Pricing and Using Swaps and Interest Rate Options under the New Market Paradigms

Duration:
3 days
Location:
Prague, NH Hotel Prague
  • Recent Developments in Swaps Markets
  • EMIR and other OTC Market Regulations
  • The Move form Libor to OIS Discounting
  • Collateralization and Multi-Curve Pricing
  • Non-Generic Swaps and Option-Embedded Swaps
  • Caps, Floors and Swaptions
  • Practical Applications of Swaps and IRO's
  • Risk Management under the New Regulations
A three-day, practical course on OIS-discounting, multi-curve pricing, trading, clearing, applications and risk management under the new OTC derivatives regulations

The purpose of this seminar is to give you a good understanding of the mechanics, pricing and applications of generic as well as more advanced swaps and of swap-related option structures.

We start with a general introduction to swaps and related options, and we discuss recent market and regulatory developments, including the introduction of the EMIR in Europe and the Dodd-Frank act in the U.S.

We then turn to look in more detail at interest rate swaps. We give a thorough explanation of how swap are traded and cleared, and how they can valued consistently according to "the new paradigms" of OIS discounting and multiple curves with and without collateral agreements. Further, we explain how to calculate and interpret risk analytics such as dollar duration and key rate duration, and we give practical, real-life examples of the uses of interest rate swaps in risk management.

On day two, we start with introduction to currency swaps. We explain how they are priced according "the new paradigm". We explain the importance of the so-called basis swap spread. We present and explain practical examples of applications of currency swaps in Treasury and Risk Management.

Further, we examine a number of more advanced swap structures and their related option instruments. We also look at structures with embedded option features such as "Cancellation Swaps".

On day three, we present and analyze a number of swap-related options, including Caps, Floors, and Swaptions. We also explain how the instruments are priced using OIS discounting in a multi-curve environment, and we demonstrate how they can be applied effectively in practical Treasury and Risk Management.

Finally, we explain how the risks of a swap book can be managed. We explain and demonstrate how interest rate risk and FX risk can be hedged using FRAS and futures. We also explain and illustrate how counterparty risk can be assessed and managed in compliance with EMIR and other regulations.

09.15 - 12.00 Recent Developments in Swaps Markets

  • Market Developments after the Crisis
  • EMIR and other OTC Regulations

Interest Rate Swaps

  • Types, Mechanics and Cash Flows
  • Standardization, Trading and Clearing Swaps
  • Swap Pricing: The New Paradigms
    • Problems in using Libor as the discount rate
    • Moving to OIS discounting
    • Single-curve vs. multiple curve approaches
  • Swap Curve Construction without Collateral
    • Case of single IRS
    • Taking the TS basis into account
  • Swap Curve Construction with Collateral
  • Practical Pricing and Valuation Examples
  • Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Interest Rate Swaps (Continued)

  • Risk Analysis
    • Dollar duration
    • Key rate duration
    • Value-at-Risk
  • Applications of Swaps
    • Creating synthetic cash flows
    • Cash flow and fair value hedges
    • Using swaps to manage interest rate risk of bond portfolio
    • Using swap overlay strategies in ALM
    • Using macro swaps to hedge banking book
  • Practical Examples
  • Small Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Currency Swaps

  • Overview of Currency Swap Structures
  • Decomposing Currency Swap Structures into Building Blocks
  • Pricing Currency Swaps as Series of Long-dated Forward Contracts
  • Liquidity Issues and the Basis Swap Spread
  • Swap curve Construction
    • Case of CCS without collateral
    • Case of collateralized swaps in single currency
    • Case of collateralized swaps in multiple currencies
  • Pricing and Valuation Examples
  • Applications
  • Risk Analysis
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.00 Non-Generic Swaps

  • Amortizing Swaps and Accreting Swaps
  • Forward Starting Swaps
  • Arrears Reset Swaps
  • Constant Maturity Swaps
  • Yield Curve Swaps/Basis Swaps
  • Mark-to-Market Swaps
  • Differential Swaps
  • Overnight Index Swaps
  • Deferred Coupon Swaps
  • Stepped Coupon/Ratchet Swaps
  • Total return swaps
  • Examples of Applications of Non-Generic Swaps
  • Cases and Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Swap-Related Options and Option Embedded Swaps

  • Interest Rate Guarantees, Caps and Floors
    • Pay-off profiles and valuation (overview)
  • Swaptions
    • Receiver/payer swaptions
    • European, American, Bermudan types
    • Pay-of profiles and valuation (overview)
  • Option Embedded Swaps
    • Cancellation swaps
    • Extendable swaps
  • Applications (examples)
    • Hedging loan with swap, cap or collar
    • Hedging contingent interest rate exposure with swaptions
    • Call monetisation with swaptions
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Risk Management of the Swap Book

  • Managing Interest Rate Risk
    • Hedging with FRAs, ED futures and bond futures
  • Managing FX Risk
    • Hedging wit currency forwards and options
  • Calculating and Managing Value-at-Risk of the Swap Book
  • Measuring and Managing Counterparty Risk
    • The new regulatory requirements
    • Moving to centralized clearing
    • Calculating current and potential future exposure
    • Netting and collateral management of non-cleared swaps and IROs

Evaluation and Termination of the Seminar

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