The purpose of this seminar is to give you a good understanding of techniques for constructing yield curves and for the applications of yield curves in trading and risk management.
We start with an in-depth explanation of fundamental concepts such as yields, discount factors, spot rates and forward rates. We present different types of yield curves such as the zero coupon and par curves, and we give an overview of their uses in securities pricing, investment analysis and risk management.
We then explain how the swap curve can be "Bootstrapped" using deposits, FRAs, convexity adjusted interest rate futures and par swaps as building blocks. We also demonstrate how the swap curve is used for the pricing of standard and non-generic swaps.
Next, we explain how bond yield curves can be constructed from available market data. We start with the construction of the zero coupon curve using the "Cubic Splining" technique on bond data. We explain how the resulting discount factors can be used to identify arbitrage opportunities in the bond market.
We also explain how swap and bond curves can be fitted using the "Nelson-Siegel" formula.
Finally, we explain how yield curves can be used in day-to-day trading and risk management. We show how security and portfolio cash flows can be mapped to yield curve grid points and we explain how "Delta Vectors" and key ratios such as "Key Rate Duration" are derived and used to control interest rate risk. We also explain how "Principal Components" analysis can be used to decompose variations in the yield curve into independent factors and how a "factor-immunized" portfolio can be constructed.