Fundamentals of Swaps - Mechanics, Pricing and Applications

Monday, April 20

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 General Introduction to Swaps

• What is a “Swap”?
• Background and Historical Development
• Swaps and Swap Markets
• Types of Swaps
• Fundamental building blocks
• Overview of Applications
• Risks of Swaps
  • Market Risks
  • Counterparty Risk
  • Legal and Operational Risks

Introduction to Swaps and Swap Pricing

• Fundamental building blocks
  • IRS, currency swaps, non-generic swaps
  • Hedging Structure
  • Asset Swap
  • Relative Rating

12.00 - 13.00 Lunch

13.00 - 16.30 Pricing Generic Interest Rate Swaps (continued)

• Pricing Swap as Libor-Financed Bond
• What Drives the Swap Spread?
• Comparison Swap Approach
• Zero Coupon Approach
  • Yield curve construction using deposits, futures and par swaps
  • Convexity adjustment
  • Recursive “bootstrapping” of par curves
• Blending and smoothing techniques
  • Cubic Splining
• Forecasting variable cash flows
• Pricing Examples
  • Determining fair value and fair swap rates
  • Moving spreads from fixed to floating side
• Exercises

Tuesday, April 21

09.00 - 09.15 Recap

09.15 - 12.00 Pricing Currency and Cross Currency Swaps

• Decomposing Currency Swap Structures into Building Blocks
• Pricing Libor Basis Swaps
• Where does the spread come from?
• Pricing Currency Swaps as Series of Long-dated Forward Contracts
• Zero Coupon Approach to Pricing Currency Swaps
• Exercises

Analysis of Non-Generic Swaps

• Zero Coupon Swaps
• Amortizing Swaps
• Accreting Swaps
• Rollercoaster Swaps
• Forward Starting Swaps
• Cases and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Analysis of Non-Generic Swaps (Continued)

• Arrears Reset Swaps
• Constant Maturity Swaps
• Yield Curve Swaps/Basis Swaps
• Differential Swaps
• Overnight Index Swaps
• Deferred Coupon Swaps
• Stepped Coupon/Ratchet Swaps
• Cases and Exercises

Wednesday, April 22

09.00 - 09.15 Recap

09.15 - 12.00 Managing Interest Rate and FX Risk with Swaps

• Steps in Managing Interest Rate and FX Risk
  • Exposure and Risk Measurement
  • Choice of Instrument and Calculation of Hedge Ratio
• Cash Flow Hedges vs. Fair Value Hedges
• Hedging Interest Rate Risk of Single Assets and Liabilities
  • Hedging the Interest Level exposure
  • Hedging the Slope of the Yield Curve
  • Calculating Value-at-Risk on a Swap

12.00 - 13.00 Lunch

13.00 - 16.00 Managing Interest Rate and FX Risk with Swaps (Continued)

• Managing Interest Rate Risk at the Portfolio Level
  • Using swaps in Duration Management of a Bond Portfolio
  • Using “Macro Swaps” to Hedge Loans and Deposits
  • Managing ”Value-at-Risk” with Swaps
• Hedging FX Risk with Swaps
  • Types of FX Exposure
  • Hedging FX Exposure at the Cash Flow Level
  • Hedging FX Exposure at the NPV level
• Swap Overlay Strategies
• Exercises

Evaluation and Termination of the Seminar