Fundamentals of Swaps

Mechanics, Pricing and Applications

Agenda Program
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Prague, NH Hotel Prague
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Introduction to Swaps and Swap Pricing
Swaps Valuation Methods
Bootstrapping and Smoothing the Swap Curve
Currency and Cross Currency Swaps
Analysis of Non-Generic Swaps
Managing Interest Rate and FX Risk with Swaps
The purpose of this seminar is to give you a good and practical understanding of the pricing and applications of generic and simple non-generic swaps.

We start with a thorough introduction to swaps. We explain how swaps have evolved from "back-to-back" and "parallel" loans to a modern, financial instrument. We give an overview of different swap structures, and we explain the mechanics of a "plain vanilla" interest rate swaps, basis swaps, and cross currency swaps. We also show the "time profile" of a swap and give a practical explanation of how swap transactions are agreed, settled and terminated.

Further, we explain how swaps are priced and valued. We give an overview of different valuation techniques, and we explain and demonstrate in detail how swaps are correctly priced using zero coupon analysis. We show how swap curves can be "bootstrapped" and how swaps can be valued using the resulting discount factors. We explain how the instruments are valued for mark-to-market and risk management purposes, illustrated by lots of examples. We also give an overview of currency swap structures and explain the pricing of currency swaps.

Having gained a good understanding of fundamental swap pricing, we then turn to examine a number of more advanced swap structures and their related option instruments. We analyze and discuss the application of structures such as "Amortizing", "Accreting", "Forward Starting", "Arrears Reset", "Constant Maturity" and "Differential" swaps.

Finally we explain and demonstrate, using very practical examples, how swaps can be used to hedge interest rate and currency exposures of bonds and bond portfolios, loans and other types of financial instruments and transactions.
Participants are encouraged to bring their own notebook with MS Excel to maximize the interaction, practical examples and benefit from the seminar.

Program of the seminar: Fundamentals of Swaps

The seminar timetable follows Central European Time (CET).

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

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

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

Training catalogue in PDF
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