Interest Rate Products - Mechanics, Pricing and Applications

Tuesday, December 3

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30

Interest Rates

  • What is interest?
    • What is interest compensation for?
    • How to determine interest rates from risk-free to high-risk
  • Benchmark rates
    • The use of central bank 'risk-free' rates
    • IBOR benchmarks and future reference rates
    • How do central banks control the interest rate environment?
  • Interest rate maths
    • Calculating interest cash flows
    • What conventions does each currency use?
    • Dealing with simple and compound interest
  • Using interest rates to present value future cash flows
    • Which rate do we choose and why does it matter?
  • Exercises:

  • Interest rate calculations
  • Discounting and the choice of discount rate

Debt Markets

  • The role of debt
    • Why and how do companies and governments borrow money?
    • Debt versus equity - the corporate financing choice
    • Issuing debt instruments - the role of the Debt Capital Markets division in a bank
    • Who participates in the debt markets and what is their motivation?
  • Borrowing short-term debt - the Money Markets
    • Understanding the conventions and pricing of money market instruments

12.30 - 13.30 Lunch

13.30 - 17.00

Debt Markets (cont.)

  • Borrowing long-term debt - Bonds
    • How do bonds differ from money market products?
    • Introduction to coupon, price and yield - the way we measure bonds
    • The relationship between price and yield
    • How to we measure the risk of a bond investment?
  • Financing using bonds - the Repo market
    • Using Repos to fund a bond investment
    • Borrowing bonds using Repos
  • Creating a yield curve
    • How do we define a yield curve?
    • What governs its shape and what are the consequences of difference shapes?
  • Exercises:

  • Bond pricing
  • Repo calculations and forward bond pricing

Interest Rate Derivatives

  • From cash markets to derivatives - what changes?
  • The concept of a forward interest rate
    • Why do we need forward rates? Who uses them?
    • How might we develop a pricing approach for forward rates?
  • Derivative products relating to forward rates
    • Description of FRAs and Futures
    • Look at the details of both and contrast differences
    • Understanding the convexity difference between FRAs and Futures

Wednesday, December 4

09.00 - 12.30

Interest Rate Derivatives (cont.)

  • Interest Rate Swaps - switching fixed interest for floating
    • Who uses interest rate swaps and why?
    • Creating synthetic assets using interest rate swaps
    • Bank asset and liability hedging using tenor basis swaps
  • Measuring the risk of interest rate derivatives
    • Managing a derivatives portfolio
    • Defining and quantifying your risk
    • The delta ladder - the risk position for a derivatives trader
  • Exercises:

  • FRA settlement calculations
  • Interest rate swap applications

Interest Rate Options

  • What are the types of options that exist in the interest rate world?
    • Caps, floors and swaptions - how do they each work?
    • Understanding the exercise decision
    • Who uses interest rate options and why?
  • Developing a pricing approach for interest rate options
    • Using the standard Black-Scholes approach - what adjustments do we need to make?
    • Understanding the interest rate volatility surface and why it matters
  • Hedging interest rate options
    • What risk measures do interest rate option traders use?
    • How do you risk manage an option portfolio?

12.30 - 13.30 Lunch

13.30 - 17.00

Interest Rate Options (cont.)

  • Introduction to more complex option types
    • Bermudan options - the right to switch the decision date
    • Spread options - taking a position on yield curve shape
    • Digital options - binary outcomes
    • CMS swaps - not really options, but option-like
  • Exercises:

  • Option pricing
  • Simple option risk management

Interest Rate Exotics and Structured Products

  • The world of interest rate structured products?
    • Who invests in structured products and why?
    • What are the driving forces behind the popularity of certain interest rate investment ideas?
  • Simple interest rate structured products
    • Capped FRNs, Callable Bonds, Reverse FRNs
    • How do the above work and what is the investment idea?
  • More complex products
    • Range accruals, CMS-linked notes, Autocallables, TARNs
    • How do these products work and why are they so popular?
  • Exercises:

  • Analysis of common structured products
  • Callable range accruals

Termination and Evaluation of the Seminar

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