Financial Derivatives - Instruments, Mechanics and Markets

• Futures and Options
• Forward Rate Agreements
• Interest Rate and Currency Swaps
• Interest Rate and Currency Options
• Credit Derivatives
• Exotic Options
• Risk Management, Reporting and Regulation

The objective of this seminar is to give you a good understanding of financial derivative markets and instruments and of the “mechanics” and applications of these instruments.

We start with an overview of derivatives and derivative markets and we explain the main characteristics of derivative instruments. We also explain the important differences in terms of liquidity, flexibility and counterparty risks between the two “market forms”, listed and OTC, and we discuss the institutional and regulatory changes in the aftermath of the global financial crisis.

We then introduce and explain in turn the different types of instruments. We first look at futures and options. We define the instruments and we explain how they are traded and settled. We explain thoroughly how the instruments are priced using standard pricing models such as “cost-of-carry” for futures and the “black-scholes” and numerical models for options. We also show how to calculate important risk analytics such as delta, gamma, vega, theta and rho, and we explain how these analytics should be interpreted.

We then introduce Interest Rate Swaps, FX forwards and Currency Swaps. In each case, we explain their time profiles, cash flows and trading and settlement mechanisms. We show how these instruments can be priced and valued using yield curves, discount factors and FX rates, and we explain how to assess their risks. We also present and analyze Caps, Floors, Swaptions and other types of interest rate options.

Further, we introduce and explain the mechanics of credit derivatives such as “credit default swaps”, “total return swaps” and credit options. We also present and analyze a number of exotic derivatives such as Asian options, lookback options, barrier options, digital options and compound options. We explain the pay-off profiles of these options, and we give examples of their applications in trading, investing and risk management.

Finally, we explain how the risks of using derivatives can be measured and managed, and we discuss the (changing) regulatory requirements for using these instruments in banks, pension funds, investment funds and other institutions.

 

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction and Overview

• Key Characteristics of Derivative Instruments
• Types and Markets
• Market Developments after the Crisis

Futures and Options

• Review of the Mechanics of Futures and Options
• Valuation and Risk Assessment of Futures
  • Fair Futures Price and Implied Repo Rate
  • The Delivery Option and the CTD Bond
  • Sensitivity and Risk Analysis
• Valuation and Risk Assessment of Options
  • Option Pricing Models
  • Option Price Sensitivities (“Greeks”)
  • Computer Simulations

12.00 - 13.00 Lunch

13.00 - 16.30 Futures and Options (Continued)

• Examples of Applications of Futures and Options
  • Trading Strategies
  • Hedging Interest Rate Risk, FX Risk and Equity Risk
• Small Exercises

Swaps

• Quick Review of Swaps Basics
• Pricing and Risk Assessment of Interest Rate Swaps
• Pricing and Risk Assessment of Currency Swaps
• Examples of Non-Generic Swaps
  • Accreting and Amortizing Swaps
  • Forward Starting and Arrears Reset Swaps
  • Constant Maturity Swaps
  • Overnight Index Swaps
• Examples of Applications of Interest Rate and Currency Swaps
• Small Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Interest Rate Options

• Interest Rate Guarantees, Caps, Floors and Collars
• Swaptions
• Cancellation and Extendable Swaps
• Examples of Applications of Interest Rate Options
• Exercises

Credit Derivatives

• Credit Default Swaps
• Total Return Swaps
• Credit Spread Options
• Applications of Credit Derivatives
  • Buying and Selling Credit Risk
  • Hedging Against Spread Changes
• Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Exotic Options

• Asian (Average Rate) Options
• Lookback and Touch Option
• Digital Options and Barrier Options
• Basket Options and Compound Options
• Rainbow Options
• Examples of Applications

Risk Management, Reporting and Regulation

• Risks of Using Derivatives
• Regulatory Requirements for Using Derivatives in Banks, Investment Funds, Pension Funds etc.
• Measuring and Managing Market and Counterparty Risk of Derivatives
• Internal and External Reporting
• Discussion: Regulatory Developments in Derivative Markets

Evaluation and Termination of the Seminar