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Interest rate options - 2.5 hours

A foundation course that explains the over-the-counter interest rate option market. This includes the main products, how they work and how they are used.

It is suitable for those working in or around financial markets who need to know more.

There are simple examples with time for questions and answers.

This course is only available in-house and is suitable for up to 12 people.

This is what is covered:

Option terminology
Underlying, expiry, premium, exercise and strike
The four basic option trades
Payoff profiles
Forward interest rates
Caplets and floorlets – options on forward rates
How caps work
How floors work
How these options can be used to hedge borrowing costs
How these options can be used to hedge asset returns
Buying one option to pay for another – collars
Caps embedded in bonds
Payer’s swaptions – how they work
Receiver’s swaptions – how they work
Using swaptions – hedging examples
Option risks in bank balance sheets

Related Documents

Interest rate caps are a string of options on forward starting Libor. The individual option is called a “caplet” with the combined sum of each caplet’s value giving the cap price or premium. Forward interest rates are calculated from the par yield curve. To help understand them a simple example helps. If you borrow money for six months and deposit it for three months there is a rate of interest that you need to receive on your deposit between month three and month six in order to give you sufficient cash to repay your initial borrowing with interest. This is the breakeven or forward rate:

Interest Rate Swaps

Short courses>Interest rate swaps

elearning > Interest rate swaps

Learn about the following: What interest rate swaps are and how they work. How dealers make (and lose) money with swaps. How swaps can be used to manage risk. The key risks with swaps. How these risks can be controlled.

Using Interest Rate Swaps

Market Guides > Gap reports - how do you use them?

14th October 2009

Gap reports show you the interest rate risk you are running in your balance sheet. They put the assets and liabilities into time buckets in accordance with their interest rate repricing. From this simple approach you can obtain a table or graph of the risk being run. This normally includes a profit and loss figure that results from moving the yield curve. Gap limits are also applied in order to keep the interest rate exposure within risk tolerence. Gap reports aren't new; they are widely used and have both strengths and weaknesses. Let's find out more.