Interest Rate Derivatives 3: Structuring

London Financial Studies
Training overview
Professional Course
3 days

Course description

Interest Rate Derivatives 3: Structuring

A comprehensive and practical workshop on pricing, using and managing structured interest rate derivatives.

What used to be called exotic interest rate derivatives are now commonplace and an essential part of the financial marketplace either as legacy transactions or embedded in new structures.

This intensive course is for anyone who wishes to be able to use, price, manage, market or evaluate standard interest rate derivatives such as Constant Maturity Swaps, Range Accruals and Quantos. We also look in detail at such important products as CMS spread-linked structures and volatility/variance swaps, always from a pragmatic practitioner’s perspective.

Learning Objectives:

  • Gain familiarity with advanced option products traded in the rates world
  • Learn how to build up second generation IRDs from vanilla products and thereby hedge and manage the risk in these structures
  • Explore how to use second generation and structured products in the design of risk management strategies
  • Gain an intuitive understanding of convexity and timing adjustments needed in the valuation of second generation derivatives
  • Understand the role of correlation and volatility in the pricing and structuring of second generation IRDs
  • Understand the replicating strategy behind variance swaps

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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.

  • 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

Prior Knowledge

Basic knowledge of Microsoft Excel, a broad understanding of fixed-income markets and basic knowledge of Interest Rate Swaps and Futures is assumed.

Comprehensive teaching on fixed income markets and bond maths takes place in the Fixed Income Markets & Analytics course; comprehensive teaching on Interest Rate Swaps and Futures takes place in Interest Rate Derivatives and Swaps.

Training content

Day One

Review of Key Concepts

  • Intuitive swap pricing, PV01
  • Swaps risk and DV01
  • Option price, delta and vega
  • Principles of building a structured note or structured liability-side solution

Callable Bonds

  • The callable bond market
  • Structuring a callable with swaptions
  • Bermudan variations
  • Zero-coupon callables and Formosa bonds

Capped and Reverse FRNs

  • Capped FRNs – understanding the pricing
  • Pricing a reverse floater
  • Understanding the geared duration
  • Understanding the embedded coupon floor
  • Adding callability

Liability-side Restructuring

  • Funding arbitrage through cross-currency swaps
  • Embedding optionality into a funding transaction

Day Two

Digitals and Range Accruals

  • Examples of typical range accrual products and how they are used
  • The motivation for high-strike accrual structures
  • The cap-spread replication approach
  • Hedging digital options
  • Understanding the gamma/vega behaviour
  • Floating-rate range accruals
  • Cross-market range accruals
  • Call features


  • Description of quanto structures
  • Why use quanto swaps
  • Relative yield curve trades and carry
  • Determinants of value
  • The implications of a non-static hedge – the quanto drift-adjustment
  • The importance of correlation and its limitations

Other Drift Adjustments – Convexity Effects

  • The LIBOR-in-Arrears trade – how and why
  • Pricing LiA, the timing effect
  • Relationship to Futures/FRA convexity

Day Three

Trading Volatility

  • Why straddles don’t really get the job done
  • Vol and variance swaps – mechanics and quotation conventions
  • Pricing and hedging by a replicating log-contract

Forward Vol Structures

  • Implied forward vol
  • Ratchet floaters
  • Mid-curve options
  • Hedging mid-curve options
  • Mid-curve options and the problem of skew

Constant Maturity Swaps

  • Mechanics of constant maturity swaps
  • Understanding the convexity adjustment
  • Pricing and hedging CMS – the replicating swaption portfolio
  • Pension fund liability-management through CMS swaps and floors

CMS Floaters and CMS Spread-Linked

  • CMS floaters and SURF structures
  • CMS spread-linked structures and YCSOs
  • The motivation for CMS spread-linked

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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