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Euromoney Learning Solutions

Advanced Derivatives

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Description

A comprehensive course covering the key pillars of the modern derivatives world

This is a comprehensive five day programme, split into two halves: a detailed 2-day course on interest rate derivatives, and a 3-day course covering equities, FX, credit and XVA . The content is modular, with each day a standalone session on the key pillars of the modern derivatives world.

Module 1 – Interest Rate Derivtives

  • Day 1 Interest rate derivatives, swaps and cross-currency swaps, modern yield curve construction
  • Day 2 Interest rate options and exotics, CMS and applications, structured products

Module 2 – Equities, FX, Credit and XVA

  • Day 3 Equity and FX options, exotics, structured products and trading the volatility surface
  • Day 4 Credit derivatives, CDOs and structured credit
  • Day 5 Funding, XVA, and the new regulatory world

The emphasis is on a healthy mix of theory and client applications, and is illustrated throughout with real-life examples and case-studies.

Agenda

Day 1 Interest Rate and Cross-Currency Swaps

Interest rate swaps

  • Quotation and terminology
  • Drivers of yield curve shape and level
  • Understanding swap spreads

Settlement and clearing

  • OTC versus central clearing
  • The ISDA Master and the role of the CSA
  • Collateral and netting
  • Briefly on CVA adjustments

Customer applications

  • Using swaps to hedge debt issuance
  • Asset swaps
  • Curve trades and other proprietary positions

Formal swaps pricing

  • From par rates to discount curves and forwards
  • Bootstrapping the discount curve
  • The choice of the discount curve – why OIS?
  • Tenor basis and projection curves
  • Modern yield curve construction

Cross-currency swaps

  • Mechanics of a CRX swap
  • Understanding the drivers of the CRX basis spread
  • Customer applications  

Day 2 Interest Rate Options

Caps, floors and collars

  • Mechanics and settlement

Swaptions

  • Structure and mechanics
  • European versus Bermudan settlement

Constant maturity swaps

  • Mechanics, quotation and settlement
  • Understanding the convexity adjustment
  • Model-independent replication and hedging of the convexity
  • Applications in liability-management

Understanding the volatility surface

  • Drivers of the skew and smile
  • Normal versus lognormal vol, CEV models, shifted lognormal
  • Introduction to stoch vol and SABR

Introduction to interest rate modelling

  • Single-factor models
  • Mult-factor models and the LMM

Structured products

  • Callable bonds
  • Embedding options for yield-enhancment: capped FRNs, reverse floaters

Corporate liability management Interest rate exotics and structured products

  • Digitals and range accruals
  • Target redemption structures
  • CMS spread-linked

Day 3 Options, Exotics and Structured Products

Option fundamentals

  • The basic payoff diagrams
  • Cash versus physical settlement
  • Popular option combinations and strategies
  • Volatility - what it is and why it matters

Option pricing

  • Intuitive drivers of the premium
  • Binomial trees
  • Monte Carlo
  • Black-Scholes

Option risk-management

  • The delta hedge
  • The fundamental role of gamma
  • Gamma versus theta

Understanding and trading volatility

  • Defining implied volatility
  • Defining the vol surface, smile and skews
  • Hedging smile and skew risk, risk-reversals and butterflies
  • The role of stochastic vol in understanding smile and skew
  • Quantifying the risk - vanna and volgamma
  • Introduction to local and stochastic vol models

Exotics and structured products

  • Digitals and range-accruals
  • Barrier options and client applications
  • Static hedging of barrier options
  • Autocallables and accumulators
  • Cliquets and the problem of forward vol

Day 4

Credit Derivatives

Mechanics of a CDS contract

  • Defining a credit event
  • CDS setttlement

Pricing and risk

  • The credit triangle – relating credit spreads to default probability (PD), exposure (EAD) and expected recovery (LGD)
  • Risky discounting
  • Standard contracts, fixed spreads, computing the upfront
  • CS01 and convexity

Hedging bond positions

  • Constructing the hedge – default risk or spread risk?
  • Trading the cash-CDS basis
  • Drivers of the basis

CDS indices (iTRAXX and CDX)

  • Mechanics and settlement
  • Intrinsic spread and skew
  • Sub-indices

Tranching and correlation

  • Synthetic single-tranche CDOs
  • Credit correlation and why it matters
  • Understanding the tranche delta

Structured credit trading

  • Tranche trading and convexity
  • Nth-to-default baskets

Day 5 Counterparty Risk, Funding and XVAs

Key concepts and metrics of counterparty exposure

  • When exposure is non-static – why derivative are tricky
  • Key metrics of exposure for derivatives: EL, EE, EPE, PFE

From exposure to Expected Loss

  • Monte carlo simulation and semi-analytical methods
  • Computing EL for some simple positions: IRS, forward FX

Pricing for default risk

  • The traditional approach versus the CVA approach

Computing the CVA charge for the most common positions

  • Shortcut calculational tricks
  • Mitigating the exposure on cross-currency swaps

Wrong-way risk

  • Examples of wrong-way (and right-way) risk
  • Computing the CVA charge with wrong-way risk
  • The new CVA capital charge in Basel III

DVA – adjusting for your own risk

  • DVA for some common positions
  • Is DVA real? Why it remains controversial

CSAs and collateral

  • The importance of netting
  • CSA key terms
  • The dual role of the CSA – collateral as funding

Building a funding curve

  • The choice of OIS as a core discount curve
  • What is meant by ‘CSA discounting’
  • The ‘cheapest-to-deliver’ option in collateral posting

Understanding the Funding Valuation Adjustment (FVA)

  • Adjustment for asymmetric collateral terms
  • Avoiding the trap of double-counting FVA and DVA
  • Other XVA adjustments

The new regulatory world

  • Central clearing
  • Regulatory legislation: Dodd-Frank, EMIR, MiFiD and the rest
  • What can we expect from Basel IV?

Experts

Richard started his career in 1988 in the Derivatives Product Group at Morgan Stanley, which he joined after three years of post-grad research in Theoretical Physics. He spent three years as a rates and FX structurer at Morgan Stanley before moving to a similar role at Deutsche Bank in London. In...

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