Advanced SWAPS

Course Overview: The Aim of this course is to provide participants with the skills and techniques necessary to understand, analyse, assess and utilise the Swaps market. We will address non-generic and exotic swap products, terminology, pricing methodology, risk management and product applications.

By the end of this course, participants will be able to:

• Understand the key concepts of yield curve modelling
• Apply and use interest rate derivatives effectively
• Price and hedge Interest Rate Swaps
• Price Exotic Swaps
• Calculate the risks and rewards of swaps market
• Structure Interest Rate Options into Structured Bonds
• Comprehend the CDS market Methodology Teaching methodology will include discussions, casework, exercises and computer-based exercises

Day One: Broad introduction to the Swaps Market

• Evolution of the Swap Market
• Main uses of Swaps
• Examples of the concept of Comparative Advantage
• Some market statistics Building the Yield Curve
• Zero coupon yield curve approach
• Yield curve construction using a futures strip and par swap rates
• Bootstrapping a curve from market data The Yield Curve applied to pricing swaps Short-term Money Market Swaps
• Estimation of Forward rates
• 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 Exercises: Complete the pricing and hedging of the Swap Demonstrating hedge effectiveness Pricing Non-generic Swaps Generic IRSs and their relationship to bond markets
• Valuing the floating side
• Valuing the fixed side
• Components of the swap spread
• Valuation using forwards method
• Compare with a notional principal approach Pricing simple non-generic swaps using implied forwards
• Forward start, amortising, etc.
• Rollercoaster Exercise: Pricing simple non-generic Swaps Pricing Cross-Currency Swaps
• Pricing and Valuation of Cross Currency Swaps
• Generic and non-generic cross currency swaps
• Cross currency coupon swaps
• Pricing and valuation of cross-currency basis swaps; pricing bias
• Basis point conversion factors; PVBP conversion matrix
• Basis point conversion factors

Day Two: Liability Swaps Single Market Exposure: Interest Rates

• Using company reports to

- Identify and quantify the risks and opportunities

- Identify possible sources of internal or external conflict

• Using derivatives to improve the risk-return trade-off
• Selling it all to the clients – and to their shareholders
• Counterparty credit exposure Case Study: Transportation (British Airways and a European Company) Asset Swaps
• How significant is the business
• Looking at the drivers and spreads
• Using notional principals
• Structuring and pricing methodologies for asset swaps
• Par/par asset swap
• Yield/yield asset swap
• Yield Curve Shift – Z spread analysis Exercise: Valuing an Asset Swap Swap Trading
• How to manage a portfolio
• What risks do you want to run – understanding Value at Risk (VaR)
• Yield curve arbitrage
• Delta neutral curve trading
• Relative value and directional trading strategies Hedging and Arbitrage
• Creating a delta-sensitivity ladder of a swap portfolio
• Building an Equivalent Portfolio
• Hedging a Swap Portfolio
• Practical Issues of Swap risk management Case study: Demonstrating an effective hedge for a portfolio

Day Three: Interest Rate Options - The Greeks

• The volatility trader – how they review their positions
• Delta hedging and its dynamics
• Delta and Gamma
• Rho, Theta, Vega
• Volatility trades – straddles, strangles Case Study: Understanding delta hedging Applications of Interest Rate Options in Structured Bonds
• Concept and Rationale
• Key Structural Features
• Value Aspects
• Capped and Floored Floaters
• Range floaters and leveraged floaters
• Reverse FRNs
• Callable bonds
• European and Bermudan style swap options
• Pricing:
• Black model
• Option Embedded Swaps
• Callable and puttable swaps
• Switchable swaps, accrual swaps
• Applications: structured (callable, puttable)bonds; call monetisation
• Index amortising swaps Case Study: Comparing Caps, Collars and Swaps Advanced Swaps and Options
• Different types of exotic option
• Volatility trades – straddles, strangles
• Volatility and correlation effects
• Inflation swaps
• Pricing and valuing inflation swaps
• Constructing an inflation swap curve
• Applications of inflation swap
• Constant Maturity swaps Case Study: Use combinations to achieve desired view Credit Default Swaps
• Understanding the CDS market
• Pricing a CDS
• Understanding the relationship with Asset Swaps
• Review both Sovereign and Corporate CDS pricing
• The relationships between Credit Spreads
• Reverse engineering a Credit Linked Notes Case Study: An analysis of Structured Products understanding the components