The purpose of this intensive hands-on workshop is to give you a good and practical understanding of techniques for constructing yield curves and for the applications of yield curves in pricing, trading and risk management.
We start with a discussion of "the new paradigm" in yield curve modelling, reflecting the fact that post-crisis most banks have begun to use different curves for discounting collateralized and non-collateralized transactions. We explain the concept of "OIS discounting" and discuss the differences between Libor curves and OIS curves.
We then explain and demonstrate how bond yield curves can be estimated using the Nelson-Siegel-Svensson method (used by the ECB and the Bundesbank). We also look at other methods such as cubic splining, and we explain how credit spreads curves are constructed.
In the afternoon of day one, we give a thorough explanation of how Libor curves can be constructed and applied in a multi-curve framework, showing how cash flow projections and the choice of discount rate depends on i.a. the swap tenor and upon whether the swap is collateralized or not.
On day two, we turn to look at stochastic yield curve models and their applications in interest option pricing. We present, explain and implement the BDT, Hull-White and the Modern Libor Market Models, and we explain and demonstrate how they are used to price caps, floors swaptions and other types of interest rate options. We also explain how to calculate risk analytics for hedging purposes and how yield curves can be used as a tool in advanced interest rate risk management.
Throughout the workshop, you will have the opportunity to work hands-on with the techniques and models on real-life market data.
