The purpose of this seminar is to give the participants a good understanding of the pricing and applications of more advanced swaps and of swap-related option structures. We start with a quick recap of the fundamental valuation techniques.
We then turn to examine swap-related options ranging from the simple cap to the highly complex American cancellation swap. We illustrate how the standard Black model can be extended to value the European swaptions but for the American swaptions a numerical approach is needed. Here we will use the BDT-model with a time varying volatility. We discuss practical calibration issues in building binomial trees and the trade-off between accuracy and calculation time. The binomial tree is used to calculate the probability of exercise of the swap related option together with the expected lifetime of the American option.
We then look in detail into how swaps and interest rate options can be used in financial management. Synthetic cash flows are created using swaps and we show how profits on illiquid instruments can be turned into locked-in spreads on swaps. Also the importance of swaps in exploiting funding opportunities is discussed together with tax and regulatory arbitrage.
We look at the highly popular credit default swaps (including "first-to-default", "second-to-default" and "nth-to-default" swaps), total return swaps and equity default swaps and see how these structures can be used in managing the credit risk exposure.
We look at various applications of swaps in portfolio management including duration management, cash-flow matching and the hedging of contingent exposures.
Finally we look at financial engineering with swaps and interest rate options, where we start by formulating a toolbox of fundamental building blocks in structured products. We also discuss possible goals and intensions for using structured products. We conclude the presentation by going through some popular structured products containing swaps and/or interest rate options.