The Banking and Corporate Finance Training Specialist

Advanced Interest Rate

Derivatives

This course can be presented in-house for you on a date of your choosing

Course Overview

This programme has been designed to provide a thorough overview of interest rate derivatives products, pricing, risk management and applications. We will use real life

case study examples to illustrate the techniques and strategies that are used by both “buy side” and “sell side”.

Participants will require laptops with MS Excel for the exercises and case studies.

The broad objectives of the programme are:

To provide a complete understanding of the properties and risk profiles of interest rate derivative products.

To provide participants with a thorough understanding of the applications of interest rate derivatives so that they have the ability to advise their clients on strategies

that may be used to meet specific hedging and trading requirements. To provide participants with a thorough understanding of pricing techniques used in

interest rate derivatives. This will give participants a good understanding of whether

prices quoted are fair. To provide participants with a thorough understanding of the risk management

processes and techniques used in interest rate derivatives. This will allow participants to explain risk reward expectations to investors and traders and better manage risks in their own portfolios.

To provide participants with a thorough understanding of the trading and hedging strategies and techniques used in interest rate derivatives. This will allow

participants to match products to their market expectations and risk profiles. To explain to participants how collateral management works through the process of

VaR, marking positions to market and margin management. This will give prime

brokers a better understanding of the role of collateral in risk reduction.

Day 1

A short recap of the properties and risk/reward profiles of interest rate derivative products? Derivative Products

Futures and Forwards STIR Futures

Bond Futures Forward Rate Agreements (FRAs)

Options

Interest Rate Options on: Swaps – Swaptions

Short Term Interest Rates Caps and Floors Options on STIR and Bond Futures

Swaps Interest Rate Swaps

Currency Swaps Overnight Index Average Swaps

Basis Swaps Inflation Swaps

Course Overview

Course Content

Course Content

Exercise for Module 1 Participants will be asked to explain the properties and risk reward profiles of a

series of interest rate derivative products.

Who might use interest rate derivatives and why? This module examines the uses of the products by both traditional fund managers and hedge funds.

Derivative Products STIR futures and FRAs

Used by hedgers to change short term interest rate risk from fixed to floating or

vice versa Used by macro hedge funds to speculate on the future direction and level of short

term interest rates Bond futures

Used by fund managers to manage duration risk and hedge against future changes

in the shape of the government yield curve Used by macro hedge funds to speculate on future direction and level of long term

interest rates and the shape of the yield curve Interest Rate Options

Used by companies, traditional fund managers, banks and hedge funds for:

Hedging of interest rate risk Directional trading

Portfolio hedging Volatility trading Income enhancement

Interest Rate Swaps Used by companies, traditional fund managers and hedge funds for:

Hedging of interest rate risk Directional trading Portfolio hedging

Curve trades Asset and liability management

Inflation swaps Used by companies to hedge against future inflation risk To trade future expected levels of inflation

Asset swaps Used by investors to access floating rate returns from fixed rate securities

Exercise for Module 2 Participants will be provided with a series of market expectations and trade

criteria and be asked to choose an interest rate derivative product to use, giving their reasons and expected outcomes over a range of interest rates at

maturity.

How are interest rate derivatives priced? This module examines pricing of the products. Futures contracts by a combination of

Supply and demand in the market Theoretical arbitrage pricing by buying the long interest rate

Selling the short interest rate Amortizing the surplus or deficit cash flows over the contract period By deriving forward rates from the interest rate swaps curve

Options using an option pricing model which requires inputs for:

Long and short term yield curves Interest rate price volatility

Time to maturity

Exercise for Module 3

Participants will be provided with a set of interest rates and volatilities and will be asked to price various products. For this exercise participants

will be given a pricing model for options but will be expected to build their own pricing model for the Delta 1 products.

Day 2

How are interest rate derivatives risk managed? Delta 1 products

VaR

Duration, convexity and DV01 Default risk, recovery rates, credit spreads and CS01

Options Delta and gamma silos for underlying interest rate risk Vega ladders for volatility risk

Theta for the impact of time decay

Exercise for Module 4 Participants will be provided with a set of interest rates, credit spreads and volatilities and will be asked to project the expected profit or loss

(risk) for various products as a result of changes in market conditions. For this exercise participants will be given a risk analytics programme

for options. For Delta 1 products they will expand the model that they built in Module 3 to incorporate “what if” scenario analysis.

Trading and hedging strategies. This module discusses how to choose a strategy to fit a market expectation.

Interest rate swaps Interest rate directional trades

Carry trades Steepeners and flatteners Butterflies

Hedging interest rate risk Converting assets and liabilities from fixed rate to floating rate

Options Directional trading Volatility trading

Spread trading Income enhancement

Exercise for Module 5 Participants will be provided with a series of market expectations and

trade or hedge criteria and be asked to choose a strategy to use, giving their reasons and expected outcomes over a range of interest rates at

maturity.

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+44 (0)20 7387 4484

Life cycle of a trade and collateral management including examples of mark to market. This module provides an in-depth analysis of risk and collateral

management to ensure that participants understand how risk is reduced. Trade execution

Request for quote from the buy-side

Price construction from the sell-side Mark to market for futures and interest rate swaps

Changes in interest rates Passage of time

Options

Change in interest rates Changes in volatility

The passage of time

Exercise for Module 6

Participants will choose one of the strategies from Module 5 and calculate the VaR and initial collateral requirement and haircut and then execute the

strategy. They will then mark the strategy to market and manage the collateral over these two marks. One of the marks will be for a profitable market

movement and the other for a losing market movement. They will then close the trade out and calculate the final profit or loss and manage the close out of the strategy and the return of the collateral.