Interest Rate Options: Characteristics, Uses and Sensitivities

LEVEL: INTERMEDIATE LEVEL

▪	Master the use of interest rate options and various underlying financial instruments
▪	Gain an in-depth knowledge of interest option sensitivities (“Greeks”) and implications of the smile effect
▪	Understand the risks involved in managing an interest rate option portfolio and analyse mark-to-market variations
▪	Optimise trading strategies and corresponding hedging techniques

▪	Characteristics and sensitivities (“Greeks”) of interest rate options - Intermediate
▪	Volatility smile and skew - Introductory
▪	Pricing elements of an interest rate option - Introduction
▪	Mark-to-Market of an interest rate option portfolio - Intermediate
▪	Barrier option structures - Introductory

▪	Step by step and comprehensive analysis of the dynamic behaviour of a hedged/unhedged interest rate option portfolio
▪	Hands-on approach to fully master the use of pricing spreadsheets

▪	Traders/fund managers/junior structurers
▪	Salespeople
▪	Corporate finance divisions
▪	Risk management
▪	Middle office, back office, IT
▪	Internal controls, audit
▪	Corporate treasurers

Characteristics of Interest Rate Options

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Underlying instruments:

Revision of forward rate concepts

FRAs and short-term interest rate futures

Bonds and long-term interest rate futures

Interest Rate Swaps

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Practical workshop
. Build a spot and forward yield curve

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Interest Rate Options

Bond and Future Options

Swaptions, caps/floors (plain vanilla and exotic)

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Practical workshop
. Use options as hedging tools

Market Use of Interest Rate Options

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Market participants, various uses of options (hedging, trading, leverage etc.) and market conventions

Valuing an Option Portfolio and Market Risk Management Techniques

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Pricing components: calculation of premium

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Mark-to-market of an option portfolio:

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sensitivity (“Greeks”) to the underlying instrument (delta, gamma), maturity (theta) and volatility (vega, volga)

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Relationship between Greeks

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Practical workshop
. Build in EXCEL™ an interest rate future option pricing spreadsheet, calculate and analyse the “Greeks”

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Practical workshop
. Delta-neutral and gamma-neutral strategies, vega hedging

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“Black” volatility: implied and historical volatility/notions of variability

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Volatility smile and skew

Introduction to the concept and study of current market levels

Managing the smile: beta, interest rate/volatility correlation, volatility of volatility

Introduction to the SABR model

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Practical workshop
. Analyse and handle a smile effect

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Smile in standard and exotic options: caps/floors (forward yield curves and smile) and swaptions (volatility matrix and smile)

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Practical workshop
. Use a pricer to run a cap/floor and swaption portfolio

Option Portfolio Analysis

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Global sensitivities and mark-to-market of a portfolio

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Typical structures and hedging strategies

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In-depth examination of hidden risks

Presentation of a few exotic option strategies

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Practical workshop
. Break down a structure of options into basic instruments