Pricing Interest Rate Swaps and Interest Rate Options - Package

About the Course

This course consists of

• Three modules with supporting EXCEL files of the basic Pricing IRS & interest rate options course
• A PDF file which explains the derivation of the Zero Curve and Forward Rates
• An EXCEL file & PDF write up that illustrate the pricing of IRS using OIS & LIBOR discounting

The first module focuses on the interest rate term structure which is a key element in the pricing and valuation process. The course begins by defining the various types of interest rates. It then gives a brief overview of the variations of the swap contract. This is followed by a summary and flowchart of the pricing process for interest rate swaps. Finally, it walks through a step-by-step approach of deriving zero rate and forward rate term structures.

The second module focuses on the pricing of various interest rate and currency swaps. The course presents specific examples and a step-by-step procedure of how to determine the value or price of interest rate swaps in particular coupon and basis swaps and cross currency swaps in particular fixed-for-fixed, floating-for-floating and amortizing floating-for-floating currency swaps.

The third module focuses on the pricing of various interest rate options. A step by step methodology for calculating the value of interest rate options, in particular caps and floors is presented. The use of cap floor parity in pricing a swap is also illustrated. This is followed by walkthroughs of how the values of other derivative products such as accrual swaps, commodity linked notes and range accrual notes are calculated.

“Interest Rate Swap (IRS) valuation – OIS versus LIBOR discounting” focuses on demonstrating the valuation methodology for collateralized IRS using OIS discounting. In addition for comparison purposes pricing of IRS using LIBOR discounting is also included

Learning Objectives

After taking this course you will be able to:

• Define cash flows
• Understand why cash flows need to be discounted
• Define spot, forward and short rates
• Understand how spot, forward and short rates are linked
• Define yield to maturity
• Understand what a term structure of interest rates is
• Define forward rate agreements and forward contracts
• List and define the various types of swaps
• Outline a process for pricing interest rate swaps
• Derive a zero curve and forward curve term structure from observable market rates
• Define & price coupon swaps
• Define & price basis swaps
• Define & price fixed for fixed cross currency swaps
• Define & price floating for floating cross currency swaps
• Define & price amortizing floating for floating currency swaps
• Define and price caps and floors
• Understand how the cap floor parity may be used to price a swap
• Define and price accrual swaps
• Define and price commodity linked notes
• Define and price range accrual note
• Define an Overnight Indexed Swap
• List the reasons for switching from LIBOR to OIS discounting
• Price IRS using LIBOR discounting as a combination of bonds
• Price IRS using LIBOR discounting as a series of forward contracts on the reference rate
• Price IRS using OIS discounting as a combination of bonds
• Price IRS using OIS discounting as a series of forward contracts on the reference rate

Prerequisites

The student should be comfortable with basic mathematics, statistics, probability, EXCEL including the use & interpretations of the EXCEL, VLOOKUP, HLOOKUP NORMSDIST & STDEV functions.

Target Audience

This course is for individuals involved in pricing and valuation of derivatives, in particular interest rate sensitive instruments.