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Finance Training Course – Course Outline – Interest Rate Models: Forecasting Interest Rates and Application

The workshop is aimed at treasury, risk and fixed income investors who use interest rate forecasting tools for arbitrage, ALM, risk or credit policy decisions. Teaching methodology is based on intensive hands on model building and application cases.

The workshop covers four different families of interest rate models starting with the simplest CIR (Cox, Ingersoll & Ross) and finishing up with the multi-factor HJM model. We then look at applications of the same models in Asset Liability Management, Fixed Income Arbitrage, monetary policy announcements and predicting unexpected interest rate shocks. A final session extends the analysis to a macro economic model of the economy using core interest rate drivers and Monte Carlo simulation.

1. COURSE OBJECTIVES

By the end of this workshop participants will be able to: 

  1. Use models to identify fixed income arbitrage opportunities in treasury term structure
  2. Build basic and advance interest rate models in excel for forecasting and extrapolating interest rates across the full range of maturity tenors
  3. Review the impact of external shocks (such as oil prices) on domestic interest rate environment and monetary policy
  4. Review interest rate inputs for ALCO meetings as well as ALM models

The packaged workshop represents an integrated skill building exercise that combines concepts with practical hands on application and is aimed at professionals who deal with pricing, valuation and portfolio management issues related to fixed income markets in Pakistan.

2. TRAINING COURSE LEVEL

Intermediate and advance users.

3. TRAINING PREREQUISITES

Some familiarity with interest rate modelling required. All participants are requested to arrange Laptops with a functional version of Microsoft Excel.

4. COURSE OUTLINE

Session & TitleTopics
Session 1: The Interest Rate Modelling Crash Course in 90 minutesThe term structure, Zero and Forward Rates.Building Static Interest Rate Models.Bootstrapping Zero and Forward Curves.Using interpolation and interpreting Forward Curve.

Interest Rate Model Families.

Cox, Ingersoll and Ross (CIR), Black, Derman and Toy (BDT) and the multifactor HJM.
Building models using macro factors.

Session 2 : Case Study A: CIR and ALM – Generating Rates and re-pricing productsBuilding a simple interest rate generator and linking it to the ALM model.Revaluing loan book and collateral impairment.Linking ALM inputs with model drivers.Calibrating CIR for domestic interest rate data.
Session 3: Case Study B: Term Structure model and BDT: When issued pricingBuilding BDT (Black, Derman and Toy).Filling in the blanks for intermediate tenor rates.Using BDT to price when issued securities and identifying opportunities for fixed income arbitrage.
Session 4: Case Study C: Forecasting forward rates and HJMForward rates and the multifactor HJM model.Using HJM to price interest rate derivatives. Building the HJM model.
Session 5: Case Study C: Forecasting forward rates and HJMMultifactor model applications continued.Building and testing the HJM model. PCA Analysis and HJM calibration. 
Session 6: Case Study D: Simulating the EconomyBuilding a macro economic model for simulating a national economy and monetary policy decisions. Identifying drivers. Implementing the model. Interpreting results. Review, wrap up and closure.
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