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

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at post@redcliffetraining.co.uk.