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Swaps - Mechanics, Pricing, Applications and Risk Management

Duration: 3 days
  • Interest Rate Swaps and Currency Swaps
  • Non-Generic Swaps
  • Swap Pricing – Single and Multiple Curves
  • Swap Curve Construction with Collateral
  • Swaps with Embedded Options
  • Caps, Floors and Swaptions
  • Applications of Swaps and IRO’s
  • Risk Management of the Swap Book
The objective of this seminar is to give you a good understanding of the mechanics, pricing and applications of generic as well as more advanced swaps and of swap-related option structures.

We start with a general introduction to swaps and swaps markets and we discuss important market developments. We then turn to look in more detail at interest rate swaps. We explain the mechanics of “vanilla” interest rate swaps and give examples of swap cash flows. We give a thorough explanation of how swaps are valued consistently according to “the new paradigm” of multiple curves with and without a collateral agreement. Further, we explain how to calculate and interpret risk analytics such as dollar duration and key rate duration, and we give practical, real-life examples of the uses of interest rate swaps for creating synthetic assets and liabilities and for managing interest rate risk.

On day two, we start with introduction to currency swaps. We give examples of the cash flows of different types of currency swaps and we explain how they are priced according “the new paradigm”. Among other things, we explain the reason for and the importance of the so-called basis swap spread. Further, we give examples of applications of currency swaps in Treasury and Risk Management.

Having gained good understanding of swap fundamentals we then turn to examine a number of more advanced swap structures and their related option instruments. We analyze structures such as “Amortizing”, “Accreting”, ”Forward Starting”, “Arrears Reset”, “Constant Maturity” and “Differential” swaps. We also look at structures with embedded option features such as “Cancellation Swaps”.

On day three, we present and analyze a number of swap-related options, including Caps, Floors, Swaptions and more advanced types such as “Constant Maturity Floors”. We also explain and demonstrate how they can be practical applied in Treasury and Risk Management.

Finally, we explain how the risks of a swap book can be managed. We explain and demonstrate how interest rate risk and FX risk can be hedged using FRAs and futures. Further, we explain and illustrate how counterparty risk can be assessed and managed.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Swaps

  • Swaps and Swap Markets
  • Overview of Swap Types and Applications

Interest Rate Swaps

  • Types, Mechanics and Cash Flows
  • Swap Pricing: The New Paradigm
    • Problems in using Libor as the discount rate
    • The effect of collateral
    • Single-curve vs. multiple curve approaches
  • Swap Curve Construction without Collateral
    • Case of single IRS
    • Taking the TS basis into account
    • Implications from different choice of discounting curve
  • Swap Curve Construction with Collateral
  • Pricing and Valuation Examples
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Interest Rate Swaps (Continued)

  • Risk Analysis
    • Dollar duration
    • Key rate duration
    • Value-at-Risk
  • Applications
    • Creating synthetic cash flows
    • Asset swaps
    • Liability swaps
    • Using swaps to manage interest rate risk of bond portfolio
    • Using swap overlay strategies in ALM
    • Using macro swaps to hedge banking book
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Currency Swaps

  • Overview of Currency Swap Structures
  • Decomposing Currency Swap Structures into Building Blocks
  • Pricing Currency Swaps as Series of Long-dated Forward Contracts
  • Liquidity Issues and the Basis Swap Spread
  • Swap curve Construction
    • Case of CCS without collateral
    • Case of collateralized swaps in single currency
    • Case of collateralized swaps in multiple currencies
  • Pricing and Valuation Examples
  • Applications
  • Risk Analysis
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.00 Non-Generic Swaps

  • Amortizing Swaps and Accreting Swaps
  • Forward Starting Swaps
  • Arrears Reset Swaps
  • Constant Maturity Swaps
  • Yield Curve Swaps/Basis Swaps
  • Mark-to-Market Swaps
  • Differential Swaps
  • Overnight Index Swaps
  • Deferred Coupon Swaps
  • Stepped Coupon/Ratchet Swaps
  • Total return swaps
  • Examples of Applications of Non-Generic Swaps
  • Cases and Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Swap-Related Options and Option Embedded Swaps

  • Interest Rate Guarantees, Caps, Floors and Collars
    • Pay-of profiles and valuation (overview)
  • Swaptions
    • Receiver/payer swaptions
    • European, American, Bermudan types
    • Pay-of profiles and valuation (overview)
  • Option Embedded Swaps
    • Cancellation swaps
    • Extendable swaps
  • Applications (examples)
    • Hedging loan with swap, cap or collar
    • Hedging contingent interest rate exposure with swaptions
    • Call monetisation with swaptions
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Risk Management of the Swap Book

  • Managing Interest Rate Risk
    • Hedging with FRAs, ED futures and bond futures
  • Managing FX Risk
    • Hedging wit currency forwards and options
  • Calculating and Managing Value-at-Risk of the Swap Book
  • Measuring and Managing Counterparty Risk
    • Calculating current and potential future exposure
    • Netting and collateral management
  • Managing Legal Risk

Evaluation and Termination of the Seminar