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Course Calendar Course Calendar

Interest Rate Derivatives

Day One

Money-Market Rates

  • Interest rate conventions and calculations
  • Simple and compound interest, continuously-compounded rates
  • Time value of money and discounting
  • Money-market (LIBOR and Overnight) rates, background to LIBOR controversy
  • The emergence of new benchmark overnight rates and the transition away from LIBOR

Futures and FRAs

  • FRA mechanics and settlement
  • Using FRAs to manage short-term interest rate risk
  • Computing forward rates in a classical world, and briefly on why the calculation fails in reality
  • Eurodollar futures contract details, settlement and margining
  • Using Futures to manage short-term interest rate risk
  • Understanding the Futures/FRA convexity adjustment

Workshop: Hedging corporate interest rate exposure with Eurodollar futures

Understanding Curves

  • Discount curves and projection curves
  • What is the right discount curve for a bank to value its trading book?
  • Computing the four representations of a yield curve: par rates, zeros, the discount curve, the forward (projection) curve
  • Bootstrapping an overnight discount curve
  • Constructing a projection curve from FRAs/futures/LIBOR swaps
  • Interpolation techniques
  • Introduction to interest rate risk, DV01 and bucket DV01s by perturbation

Workshop: Take a par overnight curve and derive the discount curve, forward curve and zero-coupon curve; price swaps; compute bucket-DV01 risk vector

Workshop: Build a forward-rate zero curve from depos, Eurodollar futures and LIBOR swaps

Interest Rate Swaps

  • The background to swaps, today’s market and applications
  • Quoting swaps – absolute rates or spreads?
  • Market conventions, structures and terminology
  • Intuitive swap pricing, PV01
  • Close-outs, unwinds and assignments
  • LIBOR swaps vs. OIS
  • The modern multi-curve framework, tenor basis and term premiums

Day Two

Interest Rate Swap Applications

  • Swaps in funding, new issue swaps
  • Asset swaps, par/par and market value structures
  • ASW vs. CDS spreads
  • Trading swaps – curve trades
  • Hedging short-end risk: with interest rate futures
  • Hedging long-end risk: with swaps, with cash bonds, with bond futures

Workshop: Price a swapped new issue

Workshop: Price an asset swap (par/par and MV) of a corporate bond

Bond Futures

  • The 10yr Bund Future on Eurex – mechanics and settlement
  • Conversion factors, implied repo and the CTD
  • Basis trading
  • Bond futures DV01

Cross-Currency Swaps

  • Cross-currency swap mechanics, comparison with FX swaps
  • The CRX basis and its drivers
  • Applications of CRX swaps
  • CRX swaps and credit exposure
  • Doing it properly: CRX-adjusted discount curves

Workshop: Pricing a cross-currency new issue


Day Three

Docs, Credit and Settlement

  • OTC vs. exchange-traded
  • Swap clearing and CCPs
  • Swap execution through SEFs
  • Bilateral (OTC) swaps – the role of the ISDA Master
  • Credit mitigation – quantifying exposure (EAD, EPE, PFE)
  • CSAs and collateral

XVA Adjustments

  • The impact of asymmetric collateral positions
  • FVA and the cost of funding
  • Pricing credit risk, CDS fundamentals
  • Computing the cost of credit exposure (CVA)
  • Own-risk adjustment (DVA)
  • The double-counting trap between FVA and DVA

Workshop: Computing the CVA charge from first principles for a swap

Option Fundamentals

  • Terminology, settlement, basic payoff diagrams
  • Key drivers of the premium – the forward and the implied vol
  • Put-call parity, intrinsic and time value
  • Briefly on options pricing – binomial trees, BSM, monte-carlo
  • Option “Greeks”
  • Delta-hedging an option position
  • The fundamental importance of gamma
  • Quantifying vol risk (vega)

Workshop: Delta-hedging an option position


Day Four

Interest Rate Options: Caps, Floors

  • Definitions and mechanics
  • Applications
  • Zero cost collars, participating caps
  • Delta-hedging caps and floors

Interest Rate Options: Swaptions

  • Definitions and mechanics
  • Cash vs. physical settlement – why it matters
  • Bermudan swaptions
  • Hedging swaption risk – why Bermudans are so much harder
  • Applications (in corporate interest-rate risk management, in structuring callable bonds)

Workshop: Liability-hedging for corporate treasury

The Vol Surface for Rates

  • Defining interest rate dynamics – Normal, Lognormal or CEV?
  • Quoting vols – Lognormal (Black) or Absolute (Normal)
  • Understanding and quantifying smile and skew
  • Hedging with RRs and Flys
  • Drivers of the smile and skew
  • The role of stochastic volatility
  • The needs for a better model – introduction to SABR


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