Advanced Interest Rate Derivatives

4 days 4-7 Sep 2017, Stockholm Sweden £4,295.00 Download brochure Add to basket

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Course Background

This 4-day intensive programme provides delegates with a comprehensive exposure to a range of advanced swap topics, including pricing and valuation in the presence of funding and liquidity risk, 2nd generation swaps and interest rate option derivatives. Delegates will also be exposed to state of the art techniques employed in measuring and managing risk within swap and option portfolios, including both ‘traditional’ and value-at-risk methodologies.
The programme provides a comprehensive examination of the ways that swaps are employed in a wide range of trading strategies, and why swaps are increasingly used within the fixed income arena. Finally, the programme provides delegates with an introduction to financial engineering and the use of embedded interest rate derivatives in the creation of structured debt instruments. Delegates will gain exposure to the processes employed in structured product design and creation, as well as in product decomposition, pricing and risk analysis – reverse engineering.
Overall the programme seeks to impart a detailed and practical understanding of a range of complex interest rate derivative instruments, of growing importance and significance within the marketplace, in such a manner that such knowledge can be immediately applied within the contexts of trading, structuring and pricing, and risk management.

Focus of the Course

This is an advanced level programme that assumes that delegates will be familiar with basic concepts of derivatives and more specifically swaps markets. Whilst the programme agenda is not based upon detailed theoretical or mathematical approach, it does require basic mathematical fluency. This is your chance to learn about:

  • Pricing and valuation of advanced swap structures
  • Understanding theory and practice in swap pricing
  • Interest rate term structure modelling
  • Swap portfolio management
  • 2nd generation swaps and options
  • Interest rate linked structured products
  • Trading and risk management applications of swaps

The training will comprise a combination of classroom-based teaching combined with computer based (Excel™ based) simulations and exercises, to gain practical exposure to key principles and concepts. Delegates will each receive copies of all spreadsheet software for their own use after the programme.


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.



Stockholm Hotel

This programme takes place on a non-residential basis at a central  Stockholm 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.





A Review of the Principles of Curve Construction and Interest Rate Swap Valuation
In this first session we review the methodology for pricing and valuation of generic and simple non-generic swaps, and examine the practical steps of constructing swap discount curves. A fundamental knowledge of the contractual structure and mechanics of interest rate swaps is assumed.

Review of Theoretical Basis of Swap Pricing

  • The theory of risk neutral valuation and its application to swap pricing

Practical Yield Curve Modelling

  • Yield curve construction: Modelling the deterministic LIBOR pricing curve
  • ‘Bootstrapping’ market data
  • Curve fitting and smoothing techniques
  • LIBOR as a risk free rate? Historical inconsistencies and compromises

Paradigm Shift: Current Developments in Swap Pricing
Until recently methods for valuing interest rate swaps have been stable for decades. However, recent events have seen an unprecedented evolution, in particular in the changes to the discounting methodology for the valuation of fully/partially collateralised derivatives and in the methods developed to better reflect counterparty risk and funding costs.

Dual Curve Pricing/OIS Discounting

  • The effects of the financial crisis on OTC derivatives pricing

                      - Divergence of LIBOR and OIS rates
                      - Divergence of FRA and implied forward rates
                      - OIS - LIBOR basis: Emergence of liquidity/credit risk premia
                      - Trend from unsecured to collateralised funding

  • Collateralised swaps (CSA, centralised clearing)

                     - CSA ‘standard’ terms; 1-way and 2-way (symmetric) CSA agreements
                     - Standardised CSA terms: SCSA (2013) and SCSA2 (2014)
                     - Costs and benefits of different standardised CSA terms
                     - CCP collateral terms

  • Development of dual-curve pricing; differentiation of forward and discount curves
  • Overnight Index Swaps (OIS) [EONIA, SONIA]
  • Bootstrapping the OIS curve; practical challenges
  • Interdependencies between LIBOR and OIS curves

                    - Dual curve calibration
                    - Why LIBOR/OIS bootstrapping needs to be simultaneous
                    - Second order effects

  • CSA terms and choice of appropriate discounting method
  • Impact of CSA/OIS discounting on swap pricing and valuation
  • Practical issues in CSA discounting:

                     - Liquidity/collateral issues:
                               - Collateral terms controversies; Standard CSA resolution
                               - Collateral currency arbitrage (optionality in CSA agreements)
                               - CTD assumptions in valuation
                               - Optimal choice of collateral currency
                               - Collateral substitution/rehypothecation
                               - Haircut differences between repo market and CSA terms
                      - Hedge accounting issues
                      - IT issues
                                 - Multi-curve bootstrapping
                                 - Trade booking – deal valuation and curve selection



Pricing Adjustments for Counterparty Credit Risk and Funding

  • Incorporation of counterparty credit risk exposure into swap valuation - CV

                       - Credit Valuation Adjustment (CVA): an integral component of derivatives valuation
                       - Debit Valuation Adjustment (DVA)
                       - Estimation methods: MC simulation
                       - Examples of CVA/DVA effects on swap valuation; novation calculations
                       - Portfolio effects in CVA estimation (netting, collateral); calculating marginal CVA effects
                       - CSA terms and effects on CVA calculation
                       - Basel III: CVA market risk capital charges
                       - CVA hedging

  • Funding Valuation Adjustment (FVA)

                         - Incorporating funding costs into derivatives valuation models
                         - FVA computation for collateralised and uncollateralised transactions
                         - Modelling FVA and Treasury funds transfer pricing
                         - Current controversy in swap valuation; irrelevance of funding costs?

Workshop: Curve construction; application to pricing/valuation; impact of OIS discounting on 
                      pricing/valuation. Adjustments for credit (CVA) and funding cost adjustments (FVA)

Non-Generic Swaps

  • Forward start swaps - structures and pricing; Impact of OIS discounting on forward rates
  • Adapting the pricing framework to non-generic structures

                      - Amortising and Rollercoaster swaps
                      - Deferred coupon, stepped coupon and zero coupon swaps

  • Rationale: structured applications of interest rate swaps in ALM, funding and investment

Workshop: Pricing and valuation of generic and non-generic swap structures; impact of OIS discounting on pricing/valuation

Asset Swaps

  • Structuring and pricing methodologies for asset swaps

                      - Par/par asset swap
                      - Yield/yield asset swap
                      - Yield curve shift (YCS) – Z-spread analysis

  • Pricing adjustments for funding and counterparty risk
  • Advantages and shortcomings of different methodologies

                       - Using asset swaps in asset restructuring
                       - Using asset swap pricing in RV analysis

  • Credit Default Swaps (CDS)
  • Over of CDS contract mechanics, market conventions
  • Pricing CDS
  • Arbitrage based approach i.e. replication using asset swap
  • Understanding the relationship between CDS premia and Asset swap spreads
  • Determinants of the (Asset swap - CDS) basis

Workshop: Identifying asset swap opportunities; Structuring and pricing and asset swaps

Overnight Index Swaps (OIS)

  • Mechanics of overnight index swaps
  • Calculating the overnight index rate – actual funding rates
  • Conventions of different OIS markets (EONIA, SONIA etc.)
  • Computing the compounded average overnight rate leg
  • Constructing the OIS curve
  • Pricing and valuation of OIS
  • Convexity effects in pricing
  • Applications of OIS; isolation of interest rate risk and liquidity risk management

Basis Swaps

  • Basis swaps

                      - Tenor basis (1m vs 3m; 3m vs 6m)
                      - Cross currency basis swaps

  • Tenor basis

                      - Construction of multiple tenor curves
                      - Dual curve calibration

  • Uses and applications in asset-liability management
  • Theoretical framework for pricing tenor basis swaps
  • Cross-currency basis swaps

                     - Theoretical framework for pricing CC basis swaps
                     - The reality: Rationalising CC basis swap margins

  • FX forwards; pricing theory and practice – pricing skews
  • Multi-curve pricing: incorporating basis into cross currency swap valuation
  • Constructing adjusted swap curves for valuation of cross currency swaps     
  • Generic and non-generic cross currency swaps

                     - Cross currency coupon swaps

  • Basis point conversion factors
  • Cross-currency basis swaps

                     - Theoretical framework for pricing CC basis swaps
                     - The reality: Rationalising CC basis swap margins

  • Hedging cross currency basis swaps
  • Skewness of FX forwards; impact on pricing
  • Accounting for cross currency basis swaps
  • Multi-curve pricing: incorporating basis into cross currency swap valuation
  • Constructing adjusted swap curves for valuation of cross currency swaps

Workshop: Cross currency swap structures; adjustments for basis margins



Risk Management for Swap and Option Portfolios

  • Sources of interest rate risk:

                       - Forward rate sensitivity
                       - Discount rate sensitivity

  • Interest rate risk measures: Delta (DV01/PV01)
  • Yield curve risk analysis; parallel and non-parallel shifts
  • Empirical behaviour: Principal component analysis (PCA)
  • Single curve interest rate sensitivity analysis: Constructing a Delta vector (grid-point) risk report
  • Risk reporting: creating a replicating portfolio (futures, bond, swap) equivalents
  • Hedging swap portfolios: Basis risks in portfolio hedging
  • Non-linear instruments and higher order risks: Gamma and Vega risks
  • Constructing Vega and Gamma risk matrices
  • Dynamic hedging of Vega and Gamma risks
  • Dual curve interest rate sensitivity analysis

                       - Sensitivity to LIBOR rate curve
                       - Sensitivity to OIS curve
                       - Impact of LIBOR – OIS correlation on risk sensitivities and hedge estimation
                       - Adjusted bucket hedges and OIS bucket hedges

Workshop: Hedging a swap transaction; Risk analysis of swap portfolio; Delta risk measurement and replicating portfolio construction.

Interest Rate Options: Caps/Floors and Swaptions

Caps and Floors

  • Generic European style interest rate caps and floors
  • Conventional valuation methods: Black (1976) model
  • Why do markets use this model? Advantages and limitations
  • Calibration to a volatility surface; smile and skew effects
  • Put-Call parity: Caps, Floors and Forward swaps
  • Hybrid structures and combinations: Collars, Participating forwards
  • Embedded caps and floors (swaps, structured notes)
  • More complex structures: Digital caps; periodic caps; barriers


  • European and Bermudan style swap options
  • Market conventions:

                     - Terminology; trading conventions
                     - Cash and physical settlement
                     - Basis point versus lognormal yield volatility
                     - Spot versus Forward premium quotation

  • Pricing swaptions: Black Vs. Term structure models
  • Conventional pricing methods: Black (1976) model

                      - Why do markets use this model? Advantages and limitations

  • Calibration of swaption volatility surfaces – skew effects
  • Compatability and consistency with Cap pricing
  • Embedded Swaptions

                      - Extendible and cancellable swaps (European, Bermudan styles)
                      - Structured (callable, puttable) bonds; call monetisation
                      - Balance guarantee swaps, index amortising swaps (IAS)


Advanced Interest Rate Modelling – Stochastic Term Structure Models

  • Stochastic term structure models
  • Developing a consistent platform for valuation of generic and exotic interest rate derivatives
  • Stochastic interest rate models – implementation technique

                      - Numerical and Analytical methods
                      - MC Simulation

  • Single-factor (e.g. BDT, HW) and multi-factor models

                       - Calibrating arbitrage-free bimonial, trinomial models
                       - BGM (LIBOR) market model
                       - SABR model
                       - Model implementation by simulation
                       - Calibration to cap/swaption volatility surfaces
                       - Correlation modelling: Specifying the forward rate correlation matrix

  • Practical advantages and limitations of different modelling approaches
  • Adaptation of stochastic interest rate models to dual curve pricing (dual curve LIBOR market model)
  • Application of stochastic rate models to consistent pricing of interest rate options and exotics:

                      - Bermudan callable swaps

Workshop: Calibration of stochastic term structure model; valuation of European and Bermudan swaptions

Constant Maturity Swaps

  • CMS structures; market conventions
  • Pricing and valuation of CMS swaps
  • Determination of convexity adjustment
  • Calibration CMS valuation to swaption volatility surface
  • Risk management: Delta, Vega and Gamma risk exposures
  • Applications of Constant Maturity Swaps

                    - Hedging curve risk; ALM applications
                    - Yield curve trading and carry trades
                    - CMS linked structured products

  • CMS caps/floors, CMS spread options

 Arrears Swaps

  • Distinction between conventional and arrears set LIBOR swaps
  • Pricing and valuation of Arrears swaps
  • Convexity bias in pricing arrears and other mis-match structures
  • Estimation of convexity adjustment
  • Applications of arrears swaps

                       - Structured notes with arrears set features
                       - Rationale; exploiting forward rate bias

Differential (Quanto) Swaps

  • Defining quanto derivatives
  • Structures and application

                      - Applications in trading, funding and investment
                      - Relative value; carry trading opportunities

  • Pricing and valuation considerations
  • Volatility and Correlation effects
  • Dynamic risk management of quanto structures

Workshop: Pricing constant maturity swaps; structured applications

Interest Rate Linked Structured Products
The objectives of this session are to, with the aid of example transaction term sheets, illustrate key product types, and to understand in greater detail how to break down such instruments into their component derivatives, and to price and value such instruments. The primary focus will be to focus upon the quantitative basis of pricing and valuation, and measurement of product market risk exposures, as well as the understanding the operational mechanics and implications of different product types, and investor motivations and risks.

  • Structured notes; securities with embedded options and other derivatives
  • Common structured interest rate linked products:
  • European/Bermudan callable notes
  • Range Accruals
  • CMS-linked
  • Inverse FRNs
  • Path dependent floating rate notes (LIFTs etc.)
  • TARNs
  • PRDCs

Case study: Pricing and analysis of Inverse FRN, CMS-linked notes and Bermudan Callable structured notes

Course summary and close


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