Introduction to Derivatives for Credit Staff

The objective of the course is to provide a clear overview of the range of derivative products. It seeks to explain the complex derivative products using building blocks of the basic financial products.

The course explores how the bank’s clients could use derivatives to mitigate equity, interest rate, foreign exchange and credit risks.

Course Content:

Day One

Introduction
 Building blocks: Forwards, Futures, Swaps and Options
 Hedging Tool
 Speculative Use - a real issue
 Structuring Tool

Exercise: To calculate the forward interest rate and forward exchange rate for currencies

Forward Markets
 Principles of forward pricing
 FX forward market
 Currency Risk mitigation using FX forwards

Exercises:
1. A coal trader who sells in US$ and his costs are in Indonesian Rupiah will be able to hedge using FX forwards.

2. A German auto-manufacturer sells in Euro and pays for Steel in US$ and the participant will be given numerical examples on the appropriate Forwards to purchase/sell.

Financial Futures
 Definitions
 Terminology
 Standardisation of Contracts
 Interest-rate, bond, stock index and currency contracts
 Physical delivery vs Cash Settlement
 Margin Accounts - the mechanism

Exercises used to compare the futures price with that obtained by the forward prices quoted in the market.

Swaps
 Concept of swaps
 Interest rate Swaps
 Currency Swaps
 Equity Swaps
 Applications of swaps

Exercises: A number of examples of Companies given where they swap their ability to raise funds in a market they have an inherent advantage with the need for funds as required by their business.

Participants will be required to draw schematics and calculate all in cost for all parties involved in a swap transaction. The concept of structuring swap deals which are win-win for all will be introduced through these exercises.

Day Two

Options
 Types: European or American
 Concepts and Terminology
 Importance of Time Value
 Components of Time Value
 Value and Profit profiles
 Option Pricing - limitations of Black Scholes model
 Volatility and its effects

Caps, Floor and Collars
 Caps - to be used for limiting interest rate risk
 Floors - normally used to offset cost of cap
 Collars - in particular Zero Cost Collar
 Combinations of Swaps and Caps
 Combinations of Options and Caps/Floors
 Delayed Start Caps/Floors

Exercises: A number of exercises are envisaged in this section:

1. Calculation of current yield, minimum yield etc when a Company purchases a CAP or a FLOOR and the interest rate movements vary subsequently.

2. The effect of prepayment of Loan where a CAP has been purchased

3. The effect of valuing the derivative products following M&A activity

Workshop Section: To arrive at the best strategy say for a property development company which need to borrow funds given its cash flow requirement. The case study will allow groups to take different roles such as bank and customer so as to understand the risk and mitigants for the various stake holders.

Credit Derivatives
 Principles and Functions
 Types and the market
 Credit Default Swaps
 Terms and Definitions
 Credit events - potential event of default
 Settlement types
 Market conventions
 Applications for Credit Default Swaps
 Financial Crisis - how the CDS market reacted.

Exercises: Participants required to draw schematics and compute total cost including credit in various scenarios.

Credit Analysis & Documentation
 ISDA agreements
 Market and trading conventions
 Separating management of relationship and credit risk
 Analysis of the credit risk of each derivative
 Analysis of financial statements with derivatives stated in the notes to accounts
 Setting lines for FX and Derivatives
 Cross default and other provisions

Other Credit Derivative Products
 Asset Swaps
 Total Return swaps
 Credit spread products
 Credit-linked notes (CLNs)

Delivery:	In house
Category:	Credit Control