Course dates
Course overview
The derivative market started in the 1970s, predominantly to provide bank customers with mechanisms
to hedge their interest rate and FX exposures. Despite the recent economic downturn, organisations
were still concerned about their exposures, and by December 2011, the size of OTC derivatives market was just over US$700 trillion (measured in terms of notional amount outstanding). This represents an expansion of some 18% in the previous 6 months.
To meet the precise requirements of end-users, the derivative markets are still evolving to provide a wide range of innovative structures. This advanced derivatives
course is designed to provide the latest practical and theoretical developments in the structuring, pricing and hedging of OTC derivatives such as swaps and options plus a variety of embedded combinations.
Summary of course content:
- Convexity adjustments for swaps and CMSs
- Correctly valuing foreign assets using cross-currency basis swaps
- How to build your funding cost into your pricing
- Computer demonstration: how to price a Bermudan callable swap
- Computer demonstration: how to price a path dependent structure
Methodology
A range of modelling approaches will be used, such as analytic models, numerical trees and Liborbased simulation. The course will discuss how these approaches may be modified to fit the current market conditions such as volatility smiles, and how the simulations may be calibrated.
Computer-based exercises
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. Some experience with Excel is required for these exercises.
Delegates should bring a laptop with Microsoft Excel for some of the exercises and case studies. A calculator would also be useful.
Who should attend?
- Members of swap desks and other structuring teams
- 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
Course prerequisite
The course assumes that delegates are familiar with basic concepts such as:
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Operations of the cash, FRA, futures and swap markets
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Use of discount factors to fair price swaps
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Basic swap structures
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Basic interest rate option pricing
Supporting publication
Day 1: Brief revision of swaps
Pricing off a futures strip
- Building a discount curve
- Adjusting for the convexity bias
- Fair pricing of a short-term swap
- Demonstrating hedge effectiveness
Computer-based exercise: Price a swap
Derivation of zero coupon discount factors and forward rates
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Brief reminder: Bootstrapping and estimation of forward rates
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When does bootstrapping breakdown?
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Practical issues: interpolation, blending and smoothing
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What represents a “good” curve: An alternative approach
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Building a curve from a sparse market
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Demonstrating blending and smoothing algorithms
Computer-based exercise: Imply the discount factors from a swap curve
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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
Computer-based exercise: Pricing a CMS
Building convexity into swap pricing
Day 2: Asset packaging and a brief revision of IR options
Asset packaging
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Creating different packages: premium, par, discount
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Creating a par maturity package
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What’s really going on?
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Arbitrage between bond and swap valuation methods: the credit implications
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Practical details
Computer-based exercise: Price an asset package
Simple caps and floors
A fundamental knowledge of Black’s model for pricing European-style interest rate options is assumed
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Generic, digital and spread caps
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Floors, collars, forward swaps and put-call parity
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Volatility surfaces and smiles
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Swaps with embedded caps and floors
Computer-based exercise: Price a swap with embedded options
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Taking advantage of the multi-period structure: barriers, choosers and periodic caps
Swaptions
Computer-based exercise: Price an extendible step-up Swap
Structured securities
Day 3: Cross-currency swaps and structured securities
Cross-currency swaps
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CC basis swaps: a building block for CC swaps
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How to value a foreign asset correctly
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Swapping a bond issue: building a tailored CCS
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Creating a foreign asset package
Computer-based exercise: Swapping a foreign bond issue into domestic floating rate
Structured securities
- A very brief overview of the structured securities market
- Description of some of the more common IR and FX structures
Discussion of more advanced modeling methodologies
This section will be supported by computer demonstrations
- Analytic modelling
- Example: Swapping a range accrual note
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Numerical modelling
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Outline: Building an arbitrage-free forward interest rate tree
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Brief discussion on the inclusion of a smile effect
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Using the tree to model a complex security such as a Bermudan swap
Computer-based exercise: Modelling a callable swap
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Simulation
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Building a BGM simulator
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Using the simulation to model a range of complex securities, such as:
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Path-dependent floating notes
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TARNs
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Index amortising swap
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Callable snowball
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Brief discussion on calibration and other techniques
Computer-based exercise: Modelling a structured security
Day 4: Risk management of swap and option portfolios
A fundamental knowledge of IR risk management is assumed
Computer-based exercise: Creating an effective hedge for a portfolio
Computer-based exercise: Building a minimum-VaR hedge for a portfolio
Summary of course
InterContinental Grand Stanford Hotel, Hong Kong, Hong Kong
This programme takes place on a non-residential basis at the InterContinental Grand Stanford 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.
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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
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Course dates