Swaps  Mechanics, Pricing, Applications and Risk Management
Duration: 3 days
 Interest Rate Swaps and Currency Swaps
 NonGeneric 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 swaprelated 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, reallife 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 socalled 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 swaprelated 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
 Singlecurve 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
 ValueatRisk

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 Longdated 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 NonGeneric Swaps
 Amortizing Swaps and Accreting Swaps
 Forward Starting Swaps
 Arrears Reset Swaps
 Constant Maturity Swaps
 Yield Curve Swaps/Basis Swaps
 MarktoMarket Swaps
 Differential Swaps
 Overnight Index Swaps
 Deferred Coupon Swaps
 Stepped Coupon/Ratchet Swaps
 Total return swaps
 Examples of Applications of NonGeneric Swaps
 Cases and Exercises
Day Three
09.00  09.15 Recap
09.15  12.00 SwapRelated Options and Option Embedded Swaps

Interest Rate Guarantees, Caps, Floors and Collars
 Payof profiles and valuation (overview)

Swaptions
 Receiver/payer swaptions
 European, American, Bermudan types
 Payof 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 ValueatRisk 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
