Euromoney Learning Solutions

Available dates

Jul 20—24, 2020
5 days
London, United Kingdom
GBP 5245 ≈USD 7278
GBP 1049 per day


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About the course

A guide to derivatives instruments & markets management

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.

This course consists of two parts:

Fundamentals of Derivatives is a comprehensive overview of the major classes of derivatives, distinguishing between linear and non-linear derivatives.

Bank Applications of Derivatives 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 profile


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


Introduction to Options

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


Bank Applications of Derivatives (1)

Session 1 Delivering Customer Solutions (1): Using Swaps in Primary Bond Issuance

  • Market structure
  • Inter-bank v customer market
  • Broker quotes in the inter-bank market
  • Why a swaps market exists
  • Linking the securities market place and loan market
  • Using IRS to alter corporate liability profiles
  • Understanding the motivation for swapping from fixed financing to a floating liability
  • Swaps and price discovery in the primary market: Calculating the “all-in” funding cost as a spread over LIBOR
  • Using currency swaps to manage liability structures
  • Using swaptions and interest rate caps to secure lower floating rate funding costs
  • Miss-uses of derivative products aimed at SMEs: Best practice

Case Study: Delegates will compare funding alternatives for a company

Session 2 Delivering Customer Solutions (2): Providing Tailored Hedge Programmes for Customers’ FX Exposures

  • Understanding typical corporate FX exposures
  • Managing FX exposures with FX forward contracts
  • The problem with “forward only” cover
  • FX option primer
  • Using vanilla currency options to retain the up-side
  • Tailored solutions for non-financial institutions: Creating zero premium products with option combinations
  • Collars, range-forwards, forward-bands and cylinders
  • Participating forwards
  • Ratio forwards
  • Break-forwards, FOXs and forward reversing options
  • Introducing more innovative solutions: using “exotic” options to reduce hedging costs
  • Introduction to barrier options

Case Study: Delegates will propose a suitable hedging strategy for a corporate with FX exposures


Bank Applications of Derivatives (2)

Session 1 Financial Engineering with Derivatives

  • Primary motivations for structuring
  • Securing cheaper funding
  • Providing attractive risk/reward profiles for investors
  • Earning fee income
  • The structuring process

Session 2 Delivering Cheaper Funding: Inverse Floating Rate Notes

  • Investor perspective
  • Understanding the structure
  • Variations on a theme
  • Deferral period
  • Adding a minimum rate
  • Step-ups
  • Adding leverage
  • Pricing and valuation
  • Hedging the issuer exposure
  • “Super-floater” FRN’s

Case Study: Delegates will construct a deferred reverse floating rate note, identifying appropriate parameters, and identifying the “hedge” required by the Issuer to ensure LIBOR based financing

Session 3 Targeting the Retail Market: Capital Guaranteed Notes & High Income Products

  • Understanding the process and distribution channel
  • Who takes the risk
  • Constructing a capital guaranteed note
  • Introducing a cap and other common variations
  • High income products
  • Selling puts to increase income
  • The listed certificate market
  • Auto-callable structures

Case Study: Delegates will critically analyse a recent World Bank equity-linked note from the perspective of issuer and investor

Trust the experts

Paul Kitching

The Course Director was the Strategic Development Manager at the London International Financial Futures Exchange (LIFFE), where he was responsible for the research and definition of new specialist swap and risk transfer contracts. Prior to this, he was Head of Interest Rate Product Development wi...


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