Using Derivatives to Manage Fix Income Portfolios

Derivatives: Identification and Pricing

• Definition: Futures, Swaps, Options, CDS
• Cash & carry arbitrage
• Swap pricing basics
• Black & Scholes: overview and limitations
• Other option pricing methods
• CDS, CDX pricing
• ETF, index analysis

• Market simulation (First Trading Room™):

• Run a portfolio of bonds, futures, swaps and options under risk-management constraints and for selected market scenarios

Interest Rate Options

• Convertible bonds
• MBS, CMO, IO/PO
• Callable Bonds
• Option Adjusted Spreads

Risk Management

• Duration/shift exposure
• Currency exposure
• Yield curve exposure/shift - twist – butterfly
• Sector/theme credit exposure
• Exposure to correlation: portfolio CDS/CDO
• Volatility exposure: vega-gamma-theta

• Practical workshop:

• Develop strategies for given scenarios

Value-at-Risk (VaR) Approaches in UCITS

• UCITS
• Historical VaR, parametric VaR, Monte Carlo VaR
• VaR limitations and alternatives
• Back-testing and stress tests
• VaR (relative and absolute) and UCITS ratios

• Practical workshop:

• VaR calculations and applications applied to mutual funds

Strategy elements and implementation

• Trade engineering: choosing an instrument
• Stacks and strips: choosing a maturity
• Volatility smile: choosing a strike price
• Counterparty and operational risks

• Practical workshop:

• Identify strategies adapted to an investment strategy and cost-benefit analysis

Operations and associated operational risks

• Trade processing
• Confirmation and matching
• Events management and collateralisation
• Pros and cons of outsourcing

Risk Control and reporting

• Reporting and regulatory ratios
• Total exposure to yield curve risk (cash + synthetic), currency risk and volatility
• Performance Attribution
• Pockets and virtual cash allocation, attribution via spread moves, processing options

• Practical workshop:

• Analyse a portfolio containing various derivatives and write a risk and performance report