Euromoney Audit Training

Attend this intensive and highly practical 4–day training course and learn how to:

• Derive discount factors off cash, FRA, interest futures, and swap markets.
• Derive implied volatility surfaces from market data.
• Price, value and hedge advanced interest rate swap and option structures, including:
• Bermudan swaptions.
• Callable range accruals.
• Target accrual redemption notes.
• Callable path dependent floating rate notes.
• Convexity-adjusted CMS swaps.

Course Overview

The derivative market started in the 1970s, predominantly to provide bank customers with mechanisms to hedge their interest rate and FX risks. Despite a slight reduction in latter part of 2008, by June 2010, the size of OTC IR market was just under USD480 trillion (measured in terms of notional amount outstanding).

Despite the economic downturn, organisations were still concerned about their exposures to interest rates. In response, the interest rate derivative markets were still evolving to provide a wide range of innovative structures designed to meet the precise requirements of end-users. This advanced derivatives course is designed to provide the latest practical and theoretical developments in the structuring, pricing and hedging of OTC interest rate derivatives such as swaps and options plus a variety of embedded combinations.

Modelling Emphasis

A range of modelling approaches will be used, such as analytic models, numerical trees and Libor-based
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 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.

It is assumed that delegates are familiar with basic concepts such as:

• Operations of the cash, FRA, futures and swap markets.
• Use of discount factors to fair price swaps.
• Basic swap structures.
• Basic interest rate option pricing.

Who should attend

• Experienced members of swap desks and other structuring teams.
• Senior risk managers and risk analysts.
• Corporate treasury.
• Analysts and researchers.
• Fixed income portfolio managers.
• FX managers.
• FX sales.
• 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 delegate profile.

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

• 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.

Computer-based exercise: Imply the discount factors from a swap curve

• 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 interest rate swaps

• Yield curve swaps such as constant maturity swaps.
• Risk management characteristics.

Computer-based exercise: Pricing a CMS

Mismatch swaps

• What are the assumptions underlying the normal floating conventions.
• Violating the conventions.
• In-arrears, average-rate and compound swaps.
• Turbo swaps.
• Convexity adjustment of normal swaps.
• Convexity adjustment of mismatch swaps.
• Convexity adjustment of CMS.

Day 2

Asset packaging & a brief revision of IR options

Asset packaging

• Creating different packages: premium, par, discount.
• Creating a par maturity package.
• What’s really going on?
• Arbitrage between bond and swap valuation methods: the credit implications.
• Subsidisation effects.
• Forward valuing: How to include your cost of funding.
• 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.
• Generic, digital and spread caps.
• Floors, collars, forward swaps and put-call parity.
• Volatility surfaces and smiles.
• Swaps with embedded caps and floors.

Computer-based exercise: Price a swap with embedded options

• Taking advantage of the multi-period structure: barriers, choosers and periodic caps.

Swaptions

• Pricing swaptions.
• Swaption smile spaces.
• Compatibility with cap pricing.
• Swaps and embedded swaptions: Pricing extendible and retractable swaps.

Computer-based exercise: Price an extendible step-up swap

Structured securities

• A very brief overview of the structured securities market.
• Description of some of the more common structures.

Day 3

Modelling structured products with embedded options

Advanced modelling methodologies

• Analytic modelling.

Example: Swapping a range accrual note

Computer-based exercise: Swapping a different range accrual note

• Numerical modelling.
• Outline: Building an arbitrage-free forward interest rate tree.
• Brief discussion on the inclusion of a smile effect.
• Using the tree to model a complex security such as a Bermudan swap How to model a callable range accrual.

Computer-based exercise: Modelling a callable swap

Simulation

• Building a BGM simulator.
• Using the simulation to model a range of complex securities, such as:
• Path-dependent floating notes.
• TARNs.
• Index amortising swap.
• Callable snowball.
• Brief discussion on calibration and other techniques.

Computer-based exercise: Modelling a structured security

Day 4

Risk management of swap and option portfolios

Risk management

• A fundamental knowledge of IR risk management is assumed.
• How do interest rate curves behave?
• Some empirical results.
• Risk management reporting:
• Construction of a delta and gamma reports for different curve movements.
• The concept of an equivalence.
• Construction of a volatility report.
• Hedging swap and option portfolios.
• The use of Taylor’s theorem.
• Delta hedging.
• Delta-gamma hedging.
• Delta-gamma-volatility hedging.
• Assessing hedge effectiveness using shocks and simulation.
• Construction of a theta report.
• Running a portfolio: Funding and other issues.
• Control frameworks.

Computer-based exercise: Creating an effective hedge for a portfolio

• An outline of Value-at-Risk.
• Measuring VaR for a single risk factor.
• Extending this to two, and multiple, risk factors.
• Measuring VaR for a mixed swap/option portfolio.

Computer-based exercise: Building a minimum VaR hedge for a portfolio

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.

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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