Duration: 3 days
- Introduction to Swaps and Swap Pricing
- Swaps Valuation Methods
- Bootstrapping and Smoothing the Swap Curve
- Currency and Cross Currency Swaps
- Analysis of Non-Generic Swaps
- Managing Interest Rate and FX Risk with Swaps
The objective of this seminar is to give you a good and practical understanding of the pricing and
applications of generic and simple non-generic swaps.
We start with a thorough introduction to swaps. We explain how swaps have evolved from
“back-to-back” and “parallel” loans to a modern, financial instrument. We give an overview of
different swap structures, and we explain the mechanics of a “plain vanilla” interest rate swaps,
basis swaps, and cross currency swaps. We also show the “time profile” of a swap and give a
practical explanation of how swap transactions are agreed, settled and terminated.
Further, we explain how swaps are priced and valued. We give an overview of different valuation
techniques, and we explain and demonstrate in detail how swaps are correctly priced using zero
coupon analysis. We show how swap curves can be “bootstrapped” and how swaps can be valued using
the resulting discount factors. We explain how the instruments are valued for mark-to-market and
risk management purposes, illustrated by lots of examples. We also give an overview of currency
swap structures and explain the pricing of currency swaps.
Having gained a good understanding of fundamental swap pricing, we then turn to examine a number of
more advanced swap structures and their related option instruments. We analyze and discuss the
application of structures such as “Amortizing”, “Accreting”, ”Forward Starting”, “Arrears Reset”,
“Constant Maturity” and “Differential” swaps.
Finally we explain and demonstrate, using very practical examples, how swaps can be used to hedge
interest rate and currency exposures of bonds and bond portfolios, loans and other types of
financial instruments and transactions.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 12.00 General Introduction to Swaps
- What is a “Swap”?
- Background and Historical Development
- Swaps and Swap Markets
- Types of Swaps
- Fundamental building blocks
- Overview of Applications
-
Risks of Swaps
- Market Risks
- Counterparty Risk
- Legal and Operational Risks
Introduction to Swaps and Swap Pricing
-
Fundamental building blocks
- IRS, currency swaps, non-generic swaps
- Hedging Structure
- Asset Swap
- Relative Rating
12.00 - 13.00 Lunch
13.00 - 16.30 Pricing Generic Interest Rate Swaps (continued)
- Pricing Swap as Libor-Financed Bond
- What Drives the Swap Spread?
- Comparison Swap Approach
-
Zero Coupon Approach
- Yield curve construction using deposits, futures and par swaps
- Convexity adjustment
- Recursive “bootstrapping” of par curves
-
Blending and smoothing techniques
- Forecasting variable cash flows
-
Pricing Examples
- Determining fair value and fair swap rates
- Moving spreads from fixed to floating side
- Exercises
Day Two
09.00 - 09.15 Recap
09.15 - 12.00 Pricing Currency and Cross Currency Swaps
- Decomposing Currency Swap Structures into Building Blocks
- Pricing Libor Basis Swaps
- Where does the spread come from?
- Pricing Currency Swaps as Series of Long-dated Forward Contracts
- Zero Coupon Approach to Pricing Currency Swaps
- Exercises
Analysis of Non-Generic Swaps
- Zero Coupon Swaps
- Amortizing Swaps
- Accreting Swaps
- Rollercoaster Swaps
- Forward Starting Swaps
- Cases and Exercises
12.00 - 13.00 Lunch
13.00 - 16.30 Analysis of Non-Generic Swaps (Continued)
- Arrears Reset Swaps
- Constant Maturity Swaps
- Yield Curve Swaps/Basis Swaps
- Differential Swaps
- Overnight Index Swaps
- Deferred Coupon Swaps
- Stepped Coupon/Ratchet Swaps
- Cases and Exercises
Day Three
09.00 - 09.15 Recap
09.15 - 12.00 Managing Interest Rate and FX Risk with Swaps
-
Steps in Managing Interest Rate and FX Risk
- Exposure and Risk Measurement
- Choice of Instrument and Calculation of Hedge Ratio
- Cash Flow Hedges vs. Fair Value Hedges
-
Hedging Interest Rate Risk of Single Assets and Liabilities
- Hedging the Interest Level exposure
- Hedging the Slope of the Yield Curve
- Calculating Value-at-Risk on a Swap
12.00 - 13.00 Lunch
13.00 - 16.00 Managing Interest Rate and FX Risk with Swaps (Continued)
-
Managing Interest Rate Risk at the Portfolio Level
- Using swaps in Duration Management of a Bond Portfolio
- Using “Macro Swaps” to Hedge Loans and Deposits
- Managing ”Value-at-Risk” with Swaps
-
Hedging FX Risk with Swaps
- Types of FX Exposure
- Hedging FX Exposure at the Cash Flow Level
- Hedging FX Exposure at the NPV level
- Swap Overlay Strategies
- Exercises
Evaluation and Termination of the Seminar