial markets, including the basic instruments such as cash, bonds, FRAs, and so on, and who wish to develop a sound working knowledge of the swaps market.

 

The course will cover:

• Descriptions of the basic and advanced swap structures, including why institutions wish to enter into these  products
• How to derive discount factors off cash, FRA, interest futures, and swap markets 
• How to price and value basic IR swap structures using multiple curves
• How to price and value basic cross-currency swaps
• How swap portfolios can be risk managed

 

There are a wide range of realistic computer-based exercises, which may be taken away after the course, to reinforce the learning and to ensure that delegates are ready to apply the course as soon as they return to their institutions. Delegates are expected to have some in-depth experience with Excel, in order to get the maximum benefit from these exercises.

 

 

Who should attend?

• Traders joining a swap desk
• Middle and back office personal
• Derivatives sales
• Risk managers
• Internal audit and other control functions
• Corporate treasurers and other members
  

 

 

Day 1

 
Introduction and Short-term swaps

AM: Broad introduction to the Swaps Market

• Evolution of the Swap Market
• Examples of the concept of Comparative Advantage
• Main swap types
• Market statistics

AM: Short-term Money Market Swaps

• The time value of money and the derivation of cash-based discount factors
•  Estimation of Forward rates and the impact of Interpolation
•  Pricing a FRA
•  Hedging a FRA with a pair of Deposit Futures contracts

                     - Measuring hedge effectiveness
                     - Pricing a short-term swap using a futures strip

          Exercise: Complete the pricing and hedging of the Swap

• Measuring hedge effectiveness
• Outline of the convexity bias

PM: Relationship between generic swaps and the bond market

• Swaps as the arbitrage between cash and bond markets
•  Analysis of the swap spread
• Use of the repo market, and cost of carry model
•  Pricing and hedging of spreadlock swaps

 

Day 2

Medium-term generic swaps

AM: 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

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

AM:  Pricing and Valuing simple non-generic IR swaps

• Three alternative methods for the pricing of par non-generic swaps
• Demonstrating the methods to price:

                     - Forward starting swap
                     - Amortising swap

Exercise: price two non-generic swaps

PM: Pricing and Valuing simple non-generic IR swaps (continued)

• Two alternative methods for the valuation of swaps
• Demonstrating the methods

Exercise: valuation of two non-generic swaps
 

Day 3

 More advanced swaps for Customers
 
AM:Cheap Funding and Asset Packaging

• Swapping a new bond issue into floating rate
• Practical issues
• Two models for repackaging an old issue
• Creation of credit derivatives

                   - How does the CDS market operate

Exercise: Creating an Asset Package

PM: Cross-Currency Swaps

• Basic structure of a CCS
• Cross-Currency Basis Swaps:

                   - Why they are important
                   - An outline how they are priced
                   - Bootstrapping revisited
                   - How to correctly value a foreign asset

• Pricing and valuing non-generic CCSs

                  - Concept of rebalancing a CCS

Exercise: Swapping a foreign bond into a domestic currency

• Long-term FX forwards: pricing and hedging

• Diff and Quanto Diff swaps

 

Day 4

Modern Swap structures

These sessions will outline some more complex swaps, and why customers wish to enter into them:
am Generic Swap structures and related products

• Yield curve swaps

                       - What is meant by a “convexity effect”
                       - Why this is important when pricing swaps

• Cross-market swaps
• Inflation swaps
• Equity swaps
• Volatility swaps
• Credit default swaps
• IR options

               - Caps, floors and swaptions
               - The Black model for pricing
               - Volatility spaces
               - Swaps with embedded options

PM:  Structured securities 
 

• A brief overview of the structured securities market
•  Highlighting some of the more advanced products

                 - Range accruals
                 - Spread products
                 - Sticky floaters
                 - TARNs
                 - Snowballs

• Outline: how to break down into their basic components, and analyse

 

Day 5

 Introduction to swap risk management

AM: Basic swap portfolio risk management
 

• Creating a delta-sensitivity ladder of a swap portfolio 
•  Building an Equivalent Portfolio
•  Hedging a Swap Portfolio
•  Practical Issues of Swap risk management
•  Measuring the VaR for a swap portfolio

Exercise: Creating an effective hedge for a portfolio

PM: Capital and Credit
 

• An outline of the new Basel Accord
•  Measuring counterparty credit exposure
•  How to calculate capital for credit and market risk
•  Impact on Swap Pricing and Trading

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
  • Credit Derivatives
  • London School of Bank Risk Management

Euromoney Swaps Masterclass

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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