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Interest Rate Products - Mechanics, Pricing and Applications

Dates: November 23 - 24, 2020

Price: EUR 1,400

Location: Prague, NH Hotel Prague

Language: English

Lecturer: Mark Taylor

Attend this 2-day training course and learn about:

The nature of interest, interest rate calculations and discounting methods

The scope and structure of the bond market

Bond pricing and risk management

Interest rate derivative products - concepts and technical details

Creating synthetic assets using interest rate swaps

The risk of interest rate derivatives - measuring and managing

The interest rate volatility surface and pricing approaches for interest rate options

Interest rate exotics and structured products, and how they are used by traders and investors

This 2-day course offers a detailed analysis of the interest rate market, the products that trade within it, and how they are used by traders, investors and companies.

On day one, we start with the basics of interest rates - how are they quoted, how are the levels set and what drives movements in rates? We then look at the marketplace for debt products focussing on the details of the money and bond markets. The course will help participants understand how companies, banks and investors use these markets as well as covering the technical details around pricing and risk management.

On day two we move our focus to interest rate derivative products. This section begins with a look at the linear derivative products: FRAs, futures and swaps. We cover the intuitive understanding of these products and the client applications, through to detail on the pricing and risk management. Once we have laid the derivative foundations, we move onto option products, including a look at exotic derivatives. Main option applications will be covered, and participations will be introduced to option pricing and option risk. The course finishes with a look at interest rate structured products, examining some of the investor favourites and asking what makes them so appealing.

Who should attend?
Bank traders, salespeople, structurers
Bank market risk managers, middle office and operations professionals
Investors - institutional investors, fund managers, private traders
Company treasury managers and staff, accountants, risk managers

Course methodology
The course consists of classroom-based training which combines formal teaching of concepts and technical content, with individual and group exercises to reinforce learning points.

Monday, November 23

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30

Interest Rates

What is interest?

What is interest compensation for?

How to determine interest rates from risk-free to high-risk

Benchmark rates

The use of central bank 'risk-free' rates

IBOR benchmarks and future reference rates

How do central banks control the interest rate environment?

Interest rate maths

Calculating interest cash flows

What conventions does each currency use?

Dealing with simple and compound interest

Using interest rates to present value future cash flows

Which rate do we choose and why does it matter?

Exercises:

Interest rate calculations

Discounting and the choice of discount rate

Debt Markets

The role of debt

Why and how do companies and governments borrow money?

Debt versus equity - the corporate financing choice

Issuing debt instruments - the role of the Debt Capital Markets division in a bank

Who participates in the debt markets and what is their motivation?

Borrowing short-term debt - the Money Markets

Understanding the conventions and pricing of money market instruments

12.30 - 13.30 Lunch

13.30 - 17.00

Debt Markets (cont.)

Borrowing long-term debt - Bonds

How do bonds differ from money market products?

Introduction to coupon, price and yield - the way we measure bonds

The relationship between price and yield

How to we measure the risk of a bond investment?

Financing using bonds - the Repo market

Using Repos to fund a bond investment

Borrowing bonds using Repos

Creating a yield curve

How do we define a yield curve?

What governs its shape and what are the consequences of difference shapes?

Exercises:

Bond pricing

Repo calculations and forward bond pricing

Interest Rate Derivatives

From cash markets to derivatives - what changes?

The concept of a forward interest rate

Why do we need forward rates? Who uses them?

How might we develop a pricing approach for forward rates?

Derivative products relating to forward rates

Description of FRAs and Futures

Look at the details of both and contrast differences

Understanding the convexity difference between FRAs and Futures

Tuesday, November 24

09.00 - 12.30

Interest Rate Derivatives (cont.)

Interest Rate Swaps - switching fixed interest for floating

Who uses interest rate swaps and why?

Creating synthetic assets using interest rate swaps

Bank asset and liability hedging using tenor basis swaps

Measuring the risk of interest rate derivatives

Managing a derivatives portfolio

Defining and quantifying your risk

The delta ladder - the risk position for a derivatives trader

Exercises:

FRA settlement calculations

Interest rate swap applications

Interest Rate Options

What are the types of options that exist in the interest rate world?

Caps, floors and swaptions - how do they each work?

Understanding the exercise decision

Who uses interest rate options and why?

Developing a pricing approach for interest rate options

Using the standard Black-Scholes approach - what adjustments do we need to make?

Understanding the interest rate volatility surface and why it matters

Hedging interest rate options

What risk measures do interest rate option traders use?

How do you risk manage an option portfolio?

12.30 - 13.30 Lunch

13.30 - 17.00

Interest Rate Options (cont.)

Introduction to more complex option types

Bermudan options - the right to switch the decision date

Spread options - taking a position on yield curve shape

Digital options - binary outcomes

CMS swaps - not really options, but option-like

Exercises:

Option pricing

Simple option risk management

Interest Rate Exotics and Structured Products

The world of interest rate structured products?

Who invests in structured products and why?

What are the driving forces behind the popularity of certain interest rate investment ideas?

Simple interest rate structured products

Capped FRNs, Callable Bonds, Reverse FRNs

How do the above work and what is the investment idea?

More complex products

Range accruals, CMS-linked notes, Autocallables, TARNs

How do these products work and why are they so popular?