LFS Capital Markets Fundamentals

The Capital Markets are the main arenas where borrowers, lenders and investors – Governments, Central Banks, Banks, Insurance Companies, Fund Managers, Companies, etc. – all come together to carry out their various financial transactions and engagements.

This hands-on programme will give you a solid understanding of the overall structure, and regulation, of financial markets, as well as the key factors that drive market performance, the main participants and the main products of Equity markets, Government Bonds, Credit and Foreign Exchange including Derivatives. The course is completed by a section covering the basics of Options.

Practical exercises are used extensively to ensure that participants can apply the learning immediately and are able to advance their career.

This programme benefits all professionals new to the Capital Markets industry, including those working in ancillary roles and in the finance and funding areas of banks, companies and governments.

This course is designed for anyone who needs to learn about Capital Markets and then progress to more advanced market / product-specific topics.

• People recently graduated or transferring to a career in Capital Markets from other industries
• Professionals from other areas working in financial institutions (e.g. lawyers, marketers, IT)
• Bank, Insurance Company, Pension Fund and Asset Management employees
• Central Bank and Government Funding personnel
• Finance and treasury departments in publicly listed companies
• Risk managers, finance professionals, auditors, accountants and financial advisors

• Understand the overall structure of financial markets and the main participants and their financial requirements
• Learn about the key asset classes – Equities, Money Markets, Government Bonds, Credit, FX and Derivatives – and what drives their performance
• Understand the details of the main financial products in each of the above asset classes and how they are issued and traded
• Become familiar with basic Derivative products and how / why they are used
• Gain insights into the key global regulators, the main regulations and the effect that they have on market participants

No prior knowledge is required for this course.

Capital Markets Overview

• Market Overview
  • The key participants
    • Key participants – investors (lenders) and issuers (borrowers)
    • Hedge funds – what makes a hedge fund? How do they make money?
  • Market drivers – requirements for funding, sources of capital
  • Primary vs. secondary markets
  • Essential macro drivers
    • What drives market prices
    • What drives relative outperformance between asset classes and instruments
  • Measuring investment performance
    • ‘Alpha’ vs. ‘beta’, absolute performance vs. benchmarking
    • In defence of tracker funds
    • Key metrics of performance – total return, RoE/RoA, return per unit risk (Sharpe ratio)
    • Equity indices – total return vs. capital appreciation, price-weighted vs. market cap-weighted
• The key markets
  • Principal asset classes
  • Physical (cash) markets vs. delta-1 derivatives
  • Non-linear (bespoke) derivatives

Workshop: Understanding price drivers and how the market responds to financial and geo-political news across all main asset classes – Analysis of empirical results from history

• The role of the investment bank
  • Who are involved, from origination to trading
  • How banks make money
    • Cross-selling opportunities
  • Understanding clients’ needs on both buy-side and sell-side
  • Intermediating and warehousing risk, balance-sheet and capital implications
• Market regulation and supervision
  • Review of the Global Financial Crisis
    • Understanding the causes
    • The lessons that the market learnt
  • The role of the Central Banks and domestic regulators
  • Supranational regulation (Basel), solvency and capital
  • Financial legislation post-crisis (Dodd-Frank, EMIR)
    • The Volcker rule and the impact on banks’ business models
  • MiFiD and its consequences
  • The role of compliance departments within banks
    • Review of recent scandals (LIBOR/FX manipulation, swaps miss-selling, et al)
• The capital structure decision
  • Debt vs. equity financing – borrower perspective and investor perspective
  • Leverage vs. solvency – is there an optimal debt/equity ratio?
  • Why banks are different from corporates

Workshop: Calculation of shareholder RoE for a corporate under three capital structure scenarios

Equity Markets

Equity Cash Markets

• Primary markets
  • The decision to go public – pros and cons
  • Structuring an IPO
    • From inception, through roadshows, to launch and after-market support
    • The roles played by different divisions within the lead-manager
    • Why league tables (seem to) matter
  • Rights issues and other secondary market offerings
    • Computing the theoretical ex-rights price (TERP)
  • The ‘greenshoe’
• Equity secondary market trading
  • Sources of liquidity
    • Public inventories and dark pools
  • Equity market-making
    • Mechanics of short-selling
  • The role of research
    • Technical vs. fundamental research
    • Do historical price patterns matter?
• Trade execution and trading platforms
  • Electronic trading platforms and HFT
  • ‘Direct market access’ and execution efficiency

Workshop: Secondary market capital raising – Analysis of a recent bank rights issuer and calculation of the TERP

Convertible Bonds

• Convertible bond structure and mechanics
  • CB variations (exchangeables, mandatories)
  • Key jargon and ratios – parity, conversion ratio, bond floor, conversion premium
  • Borrowers’ and investors’ perspective
• Contingent convertibles (CoCos)
  • Structure and mechanics
  • Motivation for CoCo issuance

Equity Delta-1

• Equity forwards, single-stock and indices
  • Where is the fair forward?
  • The stock borrow
• Equity index futures
  • Mechanics and settlement, margining
  • Futures and leverage
  • Fair value and basis trading
  • Hedging with futures
    • Computing the hedge ratio
    • Tracking errors, adjusting for Beta
• Equity swaps
  • Mechanics and applications

Workshop: Using futures to hedge – Cutting the exposure on a large equity position using index futures

Fixed Income Markets

The Money Markets

• Understanding interbank rates
  • What are interbank rates? What is LIBOR and why has it been problematic?
  • Overnight indices
• Central Banks and interest-rate policy
• Other money-market instruments
  • Bank deposits and CDs
  • T-bills
  • Commercial Paper

Debt Markets

• DCM and bond issuance
  • Considerations for first time issuers
  • Bonds vs. loans
  • The issuance process – auctions vs. underwritten deals
• Bond types, structures and market conventions
  • Types of bonds, MTNs
  • Fixed rate bonds vs. FRNs
• Understanding the yield curve
  • The various yield curves that we look at
  • Drivers of shape and level
  • Macroeconomic drivers and the impact of Central Bank activity

Workshop: Comparison of different money-market instruments and the returns offered

Bond Pricing and Risk

• Coupon, price, yield
  • Clean vs. dirty prices, accrued interest calculations
  • Price/yield relationship and PV01
• The various duration measures
  • Duration, modified duration and Macaulay duration
  • From (mod) duration to DV01
• Alternative bond structures
  • Callable bonds
  • Structured notes

Interest rate swaps

• Mechanics of an IRS
• Intuitive swaps pricing and risk
• Capital market applications
  • New issue swaps
  • Asset swaps
  • Hedging interest rate risk

Workshop: Swapping a new issue

Credit Markets and FX

Credit Markets

• Understanding seniority and creditor claims
  • The bankruptcy process and order of priority
  • Historic default and recovery rates
• Pricing credit risk
  • Spread, recovery rate and default probability
  • CDS vs. cash-market spreads
    • The different spreads and how they are related
  • The role of the ratings agencies
    • Why ratings and spreads can diverge
• Corporate bond issuance
  • Investment grade and high-yield debt markets

Securitization and ABS

• What is securitization?
  • Who are the market participants?
  • Motivation for securitization
  • Credit enhancement of the collateral pool
• Asset-backed markets
  • Process of asset securitization
  • Nature and type of assets securitized
  • Long-term vehicles vs. short-term commercial paper facilities
• Mortgage-backed securities
• Covered bonds
• Tranched Structures
  • The waterfall process
  • CDOs, CLOs, CBOs, CMOs – the whole family
  • Briefly on the 2008 crisis

Workshop: The 2008 Crisis

Foreign Exchange

• Spot market conventions
• Computing cross-rates
• Forward FX quotation conventions
  • Computing the fair forward rate
• Hedging commercial exposures
• FX Swaps
  • Swaps vs. outright forwards
  • Customer applications of FX swaps
    • Using FX swaps as a cash-management tool
    • How customers use FX swaps to manage market and liquidity risk
    • Using FX swaps to optimize funding and investment opportunities

Options

• Option Definitions
• Uses of Options
• Directional Views
• Volatility, Time Value and Basic Option Pricing

Workshop: FX hedging strategies