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Swaptions

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.

  • OBJECTIVES

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

    Describe the features and characteristics of swaptions

    Differentiate between the types of settlement available for swaptions

    Price a swaption based on the Black option pricing model

    Identify the sources of pricing sensitivity

  • COURSE OUTLINE

    Topic 1: Features pf Swaptions

    Swaption Structure

    Swaptions versus Caps

    Payer and Receiver Swaptions

    Swaption Term Sheet

    Topic 2: Swaption Settlement

    Settlement Types

    Physical Settlement

    Cash Zero Curve Settlement

    Cash YTM Settlement

    Comparing Cash Zero Curve and Cash YTM Settlement Methods

    Comparing Swaption Values

    Topic 3: Pricing Swaptions

    Pricing Approach

    Swaption Valuation

    Pricing Formula for Payer’s Swaption

    Pricing a Receiver’s Swaption

    Swaption Volatilities

    Calculating Swaption Volatilities

    Topic 4: Sources of Pricing Sensitivities

    Introduction

    Parallel Shift Sensitivity

    Measuring Factor Sensitivity

    Factor Sensitivity – Hedging the Position

    Non Parallel Shift Sensitivity

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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