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FINANCIAL MARKET COURSES

Interest Rate & FX Options

Courses In This Course

The pricing of interest rate options presents significant challenges to market practitioners. While Black-Scholes type models (in particular the 1976 Black model) are generally used to price instruments such as caps, floors and swaptions, interest rate term structure models are increasingly utilized for other types of instruments, such as Bermudan structures and long-dated options on bonds. This course covers the pricing of the different interest rate options, in addition to the features and applications of these instruments. The course also includes a course on the intricacies of managing an interest rate option book.

Objectives

In this course, you will explore:

The fundamentals of caps and floors

The pricing of different types of caps and floors and the sensitivity of these instruments to changes in key pricing variables

The structure, pricing and application of swaptions and callable bonds

The determination of the expected level of future interest rate volatility from interest rate options

Various issues encountered in the management of an interest rate option book, including the hedging of delta and vega exposures and the problems in combining exposures associated with different instruments bonds

FX option trading

Prerequisite Knowledge

An understanding of the Options course is required.

Learner Profile

This course is designed for:

New or recent recruits to the options desk

Dealers/traders

Portfolio managers

Treasury department staff

Sales and marketing executives

Finance and accounting staff

IT staff

Compliance and regulatory staff

  •    CAPS & FLOORS - AN INTRODUCTION

    Overview

    While options are powerful instruments that can be used to manage many kinds of financial risks, some specific forms of options are particularly useful in the commercial world. Caps, floors, collars, and swaptions are tailored forms of options that have found ready applicability in many borrowing and other financial transactions. In this course, we will explain the structure of standard caps and floors and discuss some of the variants that have been developed.

    Course Duration

    50 mins

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    Prerequisite Knowledge

    Options - An Introduction

  •    CAPS & FLOORS - PRICING

    Overview

    The use of caps and floors has increased significantly over the years as more companies attempt to hedge their interest rate exposures. Like options, caps and floors can be specifically arranged in such a way as to provide hedgers with a win-win scenario: if the market goes their way, they can choose not to exercise the cap/floor and accept the market rate, while if the market goes against them, they can choose to exercise the instrument and thereby reduce their potential loss. As you would expect, there is a cost associated with this type of hedging.

     

    In this course, we will look at how caps and floors are priced in the market. We also look at the sensitivity of caps and floors to changes in key pricing variables.

    Course Duration

    75 mins

    Prerequisite Knowledge

    Options – An Introduction

    Options – Introduction to Option Valuation

    Options – Future Asset Prices & Volatility

    Options – Replication, Risk-Neutrality, & Black-Scholes

    Options – Beyond Black-Scholes

    Options – Greeks (Part I)

    Options – Greeks (Part II)

    Caps & Floors – An Introduction

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  •    CAPS & FLOORS - CHOOSER & DOUBLE-STRIKE

       STRUCTURES

    Overview

    Certain cap structures are designed to lower upfront costs while substantially retaining rate protection. In this course, we focus on two such structures - chooser caps and double-strike caps. The course explores the features and uses of these cap structures and lists their pricing procedures. The course will also differentiate chooser and double-strike structures from plain vanilla cap structures and outline the benefits of using these products.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a sound understanding of caps and floors and how they are priced. An understanding of barrier options and the binomial option pricing model would also be beneficial. You can learn about these concepts in the following courses:

     

    Caps & Floors – An Introduction

    Caps & Floors – Pricing

    Options – Barrier Options

    Options – Future Asset Prices & Volatility

    Options – Replication, Risk-Neutrality, & Black-Scholes

    Options – Beyond Black-Scholes

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  •    SWAPTIONS

    Overview

    Coinciding with the development of the swaps market, derivative instruments that combined the features of swaps and options emerged. One such instrument was the swaption.

     

    A swaption is an option to enter into a specified interest rate swap to start at a pre-determined future date. It can limit downside risk for users by allowing them to switch from a fixed to a floating rate (or vice versa) without limiting potential benefits associated with favorable movements in interest rates. In this course, we will explain the structure and features of swaptions and explain how these instruments are priced.

    Course Duration

    75 mins

    Prerequisite Knowledge

    Options – An Introduction

    Options – Introduction to Option Valuation

    Swaps – An Introduction

    Swaps – Pricing & Valuation (Part I)

    Swaps – Pricing & Valuation (Part II)

    Caps & Floors – Pricing

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  •    CALLABLE BONDS

    Overview

    A callable bond is a bond with an embedded interest rate option, which represents the right of the issuer to call the bond and buy it back before maturity. In this course, we outline the fundamentals of callable bonds, examine some variations on the regular call structure and explain in detail how callable structures are priced. The concept of option-adjusted spread (OAS), which allows issuers to incorporate the optionality of a callable bond into the quoted spread, is described in detail within the pricing topic.

    Course Duration

    60 mins

    Prerequisite Knowledge

    Bonds – An Introduction

    Options – An Introduction

    Options – Introduction to Option Valuation

    Options – Future Asset Prices & Volatility

    Options – Replication, Risk-Neutrality, & Black-Scholes

    Options – Beyond Black-Scholes

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  •    BERMUDAN SWAPTIONS

    Overview

    Bermudan swaptions are instruments that are only exercisable on recurring coupon dates, making them partly American and partly European swaptions. Similarly, on a cost scale, Bermudans fall between American and European swaptions. This course describes the fundamentals of Bermudan swaptions, outlines some applications of these instruments and explains in detail how they are valued using trinomial trees.

    Course Duration

    60 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a solid understanding of options and swaptions as detailed in the following courses:

     

    Options – An Introduction

    Options – Introduction to Option Valuation

    Options – Future Asset Prices & Volatility

    Options – Replication, Risk-Neutrality, & Black-Scholes

    Options – Beyond Black-Scholes

    Swaptions

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  •    INTEREST RATE VOLATILITY

    Overview

    Since the breakdown of the Bretton Woods exchange rate mechanism in the early 1970s, the volatility of both exchange rates and interest rates has increased greatly. This increase in volatility can be attributed to many factors, such as increased capital flows between countries, greater levels of international trade and the over-dependence of some countries on imported energy products.

     

    This course describes how market participants can determine the expected level of future interest rate volatility from derivative instruments. In particular, you will learn about flat volatilities and base volatilities. You will also be introduced to volatility smiles and smirks, and their significance in the market.

    Course Duration

    60 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a sound knowledge of statistics, along with a basic understanding of caps, floors and swaptions. In particular, we recommend you study the following courses:

     

     Distributions & Hypothesis Testing

     Caps & Floors – An Introduction

     Caps & Floors – Pricing

     Swaptions

     

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  •    OPTIONS - MANAGING AN INTEREST RATE

       OPTION BOOK

    Overview

    Option traders deal in multiple options rather than a single position, which means they are required to manage portfolios and cope with various risks associated with these portfolios. Consequently, option traders need to be aware of multidimensional changes in the market.

     

    This course explains the role of an option market maker as opposed to a trader speculating on the market. The course describes in detail how the initial exposure of an option trader is hedged and looks at ways of dynamically hedging market exposure over time. The course also provides an overview of managing multiple exposures derived from the option portfolio.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a strong understanding of options as detailed in the following courses:

     

    Options – An Introduction

    Options – Introduction to Option Valuation

    Options – Greeks (Part I)

    Options – Greeks (Part II)

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  •    FX OPTION TRADING

    Overview

    The foreign exchange market is the most liquid capital market in the world. According to the latest BIS survey (2010), daily turnover was around USD 4 trillion. This massive, fluid, market has spawned a very significant option sector.

     

     This course focuses on the world of the OTC FX option trader. It covers the basics of these instruments and their pricing. More exotic structures are also examined and the roles of the various market participants are described in detail.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a solid understanding of spot and forward FX markets as described in the Foreign Exchange course. You should also be familiar with the following courses on options:

     

    Options - Introduction to Option Valuation

    Options –Barrier Options

    Options–Future Asset Prices & Volatility

    Options –Replication, Risk-Neutrality, & Black-Scholes

    Options - Beyond Black-Scholes

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