Mastering Swap Markets

IFF Training

IFF Training


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About the course

Swaps continue to play a fundamental role in the financial markets. Challenges like alternative reference rates, LIBOR rigging, increased collateral requirements and intense competition for clearing business, have not slowed the inexorable growth of this vital financial tool which enables borrowers, investors and banks to hedge their interest rate, currency, credit, equity, commodity, volatility and inflation exposures.

This course will give you the opportunity to integrate a theoretical knowledge of swaps with practical market applications.

How you will learn

You will use practical sessions and exercises so that you will be able to apply your new knowledge immediately. These include:

  • Calculating the risks and rewards of the swaps market
  • Applying and using interest rate derivatives effectively
  • Exploring the full range of swap products
  • Learning about the pricing and arbitrage relationships in the swaps market
  • Applying swaps to risk management


Mastering Swaps Markets

  • Identifying risk
  • Measuring risk
  • Managing risk
  • Identifying existing positions
  • Creating a hedge for existing positions
  • Creating the required position
  • Swaps exercises

Pricing a Corporate Bond

  • ICMA 803.1 & 803.2
  • Single discount rates
  • Multiple discount rates
  • Constructing a curve

Case Study - Calculating Forward/Forward Prices and Zero-Coupon Rates

  • Single discount rates
  • The compound interest formula
  • Forward/forward rates
  • Par cash flows
  • Calculating forward prices
  • Calculating zero coupon rates

Case Study - Hedging an Equity Portfolio

  • Identifying, measuring and managing the underlying exposures
  • Long and short positions
  • Creating a hedge
  • Alternative hedges
  • Settlement
  • Advantages of the swap market over the cash market
  • Advantages of futures over swaps
  • OTC and exchange traded derivatives

Swap Curves and Government Curves

  • The underlying commodity in an interest rate swap
  • The underlying commodity in a currency basis swap
  • Increases in supply
  • Reductions in demand

Case Study - Contract Specifications

  • Underlying instruments
  • Price quotes
  • Contract months
  • Tick sizes
  • Settlement procedures
  • Position limits
  • Block minimums
  • All or none minimums
  • Rulebook chapters
  • Trading hours

Case Study - How Hedging Works

  • Measuring interest rate risk
  • Duration weighted hedging
  • Balancing the hedge
  • Hedge ratios
  • Testing the hedge

Case Study - Interest Rate Risk Management

  • Time value of money
  • Future value and present value
  • Implied repo rates
  • Discount factors and compound factors
  • Simple interest and compound interest
  • Yield and return
  • Act/act, act/360 and 30/360
  • Interpreting the yield curve
  • A guide to money market products
  • Duration, PV01s and DV01s

Case Study - Hedging Duration Gaps

  • Duration hedging
  • Duration exercises
  • The economic value of equity
  • Positive and negative gaps
  • Estimating changes in the economic value of equity
  • Durations of assets and liabilities
  • Leverage adjusted duration gaps
  • Hedging with forward contracts
  • Hedging withe futures contracts
  • Hedging with swaps
  • Stress testing hedges
  • EVE and duration gaps

Case Study - Portfolio Management

  • Investment policies
  • Sensitivity to a 1% parallel shift in the curve
  • PV01s & DV01s
  • Analysing the portfolio
  • Estimating the modified duration of the portfolio
  • Hedging the portfolio in the swap market
  • Calculating the delta vector
  • Modified duration of the swap
  • Stack hedging the portfolio
  • Strip hedging the portfolio
  • Implied yield curve views
  • Stress testing the hedge
  • Managing interest rate risk

Case Study - Risk Management at Apple

  • Investment policies
  • Yield curve shifts
  • Measuring interest rate risk
  • PV01s, DV01s, duration and convexity
  • Hedging with swaps
  • Hedging with futures
  • Measuring risk as futures equivalents
  • Stack hedging and strip hedging
  • Expressing a yield curve view
  • Using derivatives to reduce risk
  • Managing duration
  • Natural hedging

Case Study - Asset Swaps

  • Mechanics of a par asset swap
  • Cashflows of a typical par asset swap
  • Credit considerations
  • Asset swap on a discount bond
  • Asset swap on a premium bond
  • Interest rate risk of an asset swap
  • PV01 sensitivities
  • Cashflow matching risk
  • Swap rate and LIBOR spread sensitivity
  • Market asset swap
  • Variations on asset swaps

Case Study - Asset and Liability Management

  • ALM hedging
  • ALCO meeting
  • Hedging, trading and market making - the Volker Rule
  • Protecting the bank’s earnings
  • Defining a strategy
  • Managing interest rate risk
  • Calculating the impact on net interest income
  • Calculating the impact on EVE

Case Study - Amortising, Accreting and Roller-Coaster Swaps

  • Amortising swaps
  • Accreting swaps
  • Roller-coaster swaps
  • Hedging amortising, accreting and rollercoaster swaps
  • Calculating the break-even swap rate in amortising structures
  • Principles employed in hedging amortising, accreting and roller-coaster swaps

Case Study - Credit Default Swaps

  • Single name credit default swaps
  • Bond and loan prices
  • Comparing buying a bond with selling protection
  • Negative basis trade
  • Positive basis trade
  • First to default protection
  • The benchmark for correlation

Case Study - FRAs, Futures and Interest Rate Swaps

  • Buying and selling FRAs
  • Selling and buying futures
  • Paying and receiving fixed rates in the swap markets
  • Perfect hedges and basis risk
  • Contrasting exchange traded and OTC derivatives

Case Study - Forward Rate Agreements

  • The mechanism of FRAs
  • Calculating FRA rates
  • Hedging and trading with FRAs
  • Calculating the settlement amount
  • FRAs and FX swaps
  • Pricing forwards from FRAs
  • FRAs and futures
  • Contrasting the use of FRAs and futures in asset & liability management

Case Study - JP Morgan Swaps

  • Intraday trading
  • Directional risks
  • Taking a view
  • Market making
  • The Volker Rule revisited
  • Realising gains and losses
  • Marking to market
  • Sensitivity

Valuing Interest Rate Swaps: A Traditional Approach

  • Zero coupon equivalent rates
  • Discount factors
  • Spot curves and implied forward rates
  • The present value of the floating leg of the swap
  • The present value of the fixed leg of the swap

Case Study - Rationale for OIS Discounting

  • Creating the OIS curve
  • Bootstrapping Libor curves in an OIS world
  • Libor curves
  • Generation of an OIS curve when collateral is posted in a different currency
  • Discounting of cross currency swaps
  • Interest rate derivative pricing in the absence of a collateralised CSA

Case Study - Nestle’s Swap Driven Bond Issue

  • Calculating the net proceeds of the deal
  • Establishing the borrower’s all in cost
  • Creating a par/par structure
  • Advantages and disadvantages of a par/par structure

Case Study - Swap Driven Bond Issues (Multilateral Development Bank)

  • Motives for borrowers
  • Motives for arrangers
  • Motives for investors
  • The advantages of par/par structures
  • Discount rates: a discussion

Case Study - Nordic Export Credit’s Currency Swap

  • Fees and expenses
  • Establishing the cash flows
  • Plumbing diagrams
  • All-in fixed rate costs
  • All-in floating rate costs
  • Initial payments and receipts
  • Annual payments and receipts
  • Dynamics of basis swap prices
  • Hedging with basis swaps
  • Cross default, pari passu and negative pledges

Case Study - FMC Corporation

  • Calculating the all-in-cost
  • Summarising and generalising the arithmentic
  • Benchmarking the deal to governments
  • Benchmarking the deal to the swaps curve
  • Asset swap spreads
  • G-spreads and Z-spreads

Case Study - Multi-Currency Debt Management

  • Identifying the exposure
  • Cash market alternatives
  • Forward outrights, FX swaps and currency swaps

How Global Investors Turn Negative JGB Yields Into Big Returns

  • Record-low negative yields
  • Discount offered to dollar holders to borrow yen
  • Fixed coupon equivalent for owning five-year JGBs
  • Foreign demand for Japan’s two- and fiveyear bonds
  • Cross-currency basis swaps
  • Demand for dollars

Hedging Challenges

  • Interest rate options
  • Hedging pitfalls
  • JP Morgan’s London Whale losses
  • ISDA - dispelling myths

Case Study - Portuguese Train Company Can’t Escape Snowballs

  • Managing financial risks
  • Laying off risks with banks
  • Laying off risks with customers
  • Snowball interest rate swaps
  • Calculating downside risks
  • The view of the courts
  • Legal and moral significance of hedging and trading
  • Bank/customer relationships

Summary Case Study - The Rules of Risk Management

  • Return and risk
  • Transparency
  • Experience
  • Known unknowns and unknown unknowns
  • Communication
  • Diversification
  • Discipline
  • Fraud, mismanagement, greed and corruption
  • Common sense


Alan McDougall

Alan helps banks and their clients to manage risk. He has designed and delivered over 1600 highly interactive training days in more than 40 countries for the International Faculty of Finance, Goldman Sachs, Morgan Stanley, JP Morgan, HSBC, Deutsche Bank, Rabobank, BNP Paribas, Societe Generale, U...

Videos and materials

Mastering Swap Markets at IFF Training

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Coursalytics is an independent platform to find, compare, and book executive courses. Coursalytics is not endorsed by, sponsored by, or otherwise affiliated with any business school or university.

Full disclaimer.

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