Hedge Interest & Currency Rate Exposures

Course review:

DAY 1

Review best practices utilized to identify financial risks and establish effective hedging policies

• Establish framework for identifying, measuring and managing exposure to financial risks
• Review current accounting requirements for calculating realized/unrealized gains and losses and impact in trading and non-trading accounts
• Discuss scope of financial risks and methodologies used for establishing exposure management policies and implementing more commonly used hedging techniques
• Discuss structure of derivatives markets and products, including current regulatory issues

Measuring, reporting and managing exposure to interest rate risks using forward derivative markets and products

• Perform basic yield curve analysis; calculate forward yield curves
• Identify and diagram interest rate risks in corporate debt portfolios
• Price and structure derivatives solutions for managing floating-rate debt using Libor forwards (FRA’s) and IR swaps
• Establish key links between FRA’s and IR swaps
• Discuss financial risks and termination techniques used for IR swap “unwinds”

Managing corporate debt portfolios using options on interest rates

• Price and structure derivative solutions using single and combined option strategies (caps and collars)
• Discuss limitations in pricing options using binomial models
• Discuss widely used options pricing methods and price sensitivities
• Define methods used for estimating volatility

DAY 2

Case Study: You will identify and analyze a corporate debt exposure, structure a series of appropriate derivative solutions and compare hedging results.

Managing corporate investment portfolios using asset swaps and forward starts

• Identify, diagram and label price sensitivities in bond investments to changes in yields
• Diagram and label how market risks on investments portfolios are transformed when hedged using IR swaps
• Review, structure and price asset swaps
• Review, structure and price forward start swaps

Enhancing yields on corporate investments using single and combined option strategies

• Structure, price and graph transformed exposures when combining long bond positions, IR swaps and options
• Graph and label yield enhancement on underlying long bond positions using single and combined option hedging strategies
• Discuss how mark-to-market process effects cost of hedge on non-cash assets and contingent liabilities

Case Study/Options Game: You will identify and analyze corporate debt exposures, structure and price a series of appropriate derivative solutions using an options pricing model and present their team findings.

DAY 3

Establish a framework for understanding how to measure, report and manage currency exposure

• Review structure of foreign exchange markets
• Discuss pricing conventions and quotation systems on FX rates
• Define net exchange position
• Review current revaluation methods and “mark-to-market” process

Hedging foreign currency receivables/payables using forward FX markets and products

• Review interest covered arbitrage hedging and pricing techniques to determine forward FX prices
• Graph and label currency hedges more commonly used by importers/exporters using forward outrights and NDF’s
• Discuss how underlying currency exposures are transformed when combined with OTC solutions

Hedging foreign currency borrowings/investments using cross-currency swaps

• Review structure of cross-currency swaps and discuss common uses for borrowers/investors
• Discuss cross-currency swap pricing techniques

Case Study: You will analyze, structure, price and compare a variety of hedges to address the needs of borrowers/investors in a multitude of different currencies

Hedging foreign currency receivables/payables using options on foreign exchange rates

• Identify, graph and label underlying currency exposures and demonstrate how they are transformed using single and combined options strategies
• Compare advantages/disadvantages between hedging through use of currency forwards vs. options on FX rates
• Team Presentations: In teams, participants will identify, structure and price currency hedges using single and combination option strategies.

Case Study: You will identify and analyze a corporate debt exposure, structure a series of appropriate derivative solutions and compare hedging results.