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December 19, 2007

Introduction to Derivatives

 

Objectives:

INTRODUCTION TO CAPITAL MARKETS INTRODUCTION TO FIXED-INCOME INTRODUCTION TO EQUITIES INTRODUCTION TO DERIVATIVES GLOBAL SECURITIES PROCESSING GLOBAL LIFECYLE OF A TRADE

By the end of the course, the participant will be able to:

• Understand the features and characteristics of futures, swaps and options
• Comprehend the risks associated with these derivative products
• Discuss the basics of pricing
• Apply derivatives in trading and portfolio management

Session 1: Introduction to Futures

The session introduces futures and explores the features and characteristics of futures contracts, including U.S. Treasury note and Equity contracts. By the end of the session the course participant will be able to:

• Define futures contracts
  • T-note
  • S&P
• Understand the features and characteristics of futures including:
  • Standardization
  • Margin requirements
• Identify where futures contracts trade
• Understand the risks associated with futures

Session 2: Fixed Income Futures – Pricing and Applications

Explore the differences between the short-term interest rates and note/bond futures. Examine applications including speculation and hedging. Modified duration and DV01 will be introduced to develop hedge ratios. By the end of the session the course participant will be able to:

• Discuss terminology including cheapest to deliver and implied repo rate
• Identify the main components of pricing
• Examine applications including:
• Speculating with note futures
• Hedging using the appropriate hedge ratio i.e. DV01 or duration

Session 3: Equity Futures– Pricing and Applications

Pricing is briefly discussed. Applications are examined. By the end of this session the course participant will be able to:

• Price an equity futures contract
• Understand a variety of applications including directional trading, hedging and stock index arbitrage

Session 4 – Introduction to Interest Rate Swaps

Introduce interest rate swaps and their features and characteristics. Examine how a swap is broken down into a fixed rate note and floating rate note. Examine fundamental pricing. Show elementary strategies and adjustments to pricing given different day count conventions and payment frequencies. By the end of the session the course participant will be able to:

• Define an interest rate swap
• Understand the features and characteristics
• Apply swaps to change a fixed rate asset into a floating rate asset
• Identify how swaps are priced off the treasury curve
• Identify the risks associated with swaps
• Examine swaps price from Bloomberg

Session 5: Other Types of Swaps

There are many variants of the plain vanilla swap structure and this section briefly highlights these structures. By the end of the session the course participant will be able to:

• Understand the features and characteristics of other types of interest rate swaps
• Step up and amortizing swaps
• Asset swaps
• Indexed swaps
• Basis swaps
• Currency swaps
• Credit default swaps
• Index and single name
• Total Return Swaps

 

Session 6: Options

Options are introduced and their features and characteristics are examined. Particular emphasis is on terminology. By the end of the session the course participant will be able to:

• Define calls and puts
• Discuss in, at and out of the money
• Show intrinsic value + time value = premium
• View payoff profiles of the respective options
• Introduce the main pricing components of an option
• Discuss the risks associated with options

 

Session 7: Equity Option Applications

By the end of the session the course participant will be able to:

• Understand covered calls on stocks
• Use S&P 500 index options to hedge a portfolio

 

Session 8: Interest Rate Options – Pricing and Applications

An introduction to interest rate options, their features and characteristics are explored. By the end of the session the course participant will be able to:

• Define caps, floors and collars
• Show the basic pricing and applications for hedging