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Yield Curves - Construction, Modelling and Applications - Workshop

Also available as online-course upon request at a reduced fee

Duration: 2 days 
  • Yield Curve Construction in the New Financial Environment
  • OIS Discounting
  • Bootstrapping and Cubic Splining
  • Blending, Interpolating and Smoothing Techniques
  • Credit Spreads and Forward Credit Spreads
  • The Effect of a CSA/Collateral Agreement on the Yield/Swap Curve
  • CVA Charges on Corporates
  • Working in a Multi-Curve Environment
  • Principal Components Analysis
  • Using Yield Curves in Trading and Risk Management
The objective of this comprehensive and highly practical workshop is to give you an in-depth understanding of techniques for constructing yield curves and for the applications of yield curves in pricing, trading, collateral- and risk management.
In the workshop you will work hands-on with the presented techniques and models using current market and credit data. You are encouraged to bring your own laptop.

We start with a discussion of how the latest financial crisis (and regulation) has forced banks to use different yield curves for discounting collateralized and non-collateralized transactions. Also the impacts on the yieldcurve of the CVA charges following Basel III/CRD IV are presented.
We then explain and demonstrate how bond yield curves can be estimated using the Extended Nelson-Siegel (Svensson) model which is the standard model used by both ECB and the Deutsche Bundesbank (see link). Risk Repair has assisted both institutions in the delopment of these models so you will get to know all the important tips and tricks including how the yield curves may be used to identify trading opportunities in the bond market.
We also look at the standard methods for deriving yield curves such as bootstrapping the liquid swap curves in combination with cubic splines and demonstrate how the swap curve is used for the pricing of standard and non-generic swaps.

The concept of OIS-discounting is presented and we discuss the differences between the Libor curves and the OIS curves. We also give an overview of their uses in securities pricing, investment analysis and risk management.
We further give an in-depth explanation of how Libor and issuer specific curves can be constructed from pier groups of issuers/segments and countries using a parametrized approach to model the credit spread. We illustrate how cash flow and value projections can be made in this multi-curve environment.

Finally, we explain how yield curves can be used in day-to-day trading and we explain how to calculate risk measures for hedging purposes and risk management. We show how security and portfolio cash flows can be mapped to yield curve grid points and we explain how “Delta Vectors” and key ratios such as “Key Rate Duration” are derived and used to control interest rate risk. We also explain how “Principal Components” analysis can be used to decompose variations in the yield curve into independent factors and how a “factor-immunized” portfolio can be constructed.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 10.15 Yield Curve Construction - Fundamentals and Applications

  • Yield Curves and their Applications in Finance
  • Building Blocks in Yield Curve Construction
    • Price and yield analysis
    • Spot rates and discount factors
    • Continuously compounded yields
    • Forward rates
  • Types of Yield Curves
    • Simple yield curve
    • The par curve
    • The duration yield curve
    • The Zero Curve
    • Libor curves
  • Current and Historical Yield curves
  • Factors Explaining the Shape of the Yield Curve

10.15 - 12.00 Bond Yield Curve Construction and Application

  • Components of Bond Yields
  • The Concept of Relative Risk-free Spot Curves
  • Estimating and Fitting the Yield Curve
    • Selecting the Bond Sample
    • Topping-up if Insuficient Data
    • Adjusting for Liquidity Issues
    • Regression Techniques
    • Using Cubic Splines
    • The Extended Nelson-Siegel Model (Svensson)

12.00 - 13.00 Lunch

13.00 - 14.30 Bond Credit Curve Construction and Application

  • The Construction and Estimation of Credit Spread Curves
    • Bootstrapping the Credit Curve (Souvereigns, Supras, Institutionals, Corporates)
    • Fitting and parametrizing the Credit Curve
    • Calculating Forward Credit Spreads
    • Probability of Credit Migration
    • Calculation of Standard CVA and CVA VaR
  • Using the Fitted Yield and Credit Curves to price Bonds and make Cash Flow Projections

14.30 - 16.30 Workshop: Participants fit Yield and Credit Curves to Current Market Data and price Bonds of Different Credit Qualities

  • Using Single and Multiple Worksheets
  • Using MS-Access Database
  • Using VBA Macros
  • Using Forms and different Built-in Objects

Day Two

09.00 - 09.15 Brief recap

09.15 - 11.00 Constructing and Using Libor Curves

  • Building Blocks in Libor Curve Construction
    • Deposits
    • FRAs and interest rate futures
    • Par swaps
  • Convexity Adjustment of Futures Prices
  • Construction of Swap Curves in a Single-Curve Environment
  • Bootstrapping
    • Constructing the short end
    • Extending the curve
  • Construction of Swaps Curves in a Multi-Curve Environment
    • Credit Quality
    • Collateralized and non-Collateralized
  • Libor versus OIS Curves
    • Idea and Methodology behind OIS Discounting
  • The Importance of Reset Frequency (Fixing)
  • Interpolation and Smoothing Techniques
    • Linear and non-linear techniques
    • Alternatives to the Nelson-Siegel Estimation Technique
  • Examples and Exercises

11.00 - 12.00 Workshop: Participants construct OIS/Libor Curves and apply these in the Pricing of OTC Products

  • Pricing of Standard Swaps
  • Pricing of non-Standard Swaps (varying Notional, fixing in Arrears)
  • Pricing of FRA's
  • Pricing of more Exotic Structures

12.00 - 13.00 Lunch

13.00 - 15.00 Using Yield Curves in Trading and Risk Management

  • Identifying Trading Opportunities
    • Cheap-rich Analysis
    • Applying Confidence Bands
    • Calculating the Expected Holding Period
  • Risk Management
    • Calculating delta vectors
    • Calculating key rate durations
    • Decomposing yield curve variations
    • Principal components analysis
    • Calculating factor sensitivities
    • Factor-immunization
    • Selective hedging

15.00 - 16.30 Workshop: Participants apply all the Acquired Knowledge on Current Market Data in an Attempt to identify Trading Possibilities and to Measure their Risks towards Various Types of Yield (and Credit Quality) Movements

Summary, Evaluation and Termination of the Seminar