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Using Interest Rate Swaps

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Using Interest Rate Swaps, (One Day)

This workshop is about interest rate swaps and how they can be used to manage interest rate risk. It also addresses how swaps are priced, how they change value, the credit risk they generate and the ongoing operational requirements of swap portfolios. 

The course is designed for staff working in the treasury and also those who work in risk and administration roles supporting the dealing team.

Training will be in a workshop format. This will include a mixture of presentation and case study material. The course is designed for up to ten staff.

Below is a summary of the workshop. The content has been placed in a logical sequence and addresses the products, mechanics, methodologies, practical uses and risks.

Morning

1. Basic financial mathematics: This section is designed as a basic introduction to the techniques that are helpful in understanding how derivatives are used.

  • Yield curves and market conventions
  • Discount factors, present / future value
  • Construction of the zero coupon model

2. Interest rate swaps: This will involve simple structuring and pricing for:

  • Spot starts
  • Forward starts
  • Amortising structures

3. Understanding why swaps change value: Valuation is important for both accounting and calculating the potential cost of breakage. This section will also consider how swaps are marked-to-market.

4. What is the basis point value of a swap and why is this useful? This section will show simple techniques that can be used to quantify interest rate risk.

Afternoon

5. Hedging debt: This will introduce the purpose behind hedging and the decisions that need to be made in relation to fixing the cost of debt.

6. Credit exposures: This will explain how and why swaps can generate counterparty credit exposures and need appropriate credit analysis and limits.

7. Mitigating credit risk through collateral: Collateral management can be used to mitigate credit exposures. This involves completing a credit support agreement. This section will examine the operational aspects of collateral, what you need to have in place to make it work and some of the risks that collateral can itself generate.

8. Operational requirements for swaps: This section will address some of the operational issues around booking a swap deal and managing the ongoing payments it generates.

End of workshop & review

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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.