The Financial Markets Academy

Transcription

1 The new ACI Diploma

2 The Financial Markets Academy The Financial Markets Academy (TFMA) is a training company that offers preparation courses and e- learning tools for the ACI exams. TFMA is registered with the CRKBO as a certified training company. TFMA works closely together with the ACI and is, amongst others, a member of the Trainer Consult Group of the ACI. In this respect TFMA is responsible for reviewing the content of the ACI syllabi and for reviewing the exam questions from the candidates perspective. The Financial Markets Association (ACI) is an international organization that strives to be the leading, global association of wholesales financial market professionals by contributing to the market development through education, market practices, technical advice and networking events.

3 The New ACI Diploma In 2015 the ACI will launch a complete new suite of examinations. After already having substantially increased the level of both the ACI Dealing Certificate and the Operations Certificate in 2013, the ACI will go live with the New Diploma in The level of the new version of the ACI Diploma easily stands the comparison with CFA. For dealers working in the treasury department of a dealing room as well as for corporate salesmen, however, the content of the New Diploma is far more relevant than the content of CFA which, in turn, is more relevant for securities traders and for institutional salesmen. Put in other words: the Diploma and CFA are complementary to each other. Compared to the IFID exam which is offered by ICMA, the new ACI Diploma covers a far wider range of topics. The New Diploma consists of two mandatory modules (Units 1 and 2) and one elective module. The mandatory modules cover indepthly each market and instrument which is relevant for treasury dealers and corporate salesmen, i.e. Foreign Exchange, FX Options, Money Market, Interest Rate Derivatives including Credit Derivatives. For the elective modules candidates are free to choose from a range of related topics. The great advantage of the modular approach of the New ACI Diploma compared to the old version of the ACI Diploma is that students can now focus on one topic at the same time instead of having to study a very broad range of topics simultanuously. This will dramatically increase the chance of passing the exam. For each separate Unit the total study time is estimated at 100 hours, including 32 contact hours. Training Courses The Financial Markets Academy (TFMA) offers open training courses for Units 1, 2 and 3. For more information about these courses and about Unit 3 - ALM and Risk, please visit If you are interested to learn about the conditions for an in-house course, please call

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5 Syllabus Unit 1 Foreign Exchange & FX Options Objective of Unit 1 Foreign Exchange & FX Options Candidates confidently deal with FX spot, swap and forward transactions, currency options, using bid-offer spreads, recognize arbitrage-relationships, collateralization, structure and price simple strategies and understand the basics of standardized exotic options (in the sense of the ISDA Definitions). Topic Basket 1 FX Spot, FX Forward Outright and Swaps, Cross Rates, Forward-Forwards, NDF, Time Options Understand basis FX principles like currencies, currency pairs, FX spot, market liquidity, and currency trading constraints; tom-next, forward and swap transactions and relationships to interest rates. Understand the fundamental FX products and explain the strategies underlying their use: Know the difference between matched-principal and unmatched-principal FX swaps with respect to having an open position or not; Understand forward-forward FX swaps and explain the strategies underlying their use; Understand how FX swap traders can take a position; Understand an NDF and explain its rationale. Apply principles of modern FX trading Apply and calculate cross rates; Apply the correct choice of spot rate in an unmatched principal swap; Apply a roll over a spot FX position with tom/next FX swaps, calculate the costs or benefits involved, and identify the risks involved; Analyse and calculate the impact of a change in the spot rate on the price of an FX swap; Apply and calculate the price of a forward-forward swap; Apply and calculate a two-way FX cross-rate spot, outright and swap quotation; Apply and calculate both sides of the theoretical swap points from an FX spot rate and the bid and offer quotes for the interest rates; Apply and calculate an FX swap over today and over tom for regular and odd periods including cross rates involving CAD; Analyse a time option/flexi forward and price one from outright forward rates or swap rates; Analyse and choose settlement rates for any short date swap and forward-forward swap.

6 Topic Basket 2 Valuation and Hedging of FX Positions and Arbitrage Opportunities Show solid working knowledge in fundamental risk management applied to the hedging of FX positions: Understand the mechanics of calculating the tail risk, hedge the tail risk with spot or outright for a given matched principal swap, understand how tail risk influences the FX result; Apply and calculate the spot-risk hedge necessary for a forward FX position; Understand the hedging of a forward-forward position using FRAs and/or futures. Understand and evaluate interest arbitrage opportunities. Understand and be able to apply basic valuation concepts of FX positions, in particular the following applications Understand which yield curves are used for valuation and discounting: Money market, OIS, EURIBOR; Apply, identify and calculate the effect of changes in the interest differential on the value of an FX swap position; Apply and calculate the cost of borrowing or lending through FX swaps Evaluate the effect on the price of an FX swap in case of a roll-over a forward FX position at a historic rate; Apply and calculate profits or losses of forward-forward FX swap positions; Evaluate the profit or loss on a spot FX position on T+1 for given revaluation rates; Apply and calculate the profit or loss on an FX swap position for given revaluation rates; Apply and calculate the profit or loss on an outright forward FX position at given revaluation rates. Analyse how a synthetic FRA can be created by using forward-forward FX swaps and another FRA; apply and calculate the profit & loss results of this strategy depending on the market swap rate at settlement.

7 Topic Basket 3 Fundamentals of FX Options and Pricing with Black and Scholes Understand the meaning of and be able to define basis FX Option principles like Understand exercise features, exercise styles (European vs. American), deemed exercise and their impact on the value of an option; Understand the concept of a currency option; Understand the relevance of cut-offs and fixings; Understand the relevance of volatility; Know: deferred delivery, cash-settlement, American and Bermudan exercise rights, cut-offs and fixings. Understand basis concepts and show solid working knowledge in fundamentals of FX Options: Apply FX specific put-call parity and put-call symmetry to pricing and hedging currency options; Know price quotations and conventions; Understand how to convert from percentage to pips and amounts and vice versa; Understand the conventions of options priced with implied volatility; Understand and apply put-call parity and synthetic forwards; Understand the difference between an outright forward and a synthetic forward; Know the relevant dates of a currency option: trade day, premium payment day, exercise/expiration time, settlement day; Know settlement types; Understand and explain the impact of settlement type on counterparty risk; Know how historic volatility is calculated; Analyse implied and historic volatility; Apply and convert volatility for different terms; Understand the difference of smile format versus Brokers quotes: risk reversal, 2- vol-strangle vs. 1-vol-strangle, vega-weighted butterfly. Understand and be able to apply basic valuation concepts of FX Options: Understand the concept of Black-Scholes / Merton / Garman-Kohlhagen model in FX; Understand the model assumptions and where they fail in practice. Show solid working knowledge in the valuation of FX Options Analyse the impact of exercise style on the price of the option; Evaluate the effect of bid-offer spreads quoted in implied volatility depending on the term and the moneyness of vanilla options; Understand and quantify the risk for a trader in cash-settled options with a reference to a fixing.

8 Topic Basket 4 Structuring with Plain Vanilla Options Show solid working knowledge in the Structuring with Plain Vanilla Options Analyse the missing leg of a given structure; Evaluate the building blocks of a risk reversal and participating forward; Evaluate the building blocks of spreads, ratio spreads, seagulls, straddles, strangles, butterflies and condors; Apply and calculate the result (final exchange rate) of these strategies at the maturity date; Apply and choose between versions of these for hedgers and/or traders; Evaluate the structure to use in which situation and to hedge which type of risk; Understand and be able to apply basic concepts of Structuring with Plain Vanilla Options Understand how to extend the concept of risk reversals and participating forwards to more general strategies; Understand how the strategies of building blocks are used by corporates from an importer/exporter point of view; Understand the relevance of the underlying cash-flow in structured forwards; Understand the impact of the sales margin of a zero-cost structure on the strike prices of the component options; Understand the difference between the bid offer spreads of structures and the bid offer spreads of the component options; Understand how dual currency and other FX-linked deposits and loans are composed by their building blocks; Evaluate the prices of each building block and the price of the structure; Understand how to unwind a dual currency deposit; Understand how structured forwards are composed by their building blocks. Understand the concepts and show solid working knowledge in the context of structured products Apply delta and vega hedging of structured products; Understand the impact of the smile effect on structured products; Evaluate how the sales margin is derived from the value of a strategy from either the seller s or the buyer s point of view; Know the risk for the sell-side and the buy-side of a dual currency deposit; Evaluate sales margin in structured products; Analyse the final exchange rate for all structures from a treasurer s point of view as a function and in a diagram; Apply the idea and calculate the worst case exchange rates for the different hedging strategies; Evaluate the final exchange rates in structured forwards.

9 Topic Basket 5 Greeks and Hedging Understand Greeks and Hedging principles for FX products Understand the importance of Greeks; Know delta, gamma, theta, base currency and counter currency rho, vega; Understand the relationship between gamma and theta; Know Forward volatility. Understand the concepts and show solid working knowledge in the context of Greeks and Hedging applied to FX products Apply and calculate the impact of the market value of a position using Greeks (mathematical derivatives vs. amounts) in a trading context; Analyse the delta hedge required for a portfolio of bought and sold options including the currencies and amounts; Evaluate examples of options for a given set of signs of Greeks; Evaluate the Greeks of a portfolio of options; Apply the smile quotation conventions in FX respecting the ATM and deltaconventions; Understand the difference between spot and forward delta, and between premiumadjusted and premium-unadjusted delta; Analyse the quotation of option prices in terms of deltas; Apply volatility smile: define term-structure, skew, risk reversals and butterflies; Analyse the conversion between quotations in terms of delta and quotations in terms of risk reversals and butterflies; Evaluate forward volatility from spot volatilities; Apply and calculate vega hedging to options for given term and deltas; Evaluate the number of at-the-money straddles required to vega hedge a given option position; Know the basic strategies for hedging volatility risk.

10 Topic Basket 6 Standardized Exotic Options Know the ISDA Supplements 2005 for barrier options and 2013 for variance and volatility swaps. Understand the functionality of and be able to handle Standardized Exotic Options Know exotic features: deferred payment, contingent payment; Understand digital options: European and American style, single and double barrier; Understand barrier options: single and double, knock-in and knock-out, transatlantic, kick-in/kick-outs, knock-in-knock-out barrier options; Understand structured forwards without worst case such as knock-out forward; Understand the product feature and risk of a variance swap; Understand the difference between variance swaps and volatility swaps. Understand the concepts and show solid working knowledge in the context of Exotic Options Analyse digitals paying domestic currency and digitals paying foreign currency; Evaluate the risk of selling digital options; Understand the relationship between digital options and spreads of vanilla options; Evaluate the risk of barrier options for the buy-side and the sell-side; Analyse simple structures, in particular a multi-leg vanilla strategy or a structured forward with worst case such as a forward extra using vanilla and barrier options); Apply the idea of a semi-static hedge of a variance swap with a portfolio of vanilla options; Analyse why other than the variance swap the volatility swap cannot be hedged with a portfolio of vanilla options. Understand and be able to apply basic concepts of the valuation of Exotic Options Apply the rule of thumb of pricing American style digital options (one-touch/notouch) based on European style digital options; Evaluate the impact of jump-risk on the value of a variance swap;

11 Syllabus Unit 2 Fixed Income & Money Markets Objective of Unit 2 Fixed Income & Money Markets The objective of this unit is to understand the historical evolution and central functions of fixed income & money markets and its related financial derivatives and to acquire a broad range of practical skills such as: how to apply derivatives in Hedging and Asset & Liability Management and manage spot and forward FX positions, how to apply interest swaps in managing interest rate risk and how to value structured interest products. In addition, candidates are taught to exploit fixed income instruments and understand their interrelationships. They will learn the relevant pricing mechanisms, and display a good working knowledge and understanding of the rationale for various special kinds of interest rate contracts including interest rate options. Candidates understand Fixed Income derivatives pricing, hedging, risk management, applications in treasury and derivatives documentation and regulation. A focus will be on Interest Rate Swaps, Swaptions, Caps and Floors, Exotic Options, structured products, and inflation related products, taking into account common pricing platforms. For this kind of derivatives candidates will be able to use risk management quantities (Sensitivities) to gauge the risk in a portfolio of Fixed Income products. Topic Basket 1 Advanced Money Market Understand the principles of the money market Understand the principal comparative advantages and disadvantages of each of the main types of cash money market instruments for typical borrowers/issuers and lenders/investors; Understand the benefits of the programmed issuance of money market securities. Know the conventions of the money market and evaluate the fundamental financial instruments Understand the features and conventions of CPs, CDs and T-Bills and perform the related calculations; Evaluate the holding period yield between the purchase and the sale of a CD or a T- Bill; Understand the principal reasons for the spreads between the yields on the different types of instruments; Understand the credit ratings used by the main agencies for short-term instruments from longer-term ratings; Understand the precise specifications of the most commonly used overnight indexes (OI); Understand the main reasons why initial margin is taken in repo, define margin threshold and minimum transfer amounts;

12 Evaluate the start proceeds of a repo using the concept of the Margin Ratio in ICMA repo documentation and a variety of collateral; Understand the difference between calculation using initial margin and calculation using a haircut; Understand the purpose of margin maintenance and calculate the margin call on a repo; Understand the early termination and re-pricing method used in sell/buy backs as an alternative to margining and calculate the payments or transfers due using this method; Understand why counterparty risk is the primary concern in repo and understand the risks introduced by the use of collateral; Understand the working of tri-party repo; Understand how rights of substitution work in repo; Understand the main reasons why collateral goes on special and calculate the implied securities lending fee from the repo rate on specials; Understand the importance of the GMRA and list its main features; Understand how to identify GC from the ICMA list; Evaluate the forward price of a sell/buy-back and recognize this as the forward price of the collateral; Know an open repo, repo-to-maturity and forward repo; Understand how to construct a synthetic repo and recognize the difference in price levels between real and synthetic repos; Evaluate the break-even on a forward interest rate position partly derived from covered interest rate arbitrage using a US T-Bill; Apply the conversion from the discount rate to the true yield; Apply the impact of negative interest rates in all cases. Topic Basket 2 Fixed Income Understand the fundamental principles of Fixed income markets Understand the characteristics and benchmarks of different Fixed Income markets; Understand the syndication process and the roles of relevant relationships; Understand the relevant characteristics of the global bond markets, especially government, corporate, and high yield bond markets, including the relationship between the investor base and yields. Understand basic concepts and show solid working knowledge in Fixed Income securities Understand the differences between different types of Fixed Income securities and their characteristics, recognize their basic features and designate their main applications in managing, diversifying and hedging of classic banking book exposures; Understand the basic techniques of valuation and return analysis for Fixed Income instruments from different sectors, industries and companies; Analyse the structural characteristics of different debt financing alternatives and Mezzanine instruments, and characterize the common features in debt contracts, including covenants; Apply the concepts of Yield to Maturity (YTM) or Internal Rate of Return (IRR);

13 Apply and calculate the inter-relationships between cash interest rates, forward rates and zero-coupon rates; Apply and calculate bond pricing relative to benchmark bonds and curves; Analyse bond risks based on Duration and Modification Duration, Convexity and Basis Point Value. Topic Basket 3 Non-Option Interest Rate Derivatives Apply the pricing techniques for bond futures and forward contracts, taking into consideration Contract specifications and conversion factors; The expiration of futures contracts; Cheapest to Deliver Bonds; Gross and net basis; The dynamics of rolls; Bond valuations on the basis of futures; Understand the following applications of Futures Contracts; Applications in strategic asset allocation; Interest rate risk management; Relative value trading; Hedging Swaps; Cash and carry arbitrage; Spread trading. Understand the fundamental principles of the non-option interest rate derivative market Know the most important roles and functions in the derivative markets like dealer, broker, broker-dealer and interdealer brokers; Understand the role of the ISDA and relevant documents like master agreements and credit support annexes; Know the key elements of an ISDA Master Agreement, mechanics of collateralized deal, collateral rate, distinguish between secured vs. unsecured transactions; Understand the market infrastructure, including electronic trading platforms; Evaluate the impacts on Global Market Infrastructures caused by Basel III, MIFID II, EMIR, MIFIR, Dodd Franck, etc., especially: Central clearing counterparties, Trade repositories, Organized trading facilities. Understand basic concepts and show solid working knowledge in non-option interest rate derivatives Understand important Benchmark Curves like ISDAfix; Evaluate the role of swaps as primary instrument in the interest rate derivatives market, and their applications for pricing and hedging more complex instruments; Evaluate the implications of the post-crisis update of the swap curve, and of multicurve-modelling and understand overnight index swaps and their role for valuation purpose; Apply and calculate the effective rate of a combination of fixed income instruments and interest rate swaps taking into account differences in day-count conventions and payment frequencies; Define a forward money market yield curve and explain the relationship between forward curves and the cash yield curve; Apply and calculate the exact cost of borrowing or return on lending that is hedged with an FRA; Evaluate the three types of basis between money market futures prices and other rates; Understand how to compensate for the basis using the concept of convergence when hedging with futures;

14 Evaluate the bid and offer price of IMM FRAs and swaps from futures strips and explain how to use a strip of futures to price non-imm periods; Evaluate the hedging ratio on non-imm periods hedged with futures using simple hedging techniques and the numbers of contracts needed; Evaluate calculate the hedge ratio for futures hedges, adjusting for mismatches between the underlying term of the contract and the term of the transaction being hedged; Understand the structure and purpose of strip and stack futures hedges; Understand the structure and purpose of calendar spreads and other common types of futures spread strategies, and calculate the profit or loss on such trades; Understand how to use futures spread trades to hedge the basis risk on futures hedges of non-imm periods; Understand the usefulness of the volume and open interest statistics on a futures contract; Evaluate open interest and volume; Apply techniques to identify arbitrage opportunities between FRAs, money market futures and money market swaps; Evaluate the problem of the convexity bias between futures and OTC derivatives like FRAs and swaps; Understand how FRAs, futures and swaps can be used to hedge and arbitrage against each other; Apply the impact of negative interest rates in all cases; Understand the concept of overnight index swaps; Know the conventions for OIS market in USD, EUR, JPY, GBP, CHF; Understand the basis between OIS curves and IRS curves as being the credit/liquidity spread for different terms; Evaluate the cash and forward basis between OIS curves and IRS curves against LIBOR/EURIBOR for different terms; Apply and calculate the settlement amount for terms up to one week; Understand how overnight index swaps are used for valuation; Apply and calculate the pricing methodology of forward starting swaps; Understand the forward swap grid; Understand the mechanism of basis swaps; Analyse how a cross currency swap can be hedged by a basis swap and one or more interest rate swaps; Know the pricing of basis swaps; Understand mechanics of Overnight Indexed Swaps, relation between OIS and collateralization. Understand the following structures: Asset swaps, Libor in arrears swaps, Constant maturity swaps, Amortizing, accreting and rollercoaster swaps, Forward start swaps. Analyse the impact of the yield curve on the price of these structures.

15 Topic Basket 4 Plain Vanilla Interest Rate Options Understand the different Plain Vanilla IR option products Know Options on futures; Understand the concept and conventions of swaptions; Understand the role of forward starting swaps as underlying instruments of Swaptions; Analyse the differences between payer and receiver Swaptions; Understand the concept of cancellable Bermudan-style IRS. Understand basic concepts and show solid working knowledge in the valuation of Plain Vanilla IR options Evaluate the role of the LIBOR-Market Model for pricing Swaptions; Understand the terms and conditions of Interest Rate Guarantees caplets and floorlets; Understand the composition of Caps and Floors as strips of caplets and floorlets; Understand the composition of a collar including zero cost structures; Evaluate the impact of the forward curve on the strike levels of a zero cost collar; Understand quoting methods in the cap and floor markets; Understand the Black 76 approach for pricing caps and floors; Apply and calculate hedging and pricing of caps, floors and collars from options on STIR futures. Topic Basket 5 Exotic Interest Options & Structured Products Understand the different Exotic IR options and structured products Apply hedging strategies of more exotic structures bases on Swaptions; Analyse important Structured Products with embedded Swaptions; Analyse important structured products with embedded caps and floors. Understand basic concepts and show solid working knowledge in the valuation of Exotic IR options and structured products Analyse the relationships of dynamics of the interest rate curve, curve expectations and structured products; Understand the method of Factor analysis of the interest rate curve; Understand the objectives of modelling the term structure of interest rates; Evaluate forward curves, curve expectations and their impact on the following structures: Capped Floater, Reverse Floater, Callable bonds, Range Accruals, Libor-in-arrears, CMS floater, Structured Products linked to Overnight Index Swaps; Understand how the above structures could be hedged; Apply combining short-term interest rate swaps with barrier options; Apply combining long-term interest rate swaps with series of digital options; Understand the different valuation approaches for structured interest products: Short Rate Models, HJM-Framework, Market Models.

16 Topic Basket 6 Credit Derivatives Understand the functionality and conventions of different Credit Derivatives Understand the basic terms of a credit default swap including the relevant ISDAdefinitions : Credit events Physical settlement versus cash Settlement Reference Obligation versus Deliverable Obligations Understand Credit indices (itraxx and DJCDX), CDOs and Basket Default Swaps. Understand the fundamental principles of the credit derivative market Evaluate the main applications of Credit Derivatives, i.e. to Reduce/hedge credit risk, Actively take certain credit risks, Generate extra returns, Set up tailor made structured credit risk profiles, Generate synthetic bonds/loans that are not available in the market in this form (time to maturity, currency, etc.). Understand arbitrage relationships of Credit Default Swaps and Asset Swaps and the CDS-Basis; Understand the main lessons from the credit crisis: Big bang and Small Bang protocols, Quoting standards and standardized pricing, Standardization of CDS contracts, Determination of occurrence of credit event by the Determination Committee. Show solid working knowledge in the field of credit derivatives Understand the structuring principles of credit-linked notes; Apply and calculate market implied default probabilities based on CDS curves; Apply mark-to-market valuation principles for CDS contracts; Apply trading strategies with CDS: Curve trades, Capital structure trades, Long-short trades, Relative value arbitrage, Role of CDS in convertible arbitrage, Credit versus equity arbitrage.