Valuation and Collateral Workshop

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Valuation & Collateral Workshop, (One Day)

This workshop is about the valuation of trades and the mitigation of credit risk using collateral management.

The course will cover:

How products are valued
Why valuations differ
Why collateral is used
The terminology and workflow of collateral
Effective procedures for collateral management

The workshop is designed for finance, middle office and administration staff and provides an introduction to the topic. More details are below.

Morning

Introduction

Why accurate valuation is important
P&L
Market risk
Credit exposures
Collateral
Importance of segregation of duties

Review of financial mathematics

Discount factors
Valuation processes

1. Swaps

Cash flows
Present value

2. Futures/forwards

Variation margin

3. Options

Using models

Problems with valuation

Validation of data
Market liquidity
Credit differentials
Independence

Introduction to collateral

Why collateral
Credit exposures, potential future exposure
Default probability & expected loss

Afternoon

How collateral works
Portfolio valuation
The collateral call
The collateral workflow

Collateral terminology

Collateral requirement
Independent amounts, (initial margin)
Haircuts, (valuation percentage)
Threshold amounts
Minimum transfer amounts
Interest on collateral

Internal procedures

Establishing a policy
Deciding on appropriated collateral
Types of transactions covered
Revaluation methodology
Credit support documents
What you negotiate

Problems & risks with collateral

Operational risk
Valuation of trades
Valuation of collateral
Dispute resolution
Why disputes arise
How to avoid disputes
How to resolve disputes

End of workshop and review

Related Documents

Training Courses > Collateral Management

Product Valuation

Market Guides > Interest rate swaps

20th September 2009

When two parties agree to enter an interest rate swap (IRS) one party pays a fixed rate of interest and the other a variable rate. The variable rate is often referenced to Libor or Euribor. The interest payments are based on a notional amount, (with IRS no principal amount changes hands). In the market there are conventions for calculating the interest payments. For example USD IRS use an annual actual 360 interest rate calculation for the fixed payment and a quarterly or semi annual actual 360 calculation for the floating payment. Maturities are normally between 2 and 20 years but it is possible to trade swaps that have maturities exceeding 50 years. Customers using swaps to hedge can expect a dealer to quote a dealing spread. The dealer will want to receive a higher fixed rate than the one they pay. It's one way the dealer makes money from trading. Dealers will insist before trading that the appropriate documentation is signed. For swaps standard documentation is provided by the International Swaps and Derivatives Association (ISDA). This document is called a master agreement. It covers all swaps between the two parties. Individual transactions are then agreed by confirmation which refers to the master agreement.