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FINANCIAL MARKET COURSES

Structured Derivative Notes & Swaps

Courses In This Course

Structured derivative notes and swaps are non-standard packaged products that have emerged as important instruments in financial markets. These products are motivated by the efforts of banks to bundle derivative products for clients (financial engineering). There are a number of reasons why banks do this, such as the desire to increase margins on existing products, market products in a different manner or disguise the cost of the product from the client. A proliferation of structured products has emerged in recent years and this course covers a sample of these.

Objectives

In this course, you will explore:

The features, characteristics and pricing of range notes

The use of reverse floaters to create a profit for investors when interest rates decline

The structure and pricing of capped and collared floating rate notes

The basic features of trigger products, the approach to their valuation and the major difficulties that are generally encountered by users of these structures

Learner Profile

This course is designed for:

New or recent recruits to the derivatives desk

Dealers/traders

Portfolio managers

Treasury department staff

Sales and marketing executives

Finance and accounting staff

IT staff

Compliance and regulatory staff

  •    RANGE ACCRUAL STRUCTURES

    Overview

    The structured note market is noted for its ability to develop new and innovative structures as it strives to meet the requirements of diverse groups of investors and issuers around the world. Range accrual structures originally emerged in 1993 and subsequently became a popular method of trying to obtain cheap funding relative to some underlying interest rate. As well as allowing borrowers to attain highly attractive below-market funding, these instruments also rewarded investors as long as interest rates remained low.

     

    This course looks at range accrual structures in detail, examining their features and characteristics and showing how to price these instruments.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a solid understanding of options and how they are priced 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

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  •    INVERSE FRNS

    Overview

    Inverse FRNs (also called reverse or bull FRNs) grew in popularity in the 1980s and 1990s, in response to investors looking to profit from falls in short-term interest rates. This course examines the evolution and construction of inverse FRNs and closely-related structures, where the coupon being paid to investors is a hybrid of different components (such as a fixed part and a floating part). The course analyzes the motivations behind the purchase of such structures, as well as how the value of the structures can change.

    Course Duration

    75 mins

    Prerequisite Knowledge

    Bond Prices & Yields

    Floating Rate Notes (FRNs)

    Swaps – Pricing & Valuation (Part I)

    Swaps – Pricing & Valuation (Part II)

    FIND OUT MORE

  •    CAPPED & COLLARED FRNS

    Overview

    A capped FRN is a floating rate note combined with an interest rate cap, while a collared FRN is one that combines both an interest rate cap and floor. These instruments are attractive to issuers seeking to reduce funding costs and to investors seeking to earn a higher spread over the floating rate index.

     

    This course describes how capped and collared FRNs work and illustrates the payoffs on these instruments from the viewpoint of both the issuer and the investor.

    Course Duration

    60 mins

    Prerequisite Knowledge

    Floating Rate Notes (FRNs)

    Caps & Floors – An Introduction

    FIND OUT MORE

  •    TRIGGER STRUCTURES

    Overview

    Trigger structures are an important development in interest rate risk management in recent years. They are attractive to liability managers looking for alternatives to traditional cap structures and to investors looking to gain extra return through taking on additional risk. Although these structures are simple to describe, they are complex to price and hedge.

     

    This course describes the basic trigger structure, how it is priced using the binomial tree and the most common uses of these structures.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Caps & Floors – An Introduction

    Caps & Floors – Pricing

    Options – Beyond Black-Scholes

    Swaps – Pricing & Valuation (Part I)

    Swaps – Pricing & Valuation (Part II)

    Swaptions

    FIND OUT MORE

  •    POWER REVERSE DUAL CURRENCY

       (PRDC) NOTES

    Overview

    Power reverse dual currency (PRDC) notes represent perhaps the most important product in the extensive Japanese structured note market. They are an interesting example of the way in which structurers can exploit the difference between the 'risk-neutral' assumptions underlying the derivative market and the more prevalent assumptions that exist in the 'real world'. The risk-neutral framework generates implied forwards in the USD/JPY FX market which, given the market interest rate differential, are very different from today's spot levels – different enough to be attractive.

     

    While the instrument itself is well understood, and has been issued in such quantities that it is almost considered a 'vanilla' instrument amongst investors, the structuring and hedging of a PRDC note is highly complex. This course tackles many of these complexities by examining in detail the structures and risks associated with these notes.

    Course Duration

    75 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a good understanding of interest rate derivatives, FX derivatives, and the structured note markets. We recommend the following courses in particular:

     

    Capped & Collared FRNs

    Options – Managing an Interest Rate Option Book

    FX Option Trading

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  •    TARGET REDEMPTION NOTES (TARNS)

    Overview

    TARNs are notes that offer a potentially high-yielding short-term investment in exchange for investors assuming the risk of long-term poor performance. While targeted redemption has been most prominent in the interest rate world, a structured note in any asset class can be a TARN.

     

    Valuing a TARN is complex, due to the path dependency of the structure. The high degree of path dependency means that a fairly sophisticated model needs to be used to value a TARN, even if the underlying coupons are fairly simple.

     

    In this course, we will study the distinctive characteristics of TARNs. We will also look into the widespread applicability of the TARN concept. Finally, we will identify the valuation difficulties and analyze the approach taken to solving them.

    Course Duration

    75 mins

    Prerequisite Knowledge

    Floating Rate Notes (FRNs)

    Inverse FRNs

    Capped & Collared FRNs

    Caps & Floors – Pricing

    VAR – Monte Carlo Simulation

    FX Option Trading

    FIND OUT MORE

  •    CMS OPTION STRUCTURES

    Overview

    Options on constant maturity swaps (CMSs) are complex instruments - they are the CMS equivalent of a regular cap/floor and valuation requires a 'convexity adjustment' to volatility. The most popular type of CMS option, a spread option that references the difference between two different observed rates, adds yet another layer of difficulty.

     

    This course introduces the different types of CMS-related options and the complex valuation issues raised by these options. The course describes the process that the market follows to price these CMS-related options. The course also describes the market and performance of structured notes and the payoff relating to each option.

    Course Duration

    90 mins

    Prerequisite Knowledge

    Prior to studying this course, you should have a good understanding of the concepts outlined in the following courses:

     

    Swaps – Constant Maturity Swaps

    Caps & Floors – Pricing

    Swaptions

    FIND OUT MORE

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