Advanced Financial Modeling
Introduction Financial Engineering
Mathematical Risk Management
Numerical Techniques in Finance
Overview of Financial Engineering

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Training - Financial Enginering

This course will show you the essential tools, beginning with the fundamentals of fixed and floating rate instruments then moving on to interest rate options and swaps, equity, currency and asset swaps. Duration, convexity, key rate duration and key rate convexity will also be explained but from a practical rather than a mathematical viewpoint. Later, the more advanced instruments such as structured FRN’s, DECS, ELKS and convertible bonds will be introduced.

Duration and convexity
Analysis for structured notes
- Duration
- Convexity
- Key rate duration
- Duration with respect to the discounting rate
- Duration with respect to the index
- Determination of the relevant index

Structured notes: How they are priced and hedged
- Forward rate agreements (FRAs)
- Caps and floors
- Collars and zero cost collars
- Interest rate swaps
- Equity swaps
- Currency swaps

Interest rate models: a survey
- Why are models important?
- The models Hull and White, Heath Jarrow Morton, Cox Ingersoll Ross, Jamshidian, Vasicek, Merton, Black Derman and Toy
- Interest rate trees: binomial and trinomial
- Choice of Models:
- why there is no single “best” model?
- speed and simplicity vs. accuracy
- what do you want the model to do?
- The software dilemma: buy or develop?
- The calibration of a model

Volatility - estimation
- Historical volatility:
- what term should be used
- what historical period should be used
- Implied volatility:
- what causes volatility
- “volatility days”
- Different methods of volatility estimation:
- using closing prices
- using daily high and low prices
- using high, low, open and close prices
- the “Parkinson” rule
- using exponential moving averages
- Volatility smile and smirk
- Pricing using a binomial tree (review)
- Tree with a volatility term structure
- Implied volatility trees
- Volatility insensitive products:
- why would anyone need a volatility insensitive product
- how to create such products

Hedging with the presence of the smile
- Looking at the problem: why the Black Scholes Delta is not correct
- Hedging in presence of the smile
- Techniques used by the leading firms?

From concept to cusip
Creation of a structured note
- Identification of the possible need
- The race for idea generation
- Comparing the various approaches:
- can we do them?
- how will they generate revenue for us?
- how about the risk profile?
- How do we hedge the risks?:
- do we enter them into our book?
- do we do them “back to back”?
- the impact of each decision
- Convincing the risk committee:
- market, credit, liquidity risk
- Legal and tax departments
- Marketing:
- creating an appealing term sheet
- convincing a client to purchase
- Pricing:
- an indicative price
- a firm price
- negotiating with the client
- The use of a product prototype:
- is this a “one off” type of deal or do we expect more of them?
- Do we need to reprogram our entire risk management system?

Advanced structures - rationale
From the investor perspective and the issuer perspective. Cover issues in pricing, hedging and risk management
- Swaptions
- Captions and floortions (floptions)
- Extendible swaps
- Ratchet swaps
- Barrier knock out caps
- The Quanto option

Structured floating rate notes (FRNs)
- The three generations of structured notes
- Inverse floaters
- Libor squared notes
- De-leveraged CMT FRN
- Spread products (e.g. Prime - Libor)
- Range floaters: the two basic types
- Accrual notes
- A ratchet floater
- Index amortising notes
- Currency indexed notes
- Commodity linked notes
- Total return index notes

Introduction to convertible bonds
From the viewpoint of the issuer, investor and banker
- Why use them?
- Why they are not a bond plus an equity option?
- Two factor model valuation techniques
- What are their special features?
- The special risks of convertible bonds

Other hybrid structures
- Aces, Decs, Prides, Sails and Strypes
- Explanation of the various structures and the differences between them
- Hybrids composed of debt and derivatives vs. hybrids composed of equity and derivatives
- Examining the structures from the point of view of the buyer and the seller

Coping with the risks
Structured notes create special risks for the investor, issuer and financial intermediary
- Market risk
- the case of “busted range floaters”
- the case of “capped floaters”
- what can happen in extreme cases?
- Credit risk
- what is “netting” and how does it mitigate credit risk?
- Liquidity risk
- will there always be a secondary market for my product?
- Model risk
- is my pricing software correct?
- Does the client understand the product?
- what is the responsibility of the banker?

Examining the markets of the world
Examining several “special” markets
- Switzerland
- Hong Kong
- Other Far-East countries
- Emerging markets
- What is the future of the structured note market in each country?
- Case Study:
  * Structured notes and reverse engineering
  * Examine actual term sheets from Wall Street
     - Definition - what is the structure called?
     - Motivation - why would a borrower issue the note? why would an investor purchase the note? under what conditions, views or interest rates?
     - Pricing - how is this structure priced
     - Sensitivity - how will the note perform under various scenarios (parallel shifts, flattening or steepening of the yield curve etc.) What about volatility swings?
     - Hedging - how can the bank hedge the option embedded in the note? What solution can the bank provide to a client who has purchased this structure?
- Alternatives - what other structures are there which offer similar behaviour under various market conditions?

Pre-Course Warm-Up
Structured finance
Corporate needs, investor appetites, the bankers and the rocket scientists
- Risk management for corporations
- mismatch between assets and liabilities
- exposure to new risks through expansion to new markets
- bundling risks: exposure to one risk factor vs. exposure to a basket
- how do risks effect shareholder value?
- The investors
- democratisation of finance: ease of access to information worldwide
- globalisation of finance: worldwide availability of investment opportunities
- the relentless search for value
- The bankers
- increasing competition between the big brokerage houses
- two main principles of financial engineering
- slicing and dicing risk and return
- The “rocket scientists”
- computers continuously increasing in power
- switching careers: academia to finance
- clients demanding more and more and increasing in sophistication

Premium reduction strategies
- Goals of hedging and risk management
- Is it cheaper to hedge several risks with one structure or hedge them separately?
- How averaging can reduce option premiums
- options on baskets
- average rate options
- Asian options on baskets

The term structure of interest rates
- Par bond yield curve
- The zero coupon curve
- Corporate curves and spreads
- What does the spread really measure?
- Forward curve
- The Libor interest rate curve
- Does volatility affect the curve?
- Commercial paper rates
- Derivation of one curve from another
- bond stripping and reconstitution
- gap and multigap analysis

Fixed and floating rate instruments
- Popular indices: Libor, constant maturity treasuries (CMT), Fed funds, etc.
- Inverse floating rate notes
- How fixed coupon bonds are related to interest rates
- How are FRN’s related to interest rates?

Course Fees
VAT to be included at the local rate, if applicable. Costs shown are per delegate inclusive of refreshments, lunches and seminar materials. Cost of accommodation is not included.
GBP 4500

Certificates of Participation
Certificates of participation are remitted to course participants upon request.