Advanced Swaps - Pricing, Trading and Risk Management
Duration: 2 days
- Quick Recap of Swap Valuation Techniques
- Swap-related Options and Option Embedded Swaps
- BDT-model with Time Varying Variance
- Practical Calibration and Calculation Issues
- Valuation of Credit Risk Swaps
- Financial Engineering with Swaps
The objective 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.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 12.00 Quick Recap of Swap Valuation Techniques
- Bootstrapping
- Cubic Splining
- Incorporating Credit Spreads
- Projecting Cash Flows
Swap-Related Options and Option Embedded Swaps
-
Interest Rate Guarantees, Caps, Floors and Collars
-
Swaptions
- Receiver/payer swaptions
- European, American, Bermudan types
-
Using Swap-Related Options to Manage Interest Rate Risk
- Case Study : Hedging Loan with Swap, Cap or Collar
- Analytical/numerical valuation
-
Analytical valuation (Black)
- Extending the standard Black framework
- Calculating the greeks
- Exercises
12.00 - 13.00 Lunch
13.00 - 16.30 Swap-Related Options and Option Embedded Swaps (Continued)
-
Numerical valuation
- The BDT-model
- Calibrating a binomial tree to discount factors and time varying volatility
- Extracting sub-trees from the binomial tree
- Finding future Par-rates using subtrees
-
Option Embedded Swaps
- Cancellation swaps
- Extendable swaps
- Calculating the exercise probability
- Calculating the expected lifetime of the Swaption
Day Two
09.00 - 09.15 Brief recap
09.15 - 12.00 Using Swaps and Interest Rate Options in Financial Management
-
Creating Synthetic Cash Flows
- Asset swaps
- Liability swaps
- Locking In Unrealized Profits
- Utilizing Funding Opportunities in Foreign Markets
- Tax and Regulatory arbitrage
-
Credit Risk Management
- Asset swaps
- Bonds
- Credit default swaps
- N’th to default swap
- Total return swap
- Equity default swap
-
Portfolio Management with Swaps and IROs
- Using swaps in duration management
- Cash-Flow Matching with Swaps
- Swap overlay strategies
- Using Caps, Floors and Swaptions
- Exercises
12.00 - 13.00 Lunch
13.00 - 15.45 Financial Engineering with Swaps/Options
-
Constructing Synthetic Instruments
- Goals and building blocks
-
Examples of Structured Products with Embedded Swaps and/or Options
- Reverse Floaters
- Bear Notes
- CMS Floaters
- Targeted Redemption Notes
- Capped Floaters
- Callable Snowball Notes
- Range Accrual Notes
- Case Studies and Exercises
Evaluation and Termination of the Seminar
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