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FINANCIAL MARKET COURSES

Swaps - In-Arrears Swaps

An in-arrears swap is a variation of a traditional interest rate swap. The difference between the two relates to the floating rate payment. With a traditional swap, floating rate payments are based on the level of the reference index at the start of the interest period. With an in-arrears swap, floating rate payments are based on the level of the reference index rate at the end of the interest period.

 

In-arrears swaps are used to speculate on changes in the shape of the yield curve and are particularly well suited to steep yield curve environments.

This course looks at how in-arrears swaps are structured and describes in detail how they are priced. Other topics, such as price sensitivities and hedging, are also covered.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe the basic features and characteristics of currency swaps

    Price different types of currency swaps

  • COURSE OUTLINE

    Topic 1: Structure of an In-Arrears Swap

    Reviewing Better Deal Bank’s Offers

    Payment Leg 1 – Libor Set in Arrears

    Payment Leg 2 – Libor Plus Some Spread

    Topic 2: Pricing an In-Arrears Swap

    Reviewing Better Deal Bank’s Offer

    Calculating the Spread

    Rule of Thumb Method

    Topic 3: Pricing Sensitivity

    Reviewing Better Deal Bank’s Offer

    Sources of Pricing Sensitivity

    Parallel Shift Sensitivity

    Factor Sensitivity

    Non-Parallel Curve Shifts

    Topic 3: Hedging an In-Arrears Swap

    Reviewing the 3-year Euribor In-arrears Swap

    Equivalent Hedge Positions

    How effective is the Hedge?

    How does the Hedge Work?

    Topic 4: Favourable Market Conditions

    When should you consider an In-Arrears Swap?

    Topic 5: Understanding Convexity Adjustments

    Why do we need a Convexity Adjustment?

    Calculating the Hedge Ratio

    How does this Hedge perform?

    Need for Convexity Adjustments

    Calculating the Convexity Adjustment

    Caplet Volatility

    Volatility and Convexity Adjustments

    o Upper Range Calculations

    o Lower Range Calculations

    Effect of the Convexity Adjustment

    The Convexity Adjustment Formula

    Timing Adjustment

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    180 Minutes

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