Derivatives Pricing This course can also be presented in-house for your company or via live on-line webinar

Transcription

1 Derivatives Pricing This course can also be presented in-house for your company or via live on-line webinar The Banking and Corporate Finance Training Specialist

2 Course Overview This course has been available as a public training programme in many countries around the world in particular in London, Frankfurt and Singapore. It has also been available as an inhouse programme in emerging markets. Bond Markets and Swaps are playing ever greater role in capital markets. Questions about how to weather the current turmoil, correctly price a new bond issue and then properly value the positions over Course time Overview has become an essential requirement. Financial Derivates have played an increasingly important role since their introduction. In some markets, they actually have become the driving force behind the movements in cash markets. Overall course aim: To provide market participants with the necessary building blocks to understand the different products in financial markets leaving them with an excellent foundation and a comprehensive overview in order to understand and develop new structures. This course starts with a review of the financial markets and the impact that the financial crash has had on markets, banks ability to trade and hedge positions and the pricing of financial instruments. It will also look at current regulatory issues such as Basel III and the Volcker Rule. No course on pricing of financial instruments could be undertaken without reference to a robust yield curve, this course shows how curves are built using instrument that the institution uses to value and hedge positions. Discussions of the future of riskless interest rates and credit value adjustments will be undertaken. The afternoon of the first day will be taken up by demonstrating how an interest rate swap is priced in the primary and secondary markets and how the correct use of an ISDA Master Agreement, CSA and collateral can mitigate use of banks own capital for credit risk purposes. Day two commences with a short summary of the futures markets and their relationship with the interest rate swap markets. Option pricing can at first seem complex and difficult to understand, the morning of day two will be used to explore how options are priced and risk managed using the Greek letters. This session will use enough mathematics to ensure that solutions are robust, but will also explain concepts in a practical manner so participants can take their newfound knowledge and apply it to their everyday trading and risk management tasks. Exotic (path dependant) options will be explained, in particular where the pricing and risk management is similar and where it is different to conventional options. Finally, a small number of structured products will be constructed from their building blocks to show how they are priced and risk managed. The products that will be demonstrated will include capital protected notes and yield enhancing structures. The trainer for this course has developed a number of Excel Spreadsheet pricing and risk management tools which will be used on the course. Where appropriate Bloomberg functionality will be referenced and explained.

3 Course Content Day 1 Introduction: Overview over Financial Markets pre and post the financial crisis Cash Flows: the Underlying of any Financial Instrument Risk and Return Characteristics Banking Regulations: Capital Adequacy Requirement Basel III The need for derivatives Current developments Basics of Pricing A refresher Simple interest calculations Single and multiple rate compounding Interest and discount factors Day/count conventions and comparative returns Curve construction, blending, interpolation and splining Building a yield curve from Deposits Futures Interest Rate Swaps Deriving zero and forward rates from the swap curve Interest Rate and Currency Swaps: The Swaps Mechanism Types of Swaps The Principle of Swap Pricing: The Need for Forward Rates The Need for Zero-coupon Rates Generic Swap Pricing: Finding the Forward Amounts Discounting the Floating Leg Equalise the Floating Leg with the Fixed Leg Discounting the Fixed Leg Finding the Swap Rate Creating a Swap Curve Swap Valuation in the Secondary Market (Mark to Market): Swap Rates Zero-coupon Rates Forward Rates Discount Factors PV of fixed and floating Leg Net Present Value Short-term Swap Pricing: Pricing and Valuation of EONIA Swaps Understanding and pricing Basis Swaps

4 Day 2 Introduction to Futures and Options: The History and Development of the Market Definitions Over-the Counter (OTC) versus Exchange Traded Products The Role of The Clearing House in both listed and OTC products Pricing and Valuing Futures: Basic Futures Mechanism Pricing Futures through Cash and Carry Arbitrage The Value Basis The Carry Basis The Importance of Credit Specialities with Futures Contracts: Cash Settlement Physical Delivery Introduction to Options: Definitions Calls and Puts A Simple Approach to Option Pricing: Volatility Realised volatility of the underlying asset Implied volatility as quoted by the market The volatility gap range and how to read it The importance of implied volatility smiles and skews the skew in equities 25 delta risk reversals in FX Creating a 3D volatility surface with which to price options and understand risk The Binomial Model The Black & Scholes Model Incorporating local volatility into the model Risk Management and Position Control of Options Option Greeks a must know and understand! Delta and Gamma for spot rate risk Gamma needs to be put into silos as Gamma is greatest at the money and loses its potency as the option moves into or out of the money Theta for time decay Vega/Kappa for implied volatility risk categorised as a change of 1% in implied volatility Volatility risk needs to time bucketed as volatility has different prices for different maturities Phi for base currency interest rate risk categorised as a increase of 1% in the base currency LIBOR applicable to the maturity date of the option or strategy Rho for pricing currency interest rate risk categorised as a increase of 1% in the pricing currency LIBOR applicable to the maturity date of the option or strategy Case Study: Managing the Risks

5 How to run an options book, three common methods: Delta hedging Gamma hedging Vega hedging Relative advantages, disadvantages and risks Exotic Options: Barrier Options pricing and hedging of: Barriers Reverse Barriers Best of two (Digital) Other types of path dependant options The principal of Structured Products: Participation and Tracking Guaranteed Return Products Yield enhancement Course Summary: Putting Financial Instruments Into Context Risk Management Tailored Learning All of our training courses can be tailored to suit your company s exact training needs. We will work closely with you to help develop a training programme with content that is unique for your organisation. Please us on enquiries@redcliffetraining.co.uk for more information E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact requirements. enquiries@redcliffetraining.co.uk +44 (0)