Yield Curves - Construction, Modelling and Applications

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Fundamentals of Yield Curve Construction

• Yield Curves and their Applications in Finance
• Building Blocks in Yield Curve Construction
  • Price and yield analysis
  • Spot rates and discount factors
  • Continuously compounded yields
  • Forward rates
• Types of Yield Curves
  • Simple yield curve
  • The par curve
  • The duration yield curve
  • Libor curves
• Current and Historical Yield curves
• Factors Explaining the Shape of the Yield Curve
  • Liquidity theory
  • Expectations theory
  • Market segmentation theory
• Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Constructing and Using Libor Curves

• Building Blocks in Libor Curve Construction
  • Deposits
  • FRAs and interest rate futures
  • Par swaps
• Convexity Adjustment of Futures Prices
• Bootstrapping
  • Constructing the short end
  • Extending the curve
• Interpolation and Smoothing Techniques
  • Linear and non-linear techniques
  • The Nelson-Siegel Estimation Technique
• Pricing FRAs, Swaps and other Libor Instruments
  • Pricing generic par and off-market swaps
  • Pricing forward starting, amortizing, arrears reset and other non-generic swaps
• Examples and Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Constructing Yield Curves with Bonds

• Components of Bond Yields
• Problems Using the Bootstrapping Technique with Bonds
• Empirical Estimation of the Yield Curve
  • Regression techniques
  • Selecting the bond sample
  • Taking liquidity and tax effects into account
  • Functional form of the discount function
• Using Cubic Splines
  • Why use splines?
  • Choosing the spline points
  • 1st and 2nd order constraints
  • Joining the splines
• Constructing Credit Curves
  • An option-theoretical approach for determining credit spreads
  • Bootstrapping the credit curve
  • Calculating forward credit spreads
• Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Using Yield Curves in Trading and Risk Management

• Identifying Arbitrage Opportunities
  • Calculation option adjusted spread
  • Cheap-rich Analysis
  • Bond switching
• Risk Management
  • Calculating delta vectors
  • Calculating key rate durations
  • Decomposing yield curve variations
  • Principal components analysis
  • Calculating factor sensitivities
  • Factor-immunization
  • Selective hedging
• Exercises

Summary, Evaluation and Termination of the Seminar