Understanding Interest Rates

SHORT and LONG TERM INTEREST RATES
  • How interest rates vary by currency, maturity, time, credit and liquidity
  • Present and Future Value - discounted cash flows, discounting problems
  • Periodicity and day counts, quotations/calculation conventions and problems
  • Types of interest rate:
    • bond market conventions, assumptions and problems
    • par, zero and forward rates - structured finance case studies
    • discount, fed funds, prime, LIBOR
CHARACTERISTICS OF INTEREST RATES
  • Money rates through to bond yields
  • Term structure of interest rates
  • Creating yield curves
  • Uses of yield curves in financial management
  • Different approaches to measuring yield
  • Deducing the zero-coupon yield curve from the observed yields on coupon bearing treasuries
  • Deducing the forward rate
SHORT and LONG TERM INTEREST RATE PRODUCTS FOR RISK MANAGEMENT
  • Forward Rate Agreements (FRA’s)
  • The SWAP mechanism
  • Comparing SWAPs with FRA’s
  • Quotation, conventions and dangers
  • Hedging and speculation with swaps
  • Asset swaps (investment arbitrage)
  • New issue arbitrage
  • Other applications
  • Risks in linking swaps with other products
  • Exotic SWAP structures
  • SWAP pricing ;
    • Par swaps
    • Off market swaps
MANAGING BOND PORTFOLIO RISK THROUGH DURATION, CONVEXITY AND PRICING STRATEGIES

q Bond yields and pricing
q Establishing the risks of a bond position
q Interpreting and measuring risk with Macauley duration
q Strengths and weaknesses of duration and modified duration
q Using duration to immunise bond portfolios from interest rate risk
q Risks in duration and convexity
q Using the term structure of interest rates for cash flow matching

Risks & Benefits Involved with Forward Markets and Contracts

THE KEY CHARACTERISTICS OF FORWARD CONTRACTS
  • The Forward Market
  • Pricing and valuation
  • Forward products
  • FRA’s, Swaps
  • Commodity
  • Foreign Exchange
  • FX arbitrage problem
HEDGING RISK WITH FUTURES CONTRACTS
  • Overview of the futures markets and the exchanges
  • Margining futures positions, margin accounts
  • Settlement of contracts: delivery vs. cash
  • Key differences between futures contracts and forward contracts
PRICING & VALUATION OF S.T.I.R. FUTURES CONTRACTS
  • Spot and money rates to futures
  • FRA’s and SWAP pricing
  • Liquidity of hedges
  • Stack vs. strip hedges
BOND FUTURES CONTRACTS
  • Cash and carry arbitrage
  • Reverse cash and carry arbitrage
  • Futures rates and implied forwards
  • Basis point values
  • Duration-based hedge ratios

Workshop Session: ACTIVELY TRADING FUTURES

Options – Introduction to the Characteristics of Options and Option Theory

DEFINING CHARACTERISTICS OF OPTIONS & THE BASIC EUROPEAN OPTION THEORY
  • Valuing an option - strike price, time to expiration, current spot market price, interest rates, volatility of the spot price
  • Black-Scholes pricing models and variations
  • Put/Call parity - the building blocks
  • Option sensitivities - delta, gamma, vega, rho, theta and phi
  • Exchange traded vs. OTC options
SWAPTIONS - OPTIONS ON SWAPS
  • Extending options to interest rate products
  • Features, benefits and risks
  • Interest rate risk management with swaptions
  • Case studies: practical applications

Using Bond Futures and Options in Portfolio Management

A Workshop: Practicalities of using Futures and Option Strategies

Successfully Integrating Interest Rate Techniques and Hedging Strategies into your Current Financial Portfolios

PROFITABLE APPLICATIONS OF INTEREST RATE CAPS AND FLOORS
  • Concepts, definitions and characteristics
  • Quotation and valuation
  • Caps as a series of put options of a hypothetical debt security
  • Floors as a similar series of call options
  • Applications in financial management
EFFECTIVELY USING INTEREST RATE OPTIONS TO HEDGE RISK
  • Combination of caps and floors
  • Cap-floor-swap parity
  • Trade-offs between caps, collars, and swaps in hedging risk
  • Comparison of a partial swap vs. full cap

Workshop Session: ENHANCE YOUR EXPERTISE BY CREATING AND EVALUATING STRUCTURED PRODUCTS

  • Using interest rate derivatives and hedging strategies in various simple to complex real-life situations
  • Analysing the decision making process
THE APPLICATION OF INTEREST RATE DERIVATIVES IN FINANCIAL ENGINEERING
  • Structured products - what, who and why?
  • Reverse floaters
  • Superfloaters
  • Leveraged swap linked notes
  • Embedded caps, floors and swaptions
RISKS ASSOCIATED WITH STRUCTURED PRODUCTS
  • Liquidity considerations – what is liquid
  • Hedging products in the futures markets
  • Identifying the product characterisitcs
  • Overview of Value at Risk and case studies of major losses
VALUE-AT-RISK ANALYSIS
  • The various forms of RISK in Financial Markets
  • The European Union Capital Adequacy Directive (EU CAD) and the Basle Agreements
  • Understanding the underlying principles of VAR
  • Different models of VAR
  • Applying VAR in practice and the drawbacks to the VAR approach
  • How valuable is the VAR approach in controlling risk?
  • Case Studies: VAR and major losses
  • The 21st Century challenge in risk management: benefits of machine power combined with human common sense Understanding the underlying principles of VAR