Advanced Interest Rate Derivatives

This course can also be presented in-house via live webinar.

Advanced Interest Rate Derivatives Course Objectives:

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

Course Content

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

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.

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.

Advanced Interest Rate Derivatives Course Summary:

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.

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Discounts

5-6 participants – 20% discount,7-8 participants – 25% discount,Over 9 participants – 30% discount