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Interest Rate Derivatives 2: Options
Interest Rate Options are an essential part of the derivatives marketplace. This course will equip you to use, price, manage and evaluate interest rate options and related instruments.
The course starts with a detailed review of option theory, from a practitioner’s viewpoint. Then we cover the key products in the rates world (caps/floors, swaptions, Bermudans) and their applications, plus the related products (such as CMS) that contain significant ’hidden’ optionality. We finish with a detailed look at the volatility surface in rates, and how we model vol dynamics (including a detailed examination of SABR).
The course includes extensive practical exercises using Excel spreadsheets for valuation and risk-management, which participants can take away for immediate implementation.
Recommend to a ColleagueThis course is also available in London Time Zone and Singapore Time Zone
This course is designed for anyone who wishes to be able to price, use, market, manage or evaluate interest rate derivatives.
- Interest-rate sales / traders / structurers / quants and relevant IT personnel
- Bank Treasury and other Asset Liability Management executives
- Central Bank and Government Treasury / Funding managers
- Insurance Company investment managers
- Fixed Income portfolio managers
- Company finance executives and Investment Bankers
- Gain familiarity with option products traded in the rates world
- Understand how (and why) to delta-hedge an option position
- Know the classic option combinations and strategies employed by practitioners and customers
- Understand the vol surface and how to trade it
- Appreciate the reasons behind the choice of Normal vs Lognormal vol
- Understand the significance of stochastic vol
- Understand how SABR works
- Understand the mechanics of Constant Maturity swaps, and the origin of the convexity adjustment
- Know how to price and hedge a CMS with a replicating swaption portfolio
Basic knowledge of Microsoft Excel, a broad understanding of fixed-income markets and basic knowledge of Interest Rate Swaps and Futures is assumed.
Comprehensive teaching on fixed income markets and bond maths takes place in the Fixed Income Markets & Analytics course; comprehensive teaching on Interest Rate Swaps and Futures takes place in Interest Rate Derivatives and Swaps.
Richard Fedrick teaches courses globally in all areas of finance with a particular emphasis on interest rates and FX, derivatives, exotic options, structured products and risk management.
He started his career in 1988 in the Derivatives Product Group at Morgan Stanley, which he joined after three years of post-graduate research in Theoretical Physics. He spent three years as a rates and FX structurer at Morgan Stanley before moving to Deutsche Bank in London, where he joined a newly-formed team designing and selling structured products across Europe.
In 1993 Richard joined General Re Financial Products, a AAA-rated derivatives boutique that rapidly became established as one of the world’s leading derivatives trading operations. At GRFP, Richard initially ran the structuring desk, before moving into trading (rates and FX exotics), and finished as a Managing Director and global co-head of structuring and sales.
He joined Dresdner Kleinwort Wasserstein in 2002 before moving into the executive education industry in 2004.
Richard has a 1st Class degree in Physics from St John’s College, University of Oxford.
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a Brochure with full details for Interest Rate Derivatives 2: Options
Option Fundamentals
- Terminology, basic payoff diagrams
- Cash vs physical, European/American/Bermudan settlement
- Key drivers of the premium – the forward and the implied vol
- Put-call parity, intrinsic and time value
Option Strategies
- Spreads, ratio spreads
- Buy-side strategies – protective puts, buy-writes
- Collars and risk-reversals
- Straddles and strangles, and the de=levered cousins (flies and condors)
Option Pricing and the Greeks
- Introduction to SDEs and modelling asset dynamics
- The fundamental BS equation and its motivation
- Solving the BS equation – the Black-Scholes formula
- Pricing options on a lattice
- Monte Carlo approaches
Option Hedging and the Greeks
- The key first-order risks
- Delta-hedging an option position
- The fundamental importance of gamma
- Gamma versus theta
- Quantifying vol risk (vega)
- Hedging at the portfolio level
Interest Rate Options: Caps, Floors
- Definitions and mechanics
- Applications
- Zero cost collars, participating caps
- Delta-hedging caps and floors
Interest Rate Options: Swaptions
- Definitions and mechanics
- Cash versus physical settlement – why it matters
- Bermudan swaptions
- Hedging swaption risk, and why Bermudans are so much harder
- Applications (in corporate interest-rate risk management, in structuring callable bonds)
Interest Rate Options: Bermudans
- Mechanics of the most common varieties
- The key pricing and risk-management issues
Trading Volatility
- Straddles and strangles
- The vol surface – smile and skew and their drivers
- Hedging smile and skew with RRs and Flys
- The role of stochastic vol
- Second-order vol risks (vanna and volgamma)
- The needs for a better model, introduction to SABR
The Vol Surface for Rates
- Defining interest rate dynamics – Normal, Lognormal or CEV?
- Quoting vols – Lognormal (Black) or absolute (Normal)
- Understanding the shape of IRD vol surface
Constant Maturity Swaps
- Mechanics of constant maturity swaps
- Applications of CMS
- Intuitive pricing – why do we get the wrong answer?
- Understanding the convexity adjustment
- Pricing and hedging CMS – the replicating swaption portfolio
- What CMS flows have done to the IRD vol surface
"David is very organized. Very thorough. Goes through material with a lot of intuition. Great course for practitioners."
(Vice President - Tata Consultancy Services)
"I found the course very well-presented and enjoyable. It was useful to see exotic products in detail, and get a better handle on their uses and features. The exercises in-class were particularly useful."
( Manager - Trading Analytics - OSFI)
"Advanced topics delivered in an efficient and simple manner with focus on concepts. David's knowledge of markets and structures is superb. The exercises are of great use in understanding the complex derivatives."
(Treasury & Capital Markets - Mashreqbank PSC)
"This was the most useful and helpful course out of a number of different courses that I've attended to date. The structured products covered in this course are described clearly and the subject is very well presented by the tutor. The corresponding pricing models are explained in a great deal of detail. I feel that I learned a lot in this course and that my understanding of these products was greatly enhanced."
(Developer - BNP Paribas)
"Brilliant tutor!"
(Fixed Income Sales - RBS)
"This was my 2nd LFS training and will likely attend again."
(AVP VA Hedging, P&L - Manufacturers Life Ins Co)
"Comprehensive course content, taught by experts in their field. Highly recommended."
(Fixed Income Derivatives - Royal Bank of Canada)
Course Details
This course is also available in London Time Zone and Singapore Time Zone
- To run this course at your organisation, contact us.
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