Course dates
This 5-day, comprehensive training workshop is designed to help a wide range of delegates to increase their skills in the various applications of derivatives products, as well as their pricing, risk management, and structuring.
The workshop focuses on a complete product range in the equity, foreign exchange, commodities, interest rate, and credit markets including:
- forwards,
- contracts for differences,
- futures,
- swaps,
- options,
- caps,
- collars,
- and swaptions.
With extensive Excel and Bloomberg exercises and applications, this workshop is designed to provide practice to thoroughly master derivatives topics and develop desk-ready skills.
Course Overview
The workshop focuses on the more liquid international markets; however, there is some time allocated to discuss the particular characteristics of derivatives products in less liquid and emerging markets. Globalisation of markets is rapidly spreading information and structuring technology, reducing regulatory constraints, and expanding market participants’ appetites over broader regions of the world and it is envisioned that, although some local characteristics will remain, much of the main thrust of derivatives products will evolve along lines already seen in liquid markets.
Classroom Methods
The workshop comprises discussions, short problems and exercises, and short cases. Current market topics are brought to real life through extensive Excel and Bloomberg exercises and examples. Only a minimal amount of calculus knowledge is required in order to master the numerical analyses and examples in the workshop.
Target Audience
The target audience includes a variety of bank treasury markets professionals; derivatives traders, marketers, and structurers; and institutional investors and finance professionals at corporations that must know how to price, risk manage, and structure a wide range of derivatives products.
Participants are required to bring a laptop computer with a full install of MicroSoft Excel, including all add-in Data Analyses functions. Models and exercises will be distributed on a CD or USB stick to participants.
Day 1
Module 1: Introduction and Overview of Derivatives Products and Markets
- The evolving need for derivatives products in today’s markets
- Summary review of similarities and differences of various derivatives products: forwards, futures, swaps, and options
- The challenges to pricing and risk managing derivatives
- Current developments in major equity, currency, interest rate, and commodities derivatives markets
- Review of major worldwide market movements in prices, rates, and volatilities
- Current market conditions that are impacting the structure, price, and risk management of derivatives
Module 2: Modelling of Spot Price and Rate Movements
- Understanding continuous time finance tools used in derivatives models: discount rates, volatility, and correlation
- Estimating, interpreting and trading volatility and correlation
- Traditional drift and shock terms in the Black-Scholes-Merton world
- The impact of risk neutrality on the drift term
- The impact of using the Gaussian distribution for the shock term
- Relating volatility to the shock term
- Understanding standard log-normal diffusion models and their limitations
- Discrepancies of Gaussian model with observed data and the “fat tails” or kurtosis problem
- Understand the rationale for a volatility surface: decomposition into term structure and cross-strike vol smiles or skews
- Time calibration of drift and shock terms
- Volatility of volatility
- Including jump processes and mean reversion parameters
- The impacts of building multi-factor models and correlations amongst factors
- No-arbitrage calibration of complex models to fit or price traded market instruments
- Excel exercises
Module 3: Pricing and Risk Managing Equity, FX, and Commodity Forwards and Futures
- No-arbitrage pricing of equity, FX, and commodity forwards and futures
- Settlement arrangements for various types of forwards and futures
- Understanding price, counterparty, liquidity, accounting, tax, legal, and operating risks in forwards and futures
- Understanding and calculating differences in pricing and institutional applications between forwards and futures
- Static and dynamic hedging strategies for managing risks in forwards and futures positions
- Excel exercises
- Short Case Studies: Using advanced and innovative equity, FX, and commodity forwards in risk/exposure management or structured investment strategies
Day 2
Module 4: Review of Options Trading and Combinations Payoffs
- Review of the development of putcall- forward parity and no arbitrage implications
- Risk reversals and pricing vol skews
- Horizontal option spreads: strategic uses of various structured call and put spreads
- Volatility positions: straddles, strangles, butterflies, and other structured positions
- Vertical positions: time spreads and vol term structure positions
- Excel exercises
- Short Case Studies: Using advanced and innovative equity, FX, and commodity options in risk/exposure management or structured investment strategies
Module 5: Option Pricing I – Constructing and Using Replicating Portfolios
- Objectives of replicating portfolios
- Setting up and calibrating replicating portfolios for options and underlying securities combinations
- Risk-free interest rate pricing from replicating portfolios
- Numerical procedures pricing techniques from replicating portfolios
- Dynamic replication/delta hedging from replicating portfolios
- No-arbitrage pricing of options from replicating portfolios
- Excel exercises
Module 6: Option Pricing II – Analytical Formulas in Continuous Time Stochastic Calculus
- Understanding and using Markov processes
- Continuous time stochastic processes
- Understanding and using Itô’s Lemma
- The lognormal process in the Itô world
- Lognormal distribution of equity, FX, and commodity prices
- Concepts underlying the Black – Scholes – Merton differential equation
- The original Black – Scholes pricing formula and its assumptions/limitations
- Analytical models beyond the limitations and assumptions of Black – Scholes
- Excel exercises
Module 7: Option Pricing III – Numerical Procedures and Non- Standard or Exotic Options
- Cox – Rubenstein and Jarrow – Rudd binomial tree techniques
- Trinomial trees, lattices, and finite differences models
- Building in rational early exercise in American-style options through tree models
- Modelling dividends on equities, yields on FX, and convenience yields on commodities
- Constructing Monte Carlo simulations running Visual Basic to achieve ultimate flexibility
- Pricing and hedging binary and digital options
- Pricing and hedging average rate (Asian), contingent (knock-in and knock-out) options, basket options, and forward start options
- Pricing compound, chooser, look back, quanto, shout and other currently used exotic structures
- Excel exercises
- Correlation derivatives and quantos
- Short Case Studies: Pricing options on indices, currency options, commodity options, and options on futures
Day 3
Module 8: Options Price Risk Management
- Defining and understanding various option price sensitivities (the “Greeks”)
- Delta hedging
- Understanding relationships amongst delta, gamma, theta, rhos, and vega
- Optimisation of simultaneous delta, gamma, and vega hedging using linear programmes
- Relationship of hedge parameters to Taylor series expansion terms
- The realities and slippages of hedging strategies
- Scenario analyses
- Portfolio insurance
- Excel exercises
- Short Case Studies: Option price risk management exercises
Module 9: Review of Interest Rate Derivatives – Markets, Concepts, and Tools
- Overview of current developments in major interest rate markets
- Central bank actions and impacts on short- and long-term rates
- Movements and volatilities of interest rates, yields, and bond prices
- Log linear and cubic yield curve interpolation techniques
- Bond cash flows and price sensitivities
- Excel exercises
Module 10: Modelling Standard Interest Rate Movements and Processes
- Applications of traditional drift and shock terms in the Black-Scholes- Merton world for interest rates
- Martingales and measures
- Alternative choices for and changing the numeraire in risk neutral pricing
- Jump processes and mean reversion parameters
- Standard market models: Black’s model for interest rate caps, floors, bond options, and swap options
- Excel exercises
- Price risk management for interest rate derivatives
- Short Case Studies: Interest rate option structures and applications
Module 11: Interest Rate Zero Curve Bootstrapping Techniques
- Calculating discrete and continuous compounding zero rates from quoted yields
- Converting discount factors into comparable yields
- Calculating forward rates from zero rates and discount factors
- Pricing bonds with zero rates and factors
- Arbitrage opportunities with zero and yield pricing
- Excel exercises
Module 12: Libor Forwards and Futures
- Pricing and using Libor forward rate agreements
- Marking-to-model Libor forwards and price sensitivities
- Hedging forwards with money market transactions
- Hedging forwards with Libor futures
- Conventions and rules in Libor futures markets
- Convexity adjustments for Libor futures to match forward rates
- Tailing Libor futures hedges of Libor forwards
- Excel exercises
Day 4
Module 13: Interest Rate Swaps
- Interest rate swap definitions, conventions, and trends
- Pricing swaps as geometric averages of expected Libor forward rates
- Pricing swaps with zero rates and discount factors
- Pricing amortising, step-up coupon, stub-period, forward start, and other structured swaps
- Structuring and pricing mismatch cash-flow swaps
- Basis swaps
- Marking-to-model existing swaps in changing market conditions
- Excel exercises
Module 14: Swap Bid-Ask Spreads and Credit Risk/Returns
- Understanding the nature of credit default and swaps
- Estimating probably expected replacement costs from credit defaults
- Forecasts of default probabilities and loss-given-default for swap counterparties
- Pricing returns on credit risks into swap spreads
- Credit-enhancement for interest rate swaps
- Credit risk considerations in nonstandard swap structures
Module 15: Libor Caps, Floors, and Collars
- Libor caps, floors, and collars definitions, conventions, and trends
- Building, calibrating, and using Black’s model for pricing Libor options
- Using Black’s model to interpret broker-quoted flat volatilities
- Converting flat vols quotes into forward or time-vector volatilities
- Modelling term structure of vols using Nelson-Siegel function
- Modelling volatility smiles and skews using parabolic parameters
- Creating and interpreting volatility surfaces
Module 16: Advanced Short- Rate and Term Structure Models
- Equilibrium and no-arbitrage models
- Understanding the Ho-Lee and Hull-White and related models
- Using Monte Carlo simulations and calibrated trinomial trees for advanced models
- Using multi-factor models
- Review of Heath-Jarrow-Morton
- Review of the Libor Market Model
- Calibration and practical applications
Module 17: Structured Interest Rate Derivatives Applications, Pricing, and Hedging
- Constant maturity derivatives
- Libor averaging and in-arrears structures
- Mismatch payoffs
- Barriers, knock-outs, and knock-ins
- Quanto interest rate derivatives and other exotic structures
Day 5
Module 18: Review of the of the Credit Derivatives Market
- Need for credit derivatives today
- Understanding risk and returns on credit
- Evolution of credit derivatives markets and products to present day
- Major users of credit derivatives and their roles in market development
- Assessing the size of the market in terms of capacity and liquidity
- Recent events and the implications on the market
- The impact of the “Big Bangs” in 2009 and 2010 on convention standards
- Future potential of credit derivatives market
Module 19: Characteristics of Credit Risk that Drive Credit Derivatives Markets
- Definitions of credit risk, credit events and ISDA standardisation
- Returns on credit risk, credit spreads, and risk free rates
- Credit spreads versus corporate spreads
- Interpreting credit spread and credit forward curves
- Exposure to credit risk in bank loans, bonds, derivatives, and other contractual arrangements
- Measuring credit losses from credit movement and defaults
- The role of asset swaps in assessing credit spreads and risks
- Expected and unexpected credit loss
- The concepts of probability of default (PD), exposure at default (EAD), loss given default (LGD), and credit correlation
- The linkage of PD, EAD, and LGD to credit spreads
- Building credit loss distributions using models and Excel simulations
- Pricing and structuring credit default swaps
- Risk management of credit default swaps
- Excel Exercises
Module 20: Measuring Credit Risk Parameters
- Historical (real world) default probabilities
- Credit rating and scoring
- The role and limitations of major credit agencies’ ratings
- Currently available rating agency default intensities and migrations
- Estimating recovery rates and LGD from real world experience
- Estimating default probabilities from current market data
- Real-world versus risk-neutral default probabilities
- The construction of the fundamental Merton model
- Using equity prices to assess PD, LGD, and correlation
- Developing Excel simulations to price credit risk within this framework
- Connection between credit, share prices and volatility
- Overview of copula models and their applications
- Advantages and disadvantages in various types of copula approaches
- Excel Exercises
Module 21: Credit Portfolio Risk Management Techniques and Limitations in Practice
- Benefits and challenges of active credit portfolio risk management
- Integration of products and strategies used in active credit portfolio risk management
- Applying portfolio theory to credit risk management
- Structuring alternatives:
- Collateral and margining
- Netting arrangements
- Downgrade triggers
- Early termination rights
- Using credit default swaps to manage and/or securitise credit risk
- Credit derivatives for optimizing balance sheet use and portfolio diversification
- CDS and CDO product strategies in portfolio management
- Successful use of credit derivatives to optimise hedged bank loan portfolios
- Credit spread options
- Mitigating cross-border risks with credit derivatives
- Comparing and contrasting credit swaps and securitisation
- Credit derivatives as an alternative to the syndicated loan market
- Short Case Studies: Structuring and executing CDS under the new Big Bang Conventions
Module 22: CDO Structures for Issuers and Investors
- Latest developments in the CDO market
- Structural variations in CBOs and CLOs
- Asset Backed Securities (ABS) and Trust Preferred CDOs/CBOs
- Synthetic and Hybrid CDO
- Index CDO products
- CDO Squared and other structured variations
- Pricing and structuring CDOs
- Using standard models to value CDOs and imply correlation skews
- Rating CDOs
- How default correlation effects CDO tranche valuations
- Analyses of specific terms sheets to determine issuer and investor objectives, how created, and advantages/disadvantages
- Investor CDO trading, hedging, and arbitrage strategies
- Understanding limitations in the use of credit derivatives
- Review of the famous (or infamous) Goldman Sachs ABACUS Synthetic CDO
- Short Case Studies: Structuring and pricing cash sale and synthetic CDOs
Module 23: Implementing Successful Strategies for Profitable Trading, Hedging and Arbitraging of Credit Derivatives
- Identifying the optimal dealing methods for credit derivatives:
- Identifying and understanding motivations of key players
- Assessing the role of the interdealer broker
- Monitoring the trends in the market
- Using credit derivatives for:
- Hedging default risk
- Hedging a loan portfolio
- Hedging downgrade risk
- Implementation of proprietary trading methods
- Using credit derivatives to hedge interest rate risk and equity risks
- Taking advantage of arbitrage and mis-pricing opportunities
- Managing the risks: liquidity, basis, residual and correlation risks
Course Summary and close
Prague Hotel, Prague, Czech Republic
This programme takes place on a non-residential basis at a local hotel in Prague. 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.
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William Allen
William Allen was previously a senior associate consultant with Seabrook Associates in Boston, Massachusetts. Prior to that he worked with J.P. Morgan in various securities and derivatives trading, arbitrage, hedging, and marketing activities in London and New York.
He pursued MBA and doctoral studies in international banking and capital markets at the Harvard Business School.
William received the Elijah Watts Sells Award and the John S. Glenn Gold Medal for outstanding performance on the Certified Public Accountants (CPA) examination while he was with Ernst and Whinney, an international accounting firm.
At the same time, he was awarded the Robert Beyer Bronze Medal for outstanding performance on the Certified Management Accounting (CMA) examination. Mr. Allen also earned the professional designation of Chartered Financial Analyst (CFA) while serving as the chief financial and investments officer of Rhodes College.
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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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Course dates