Day One
Key Interest Rates & Product Overview
Risk-free reference rates post-Libor and transition / replacement rules
Product overview – forward rate agreements (FRAs) and short-term interest rate futures; interest rate swaps (IRS); asset swaps; bond futures; caps, floors and swaptions
FRAs – mechanics and applications
SOFR futures – mechanics and applications
Interest Rate Swaps (IRS)
Market background – size and trading volume
IRS – mechanics and market conventions
Forward curve construction to mark-to-market IRS (floating leg cash flow projections) – SOFR forward curve construction using FRAs, SOFR futures and IRS with bootstrapping
Case Study 1 – SOFR forward curve construction example
Case Study 2 – Zero coupon OIS discount curve construction example
Interpolation options
Marking-to-market IRS
Case Study 3 – Marking-to-market IRS using SOFR forward curve and zero coupon OIS discount curve from Case Studies 1-2
Case Study 4 – IRS application for banks – hedging a mortgage loan portfolio with IRS
Case Study 5 – IRS application for asset management firm – managing corporate bond portfolio interest rate duration vs benchmark
Case Study 6 – IRS application for corporate issuing a floating rate note – swapping floating cash flows to fixed
Case Study 7 – IRS application for hedge fund – expressing directional and curve views on interest rates
Case Study 8 – Deriving asset swap (ASW) spread and asset swap marking to market
Case Study 9 – Using asset swaps in basis packages with credit default swaps (CDS)
Bond Futures
Bund futures – mechanics, settlement, conversion factors and cheapest-to-deliver
US Treasury Note futures – mechanics, settlement, conversion factors and cheapest-to-deliver
Overview of other major bond futures contracts
Case Study 10 – Using bund futures to hedge interest rate risk on a EUR corporate bond position
Day Two
Option Essentials
Calls and puts; option pay-off profiles; European vs American vs Bermudan options
Option pricing – Black-Scholes, lattice models and Monte Carlo simulation
Implied volatility; volatility skew / smile and term structure; volatility surface – interest rates vs other asset classes
Case Study 11 – Pricing a European call option on a single stock using Black-Scholes, binomial model and Monte Carlo simulation
Case Study 12 – Pricing same call option as in Case Study 11 but now as an American option, using same Monte Carlo simulation as in Case Study 11
Option Greeks – delta, gamma, vega, theta, rho
Case Study 13 – Greeks for European call option in Case Study 11
Case Study 14 – P&L for delta-hedged European call option in Case Study 11 for illustrative share price path with delta rebalancing
Caps & Floors
Case Study 15 – Black-Scholes pricing of caps and floors
Case Study 16 – Cap application for a corporate – Embedding cap in pricing of a floating rate loan to a company to mitigate its (adverse) exposure to rising interest rates
Case Study 17 – Floor application for a bank – Embedding floor in pricing of a floating rate loan to a company to mitigate bank’s (adverse) exposure to falling interest rates
Swaptions
Case Study 18 – Black-Scholes pricing of European payer and receiver swaptions
Case Study 19 – Pricing of Bermudan payer and receiver swaptions
Case Study 20 – Swaption application for a hedge fund – Buying payer swaptions to express view on rising interest rates
Case Study 21 – Swaption application for a European insurance company – Buying receiver swaptions to manage Solvency 2 ratio and sensitivity thereof to moves in swap curve used as main component of discount curve used to present value balance sheet
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