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

Delivery:	In house
Category:	Advanced Corporate Finance