Praha, hotel NH Prague

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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

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.

- 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

Day One

- 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?

*Interest rate calculations**Discounting and the choice of discount rate*

*Exercises:*

- 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

- 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?

*Bond pricing**Repo calculations and forward bond pricing*

*Exercises:*

- 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

Day Two

- 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

*FRA settlement calculations**Interest rate swap applications*

*Exercises:*

- 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?

- 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

*Option pricing**Simple option risk management*

*Exercises:*

- 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?

*Analysis of common structured products**Callable range accruals*

*Exercises:*