Training Courses

Understanding and Pricing Interest Rate Swaps

Category: Derivatives

Course level: Introductory

In house

This two-day course is designed to provide a detailed review of interest rate swaps, the markets, pricing and uses in the markets.

Objectives

By the end of this course, delegates will have a better understanding of:

  • the nature of interest rate swaps
  • swap pricing mechanics
  • swap trading in the markets
  • settlement and marking-to-market conventions
  • uses by asset managers and corporates

Length

2 days

Course Content

Introduction

The cash flow approach
Bonds and Floating Rate Notes
Funding with loans/deposits
FRAs
Repos

Capital adequacy requirement

The Basel committee
Basel ratio
CAR, CAR I and CAR II
Accounting
Implication for banks
Off-balance sheet products

Swap definition and types of swaps

Interest rate swaps (IRS)
Basis swaps vs coupon swaps
Currency swaps with and without exchange of principals
Exotic swap structures

Uses of swaps

Speculation vs hedging
Asset and liability management
Market making
Risk management
Debt origination arbitrage
Asset swaps and synthetic structures
Collateralisation

Swap documentation

All-in quotes vs spreads
Swap dealing ticket
BBAIRS swap agreement
ISDA master agreement
Cancellation, novation, assignment

Interest rate arithmetic and market conventions

Time value of money
Discount and compound factors
Yield and return
Simple interest formula for money markets
Compound interest formula for capital markets
Market conventions

Pricing long-term swaps

Establishing the cash flows of the floating side
Discounting the floating cash flows
Compounding to find the fixed cash flows
Working out the fixed rate
Short cut
Case study: Pricing a long-term swap

Swap Valuation

Present Value of a Basis Point (PVBP)
Market risk management

Pricing short-term swaps

Establishing the cash flows of the floating side
Discounting the floating cash flows
Compounding to find the fixed cash flows
Working out the fixed rate
Case study: Pricing a short-term swap

Pricing non-standard swaps

Step-up, step-down coupon swaps
Forward starting swap
Overnight-index average swap (SONIA)

Asset swap pricing

The principles of asset swap pricing
The par structure
Issues with discounted bonds
Issues with premium bonds

Benchmarking bonds with swaps

The need for asset swaps
Comparison with other benchmarks

Risk management and summary

Managing interest rate risk with futures, FRAs, swaps, caps, floors and collars
A swap is not a swap

This course would be suitable for:

  • Client services and call centres
  • Finance and accounting
  • HR and training
  • Investment administration and operations
  • Investment professionals
  • IT and software developers
  • Legal & Compliance
  • New entrants
  • PR and recruitment firms
  • Risk management
  • Sales and marketing
  • Senior managers

This course would be suitable for these exams:

  • CFA - Level 2
  • CFA - Level 3
  • SII Certificate - Derivatives
  • SII Certificate - Financial Derivatives Module
  • SII Certificate - Securities & Financial Derivatives
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