Euromoney Learning Solutions

Introduction to Derivatives

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About the course

This five day School of Derivatives provides you with a thorough understanding of the derivatives market for both OTC and exchange-traded instruments. It focuses on how banks use derivatives to manage their own exposures and to provide practical solutions to their customers.

You can attend both modules of this School of Derivatives to enjoy most benefit or pick from the following modules.

Module 1: Fundamentals of Derivatives (Day 1-Day 3), is a comprehensive overview of the major classes of derivatives, distinguishing between linear and non-linear derivatives.

Module 2: Bank Applications of Derivatives (Day 4-Day 5) explains, by way of specific examples, how banks use derivatives for their own and their customer benefit. The first part looks at specific solutions for customers and focuses on the role of swaps in the primary issuance business, and managing customer FX exposures; whilst the second looks at financial engineering, and more specifically, at how derivatives can be used to reduce funding costs and/or as a means of the bank earning fees without taking a proprietary position, whilst at the same time providing investors with instruments that meet their risk/reward requirements.

Summary of course content

  • How and why are derivatives used in practice?
  • The difference between exchange-traded and OTC derivatives?
  • Clearing procedures for exchange-traded derivatives
  • Understanding the principal money market derivatives and how they are used to manage interest rate risk
  • Swaps and how banks and other institutions use them
  • Prima on options and their application in the management of FX risk
  • How derivatives are embedded in common structures to provide investors with attractive risk/reward profiles


The School uses interactive lectures, worked examples and real-world case studies showing in detail how the products are used and why. It shows the products in a highly practical way, without over-complication, with clear illustrations of each so that you may readily understand them and the role the bank plays.



Introduction to Derivatives & Derivative Types

Session 1 Introduction to Derivatives

  • What is a derivative?
  • The equity CFD market explained
  • Why is there a market for derivatives?
  • Attributes of derivatives
  • Practical uses of derivatives
  • Leveraged trading
  • Risk management applications
  • Creating synthetic positions
  • Advantages of derivative instruments over cash instruments

Session 2 Market Structure for Derivatives

  • Exchange traded v over-the-counter (OTC) derivative instruments
  • Identifying derivatives risks and how they can be managed
  • The role of Master Agreements in OTC transactions
  • What is payment netting and when does it apply
  • Termination of contracts in the event of insolvency: close-out netting
  • Credit Support Annex (CSA) and collateralisation
  • From bilateral to multilateral netting: advantages and reasons for caution
  • CCPs and the management of counterpart risk
  • Variation margin v collateralisation
  • Initial margin v maintenance margin

Session 3 The Regulatory Framework

  • Regulation pre the financial crisis
  • Regulation post the financial crisis
  • Underlying policy objectives
  • The provisions of the European Markets Infrastructure Directive (EMIR) and the Markets in Financial Instruments Regulation (MiFIR)
  • Reporting transactions


Swap Instruments

Session 1 Swaps

  • Interest rate swap (IRS) mechanics
  • Market conventions explained
  • IMM and MAC swaps
  • Relationship between swaps, forward rates and forward based instruments
  • The IRS as a collection of forward rate agreements (FRAs)
  • Creating a synthetic IRS using short-term interest rate (STIR) futures
  • Current issues for IRS
  • What should the “floating leg” reference to?
  • Libor following the financial crisis
  • Overnight rates v term rates
  • Recent developments in interbank reference rates and their implications on the swaps market
  • The rise of the overnight index swap (OIS)
  • Currency swaps
  • Understanding he role of the cross currency basis swap
  • Impact of regulatory changes on swap market infrastructure
  • Multi-lateral trading platforms
  • Central clearing
  • Prospects for exchange traded swaps

Session 2

A Framework for Marking-to-Market OTC Derivative Positions

  • Building the discount function
  • The concept of discounting and zero rates
  • Which curve should be used?
  • “Bootstrapping” the swaps curve

Case Study: Using the bootstrapping approach, delegates will derive the inter-bank discount function

Session 3 Marking-to-Market Interest Rate & Currency Swaps

  • Identifying the cash flows
  • Representing the floating cash flows as notional cash flows
  • Pricing and market-to-market a vanilla IRS
  • Assumptions and limitations
  • OIS discounting and forwarding curves

Case Study: Using the discount function derived earlier, delegates will mark-to-market a number of swap positions



Session 1 An Options Primer

  • What is an option?
  • Option terminology
  • Exercise types
  • Option “moneyness”
  • Intrinsic v time value
  • Understanding the payoff profiles

Session 2 Trading & Hedging Strategies with Equity Options

  • Understanding how to construct payoff profiles for combinations of options and the underlying
  • Understanding the relationship between puts and call
  • Identifying common directional and volatility trading strategies
  • Hedging with options

Case Study: Delegates will draw the payoff profiles of a number of trading strategies

Session 3 Introduction to Option Pricing & Risk Measures

  • The importance of correct valuation
  • What drives the price of the option: Understanding the model inputs
  • Approaches to option valuation: hedge approach v probabilistic approach
  • Breaking-down the Black Scholes option pricing model
  • Option risk measures: defining the “Greek” sensitivities

Case Study: Delegates will use the option Greeks to estimate the new price following a change in market variables

Trust the experts

Goliath Lau

Goliath Lau has over 13 years of trading experience in the financial derivatives industry. After a brief period as an officer in the back office, he became a HKD and USD interest rate derivatives and government bond trader at HSBC Hong Kong in 1995. As a market maker of HKD interest rate derivati...


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