Advanced Derivatives: Applications, Pricing & Hedging

5 days 1-5 Oct 2017, Dubai UAE £4,595.00 Download brochure Add to basket

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A 5-day course with extensive case studies covering:

  • Derivative Instruments and Markets
  • Forwards and Futures Markets
  • Interest Rate Forwards and Futures
  • Yield Curve Modelling Techniques
  • Interest Rate and Currency Swaps
  • Applications of Swaps in Managing and Trading Interest Rate Risk
  • Non-Linear Derivatives – Vanilla and Exotic Options
  • Option Pricing and Valuation
  • Option Risks and Risk Management
  • Interest Rate Options
  • More Advanced Interest Rate Models – Stochastic Term Structure Models
  • Mismatch Swaps and other more Complex Swap Structures
  • Structured Applications of Derivatives in Trading, Hedging and Structured Products
  • Overview of the Credit Derivatives Market – Trends and Developments
  • Credit Default Swaps; Operational Practices and Market Conventions
  • Credit Risk Modelling and Pricing of Credit Derivatives
  • Credit Portfolio Risk Management – Practical Applications of Credit Derivatives
  • Second Generation Credit Derivatives and Structured Credit Products


We work with a series of expert instructors, please select the course location of interest to review the credentials of who will be delivering the programme.

Graham Dudlyke

Graham Dudlyke is a leading consultant and specialist trainer with over three decades of experience within the international financial markets, holding senior positions in a number of leading financial institutions in both London and New York.

His career boasts a wealth of experience within the derivative and capital markets, with senior roles at JP Morgan chase and Mitsubishi UFJ Securities International within derivatives trading, marketing, structuring and risk management. At JP Morgan he managed rate option trading books, and additionally held responsibility for developing the derivatives trading and marketing presence within European markets. At Mitsubishi UFJ he held responsibility for the management of interest rate derivatives trading, and played a major role in building and developing the interest rate derivatives trading business into new products and markets.

In 2011 Graham joined Hilltop Fund Management LLP, London, as a consultant, advising on hedge fund trading and complex investment strategies.

As an independent training consultant for over 10 years, Graham brings his unique practitioner’s perspective and insight to financial markets, providing training and consultancy services to many of the world’s leading financial institutions - banks, institutional investors and asset managers, official institutions and other related financial bodies. The world’s largest asset manager, global ‘bulge bracket’ investment banks, a number of supranational development banks, Fortune 500 companies, as well as central banks across four continents are all represented amongst the institutions that Graham has worked with in the delivery of specialised training and consultancy needs.

Graham is a consultant to Euromoney Institutional Investor plc, international business-to-business publisher, business conference, seminar and training course provider, as a regular and world renowned expert on derivatives and capital markets.

Graham holds an M.B.A. from Imperial College, London and an M.A. from Oxford University.



Dubai Finance

This programme takes place on a non-residential basis at a central 4 to 5* Dubai hotel. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.

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Do you have five or more people interested in attending this course? Do you want to tailor it to meet your company's exact requirements? If you'd like to do either of these, we can bring this course to your company's office. You could even save up to 50% on the cost of sending delegates to a public course.

To find out more about running this course in-house:

Our Tailored Learning Offering

If you want to run this course at a location convenient to you or if you want a completely customised learning solution, we can help.

We produce learning solutions that are completely unique to your business. We'll guide you through the whole process, from the initial consultancy to evaluating the success of the full learning experience. Our learning specialists ensure you get the maximum return on your training investment.


We can offer any of our public courses delivered at your office or we can devise completely tailored solutions:

Read more about our offering or complete a call back request to speak to a learning specialist.



Day 1

Module 1: Introduction to Derivative Instruments and Markets

  • Evolution and development of derivative products and markets
  • Similarities and differences between derivative products:
    - Forwards and futures
    - Swaps and options
    -Vanilla and exotic derivatives
  • Fundamental principles of derivative pricing and valuation
  • Risk neutrality and no-arbitrage pricing
  • Static and dynamic hedging – practical challenges
  • A breakdown of arbitrage-free pricing conditions?
  • Current developments within the global derivative markets
    - Regulatory developments (Dodd-Frank, EMIR)
    - Developments in pricing and valuation of derivatives
    - Incorporation of Credit Value Adjustments (CVA) in derivative pricing
    - Pricing with collateral: OIS discounting
    - Accounting for funding risk in derivatives pricing; the LIBOR – OIS spread
  • An overview of the role of derivatives in financial markets
    - Hedging - Corporate and institutional use of derivatives
    - Trading and investment applications of derivatives
    - Arbitrage – Using derivatives to exploit market inefficiencies

Module 2: Forwards and Futures Markets

  • Distinctions between listed and OTC contracts
    - Execution, clearing and settlement arrangements for futures and forwards
    - Physical and cash settlement conventions
  • Arbitrage-free pricing of equity, interest rate and FX forwards and futures
    - Commodity futures; Contangos, backwardations and the breakdown of arbitrage-free pricing
  • Market, counterparty and operational risks in forwards and futures
  • Accounting and tax treatment of forwards and futures
  • Hedging forwards and futures exposures
    - Static and dynamic replication strategies
    - Liquidity and funding risks in hedging forwards and futures
  • Corporate and institutional applications of forwards and futures:
    - FX, equity, interest rate and commodity exposure management
    - Trading strategies and investment applications

Case Studies:  Using non-deliverable forwards (NDFs) to manage emerging market FX cash flow and balance sheet exposures
Identifying and exploiting arbitrage opportunities - Yield enhancement strategies using equity and commodity futures/forwards.

Module 3: Interest Rate Forwards and Futures

  • LIBOR Forwards (FRAs) and short term interest rate futures
  • Pricing and valuation of FRAs: theory and practice: 
    - Pricing FRAs from the futures strip
    - Adjusting for convexity bias between futures and forwards
  • Applications of futures and FRAs in trading and hedging interest rate risk
  • Managing basis risks in hedging forwards with futures
  • Bond futures
  • Bond futures contract types and specifications
  • Pricing bond futures and the relationship to cash markets
  • Basis risks in hedging and trading with bond futures

Module 4: Yield Curve Modelling Techniques

  • Interest rate derivatives pricing; yield curve modelling techniques
  • Construction of swap yield curves for pricing and mark-to-market valuation
    - Selecting appropriate market data in curve construction
    - Curve fitting algorithms – log linear and spline techniques
  • Bootstrapping market swap rates to generate zero coupon rates and discount factors
    - Calculating forward rates from the zero coupon rate curve
  • Constructing the swap curve from LIBOR futures price data
  • Incorporating convexity adjustments into forwards; calibration of convexity adjustments to interest rate option implied volatility data

Day 2

Module 5: Interest Rate and Currency Swaps

  • Interest rate swaps, basis swaps and cross currency swaps
  • Overnight index swaps (OIS)
  • Market conventions for quotation, execution, clearing and settlement
  • Current trends and developments within swap markets
  • Pricing interest rate swaps from the interest rate futures strip
    - Adjusting for convexity bias in futures price data
    - Pricing short term swaps; managing the convergence to ‘cash’ LIBOR rates
  • Pricing and valuation of interest rate swaps from the ‘bootstrapped’ par swap curve
    - Valuation of generic and structured swap contracts
    - Forward start, amortising, irregular swap types
    - Basis swaps: incorporation of the basis into pricing models
  • Current developments in swap pricing – pricing with margin collateral agreements
    - OIS Discounting
    - Constructing the OIS swap curve
    - Pricing swaps using the OIS discount curves
    - Which currency OIS curve to use?
  • Swap pricing and counterparty credit risk
  • Counterparty credit risk exposure in interest rate and currency swaps
  • Estimation of potential future exposure (replacement cost) for swap contracts
  • Estimation of default probabilities (PD) and loss-given-default (LGD)
  • Adjusting pricing and bid-offer spreads to incorporate credit value adjustments (CVA)
  • Dynamic pricing of counterparty risk into generic and structured transactions

Module 6: Applications of Swaps in Managing and Trading Interest Rate Risk

  • Applications of interest rate and currency swaps in managing interest rate risk
  • Benefits of using swaps in asset and liability management
  • Arbitrage opportunities: exploiting market inefficiencies to optimise funding costs and fixed income investment returns
  • Overnight index swaps (OIS) – isolating liquidity and interest rate risk management
  • Using swaps as a substitute for fixed income securities
  • Implementing directional and relative value strategies using swaps
  • Basis risks and other operational risks in using swaps

Module 7: Non-Linear Derivatives – Vanilla and Exotic Options

  • Contract characteristics, pay-off profiles and review of basic option strategies
  • Naked and covered option strategies
  • Option combinations: Calendar spreads and vertical spreads; Risk reversals
  • Volatility strategies: Straddles, strangles and butterflies
  • Fundamental concepts for European options: No-arbitrage pricing and Put-Call parity

Day 3

Module 8: Option Pricing and Valuation

  • Modelling market price behaviour: Continuous time stochastic processes
  • Markov processes and their application in option valuation
  • No-arbitrage pricing and risk neutrality concepts in option valuation
  • Analytical pricing methods: The Black-Scholes pricing framework and assumptions
  • Risk-neutral pricing and dynamic replication via continuous Delta hedging
    - Examining the assumption of Gaussian price distributions
  • Critical analysis of the advantages and limitations of the Black-Scholes model
    - Distributional assumptions – skew and kurtosis (‘fat tails’)
    - Consequences of the failure to account for stochastic volatility
    - Limitations in application to alternative pay-offs (American style options, exotics)
  • Adaptation of the Black-Scholes framework to different asset classes (equities, FX etc.)
  • Black (1976) formula for options on forwards; application to commodities, interest rates
  • Calibration of the Black-Scholes model to market data - volatility surfaces
  • Rationalising and interpreting volatility surfaces
  • Volatility smiles and skews; Risk reversals and butterflies
    - Understanding the linkage of the volatility smile to the volatility of volatility
    - Linking skew to the correlation between price and volatility stochastic processes
    - Vanna-Volga approach to constructing and calibrating to volatility surfaces
  • Numerical methods for implementing option pricing models
    - Implementing ‘discrete time’ models with binomial tree techniques
    - Cox-Ross-Rubenstein model
    - Trinomial lattice models (e.g. Hull-White) and finite difference methods
    - Pricing American style and other path dependent options with lattice based models
  • Monte Carlo simulation methods of option valuation
    - Implementing simulation models with visual Basic programming
  • Stochastic volatility models (Heston, Bates, Hagan)
  • Applying stochastic volatility models using simulation techniques
  • Local volatility modeling (Dupire et al.)
    - Calibrating and implementing local volatility models with numerical tree techniques

Module 9: Option Risks and Risk Management

  • Understanding option price sensitivities – the ‘Greeks’
  • Delta hedging
    - The concept of continuous dynamic Delta hedging in pricing models
  • Limitations and assumptions of Delta hedging
  • Understanding higher order option sensitivities – Gamma
  • Gamma and Vega – measures of volatility risk exposure
  • Understanding and actively managing interrelationships between option price sensitivities
  • Active management of portfolio delta, gamma, theta and vega risks
  • Higher order risks and their relationship to smile and skew phenomena
    - Vega and Volga risks
  • Using option greeks to measure hedge effectiveness and performance attribution analysis
  • Limitations of option ‘Greeks’
    - Discontinuities in market price behaviour; slippage in hedging
    - Expiration trading
    - Stress testing and portfolio scenario analysis; identifying potential future risks

Module 10: Interest Rate Options

  • Standard LIBOR caps, floors and collars
  • Conventional pricing methods: Black (1976) model
  • Why do markets use this model? Advantages and disadvantages
  • Calibration to a volatility surface
  • Put-Call parity relationships: Caps, Floors and Forward swaps
  • Swaps with embedded caps and floors
  • More complex structures: Digital caps; periodic caps; barriers
  • Conventional (European) swap options
  • Pricing with the Black model
  • Calibration of swaption volatility surfaces
  • Compatability and consistency with interest rate cap/floor pricing
  • Understanding the uses and applications of interest rate options in risk management, trading and yield enhancement strategies

Day 4

 Module 11: More Advanced Interest Rate Models – Stochastic Term Structure Models

  • A more sophisticated approach to modelling interest rates?
  • Modelling the short term rate stochastic process
  • Accounting for stochastic volatility, correlation and mean reversion behaviour
  • One factor and multi-factor models
  • Numerical methods

Case study: Building an arbitrage-free stochastic forward rate model using a binomial lattice.

  • Using simulation techniques to implement multi-factor models
  • Applications of stochastic term structure modelling in pricing complex structured interest rate derivatives and structured notes

Case study: LIBOR market model calibration, application to pricing index amortising swaps, path-dependent structured notes, TARNS etc.

Module 12: Mismatch Swaps and other more Complex Swap Structures

  • Constant Maturity Swaps (CMS) and options
  • Average rate and Arrears swaps
  • Quanto derivatives
  • Pricing methods and price sensitivities of exotic structures
  • Convexity adjustments and the link to the swaption volatility surface
  • Benefits and applications of complex swaps:
    - Hedging yield curve exposures
    - Yield enhancement and carry trading strategies

Module 13: Structured Applications of Derivatives in Trading, Hedging and Structured Products

  • Understanding the rationale for structured products
  • Yield enhancement opportunities
  • Principal protection – capital preservation strategies
  • Hedging – zero cost strategies
  • Interest rate linked structured securities
    - Callable structured notes 
    - Range accrual notes
  • Currency linked structures
    - PRDCs
    - Range accruals, hybrid structures
  • Structured FX hedge instruments
    - Barrier structures (Forward plus)
    - Knock-in Cylinders
    - Knock-out Forwards
  • Equity linked structured notes
    - Capital protected structures
    - Yield enhancement equity linked structures
    - TARNs and hybrid structures

Day 5

Module 14: Overview of the Credit Derivatives Market – Trends and Developments

  • Evolution and development of the credit derivatives market
  • Total return swaps
  • Credit default swaps
    - Single name CDS
    - Index (CDX, iTraxx) CDS
  • Overview of function and applications
  • Credit risk transfer – hedging and trading applications
  • Market participants and their roles in the development of the CDS market
  • Recent market developments and current trends
  • “Big Bang” and ‘Little Bang’ protocols
    - Contract standardisation
    - Settlement mechanics
    - The development of centralised counterparty clearing

Module 15: Credit Default Swaps; Operational Practices and Market Conventions

  • What is a CDS; How does it function?
  • Contract terms and definitions
  • Contract documentation
  • Credit Events
    - Defining credit events
    - The role of Determination Committees
  • Settlement mechanisms
    - Centralised clearing and settlement mechanisms
    - Settlement via CEA (Credit Event Auction)
  • What are the implications of ‘Big Bang’ and the drive towards centralised clearing mechanisms?
  • Credit indices (iTRAXX, CDX)
    - ITRAXX index CDS
    - Standardised contract terms
    - Transaction and settlement mechanics
  • Sovereign CDS
    - Contractual differences in sovereign CDS terms

Case Study: Greece

  • Accounting Treatment of CDS
  • Trading book and Banking book designation

Module 16: Credit Risk Modelling and Pricing of Credit Derivatives

  • Understanding the elements of credit risk
    - Default (DTR) risk
    - Credit spread risk (mark to market exposure)
  • Understanding the components of credit risk exposure:
    - Default probability (PD)
    - Recovery rates / Loss severity (LGD)
  • Estimation of default probabilities:
    - Using rating agency migration, default and recovery rate data
    - Structural credit models (Merton, KMV)
    - Portfolio credit risk measurement - correlation effects
    - Generating implied default probabilities from market price data
  • Arbitrage based approaches (Asset swap pricing)
    - What is the relationship between CDS premia and asset swap spreads?
    - Determinants of the (Asset swap - CDS) basis
  • Modelling CDS curves
    - Constructing default probability curves from market (CDS) price data
    - The JP Morgan model
    - Recovery rate assumptions
    - Operational issues; data requirements
  • Pricing and valuation of CDS
    - Calculation of mark to market value, novation fees
    - Calculation of up-front premia; conversion of spread to up-front premia
    - Clean prices and accrued spread calculations

Module 17: Credit Portfolio Risk Management – Practical Applications of Credit Derivatives

  • Evaluating the benefits of using credit derivatives in credit portfolio risk management
  • Using CDS to reduce credit risk concentrations, enhance diversification benefits
  • Using credit derivatives to manage and securitise credit risk
  • Balance sheet and regulatory capital management with CDS
  • Managing cross-border risks with credit derivatives
  • Using CDS to create synthetic assets:
  • Unfunded exposures (leveraged)
  • Credit linked notes (CLNs)
  • Active (alpha) credit portfolio management with credit derivatives
  • Outright and relative value trading strategies
  • Sector allocation and security selection
  • Curve trades
  • Costs and benefits of using CDS in credit portfolio management
  • Basis risk – correlation of CDS to ‘cash’ spreads
  • Differentiating spread from default risk

Module 18: Second Generation Credit Derivatives and Structured Credit Products

  • Credit Spread Options
    - Swaption strategies
    - Callable default swaps
  • Basket default swaps
    - First to Default (FTD) and nth to default basket CDS
    - Pricing and valuation of Basket CDS
    - Correlation: impact of credit correlation on basket CDS premia
  • Synthetic CDOs
    - Index tranche CDOs
    - Synthetic versus traditional securitisation structures
  • Trends and current developments in structured credit products
  • Pricing and valuation of CDO tranchesAn overview of copula models and their implementation
    - Advantages and fundamental limitations of copula models
    - Single tranche CDO risk characteristics
    - Convexity; managing correlation risk exposure
    - Interpretation of implied correlation skew patterns
  • Single tranche CDO active trading strategies
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