Interest Rate Derivatives 1: Hedging and Managing Risk

London Financial Studies
Training overview
Professional Course
4 days

Course description

Interest Rate Derivatives 1: Hedging and Managing Risk

Interest Rate Derivatives 1: Hedging and Managing Risk

Interest Rate Derivatives are an essential part of the financial marketplace. This program will equip you to use, price, manage, and evaluate interest rate and cross-currency derivatives.

The course starts with the building blocks of money markets and futures, through yield curve building to interest-rate and cross-currency swaps, options, and structured products. The approach is hands-on and learning is enhanced through many practical exercises covering hedging, valuation, and risk management. This course also includes sections on XVA, documentation, and settlement.

The program includes extensive practical exercises using Excel spreadsheets for valuation and risk management, which participants can take away for immediate implementation.

Over the course duration, participants will become familiar with the following course objectives:

  • Gain familiarity with modern multi-curve interest-rate derivatives pricing
  • Learn how to build a yield curve from alternative instruments, and then bootstrap discount factors and forward curves
  • Explore the relationship between futures, forwards, and FRAs
  • Understand the four equivalent expressions of a yield curve: par curve, zero curve, discount curve, and projection curve
  • Construct hedges using futures, swaps, and bonds
  • Price and revalue swaps
  • Learn how to value and hedge a swap portfolio
  • Structure asset and liability (new issue) swaps
  • Price and structure cross-currency swaps
  • Understand documentation, credit, and settlement including XVA
  • Learn Option fundamentals and the “Greeks”
  • Design, price, and use caps, floors, collars, and swaptions
  • Understand and structure combinations of derivative products
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Who should attend?

This course is designed for anyone who wishes to be able to price, use, market, manage or evaluate interest rate derivatives including:

  • Interest-rate sales, traders, structurers, quants, and relevant IT personnel
  • Bank Treasury and other Asset Liability Management executives
  • Central Bank and Government Treasury Funding managers
  • Insurance Company investment managers
  • Fixed Income portfolio managers
  • Company finance executives and investment bankers
  • Risk managers, finance, IPV professionals, auditors, and accountants

Training content

This intensive 4-day Interest Rate Derivatives 1: Hedging and Managing Risk course, offered in New York, covers a wide range of material and topics. The course content is structured as follows:

Day One

Money-Market Rates

  • Interest rate conventions and calculations
  • Simple and compound interest, continuously-compounded rates
  • Time value of money and discounting
  • Money-market (LIBOR and Overnight) rates, background to LIBOR controversy
  • The emergence of new benchmark overnight rates and the transition away from LIBOR

Futures and FRAs

  • FRA mechanics and settlement
  • Using FRAs to manage short-term interest rate risk
  • Computing forward rates in a classical world, and briefly on why the calculation fails in reality
  • Eurodollar futures contract details, settlement, and margining
  • Using Futures to manage short-term interest rate risk
  • Understanding the Futures/FRA convexity adjustment

Workshop: Hedging corporate interest rate exposure with Eurodollar futures

Understanding Curves

  • Discount curves and projection curves
  • What is the right discount curve for a bank to value its trading book?
  • Computing the four representations of a yield curve: par rates, zeros, the discount curve, the forward (projection) curve
  • Bootstrapping an overnight discount curve
  • Constructing a projection curve from FRAs/futures/LIBOR swaps
  • Interpolation techniques
  • Introduction to interest rate risk, DV01, and bucket DV01s by perturbation

Workshop: Take a par overnight curve and derive the discount curve, forward curve and zero-coupon curve; price swaps; compute bucket-DV01 risk vector

Workshop: Build a forward-rate zero curve from depos, Eurodollar futures, and LIBOR swaps

Interest Rate Swaps

  • The background to swaps, today’s market, and applications
  • Quoting swaps – absolute rates or spreads?
  • Market conventions, structures, and terminology
  • Intuitive swap pricing, PV01
  • Close-outs, unwinds, and assignments
  • LIBOR swaps vs. OIS
  • The modern multi-curve framework, tenor basis, and term premiums

Day Two

Interest Rate Swap Applications

  • Swaps in funding, new issue swaps
  • Asset swaps, par/par, and market value structures
  • ASW vs. CDS spreads
  • Trading swaps – curve trades
  • Hedging short-end risk: with interest rate futures
  • Hedging long-end risk: with swaps, with cash bonds, with bond futures

Workshop: Price a swapped new issue

Workshop: Price an asset swap (par/par and MV) of a corporate bond

Bond Futures

  • The 10yr Bund Future on Eurex – mechanics and settlement
  • Conversion factors, implied repo, and the CTD
  • Basis trading
  • Bond futures DV01

Cross-Currency Swaps

  • Cross-currency swap mechanics, comparison with FX swaps
  • The CRX basis and its drivers
  • Applications of CRX swaps
  • CRX swaps and credit exposure
  • Doing it properly: CRX-adjusted discount curves

Workshop: Pricing a cross-currency new issue

Day Three

Docs, Credit and Settlement

  • OTC vs. exchange-traded
  • Swap clearing and CCPs
  • Swap execution through SEFs
  • Bilateral (OTC) swaps – the role of the ISDA Master
  • Credit mitigation – quantifying exposure (EAD, EPE, PFE)
  • CSAs and collateral

XVA Adjustments

  • The impact of asymmetric collateral positions
  • FVA and the cost of funding
  • Pricing credit risk, CDS fundamentals
  • Computing the cost of credit exposure (CVA)
  • Own-risk adjustment (DVA)
  • The double-counting trap between FVA and DVA

Workshop: Computing the CVA charge from first principles for a swap

Option Fundamentals

  • Terminology, settlement, basic payoff diagrams
  • Key drivers of the premium – the forward and the implied vol
  • Put-call parity, intrinsic, and time value
  • Briefly on options pricing – binomial trees, BSM, monte-carlo
  • Option “Greeks”
  • Delta-hedging an option position
  • The fundamental importance of gamma
  • Quantifying vol risk (vega)

Workshop: Delta-hedging an option position

Day Four

Interest Rate Options: Caps, Floors

  • Definitions and mechanics
  • Applications
  • Zero cost collars, participating caps
  • Delta-hedging caps and floors

Interest Rate Options: Swaptions

  • Definitions and mechanics
  • Cash vs. physical settlement – why it matters
  • Bermudan swaptions
  • Hedging swaption risk – why Bermudans are so much harder
  • Applications (in corporate interest-rate risk management, in structuring callable bonds)

Workshop: Liability-hedging for corporate treasury

The Vol Surface for Rates

  • Defining interest rate dynamics – Normal, Lognormal or CEV?
  • Quoting vols – Lognormal (Black) or Absolute (Normal)
  • Understanding and quantifying smile and skew
  • Hedging with RRs and Flys
  • Drivers of the smile and skew
  • The role of stochastic volatility
  • The needs for a better model – introduction to SABR



The cost of the Interest Rate Derivatives 1: Hedging and Managing Risk training course is available upon request.

Certification / Credits

London Financial Studies is registered with CFA and GARP Institute as an Approved Provider of continuing education programs. GARP & CFA Institute members attending this course are eligible for 32 CE/CPD credits.

About London Financial Studies

London Financial Studies

Global markets move quickly, evolving continuously and deepening in complexity. Over the past decades London Financial Studies has provided specialist executive education programs and short courses focused exclusively on global capital markets. Preparing only the highest quality and most relevant...

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