Introduction to Swaps

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Course Features

  • Course Code: 503
  • Certificate: Yes
  • CPE Credits: 7
  • Level: Beginner
  • Prerequisites: None
  • Method: Live & Virtual
  • Venue: MicroTek
  • Time: 9:00 am – 5:00 pm
  • Registration: 8:30 am
  • Dress Code: Business Casual

INTRODUCTION TO SWAPS

  • Forward Contracts
    • Quick refresher
    • Relationship to Swaps
  • Swap Market
    • Credit Risk
    • Emergence of Swap Execution Facilities
  • Swap Contract Basics – Contract Terms
    • Notional amount, term (tenor or maturity) and settlement frequency
    • Other contract terms
  • Types of Swaps
    • Plain Vanilla Interest Rate Swap
    • Basic Currency Swap
    • Basic Equity Index Swap
    • Contingent claims: credit default swaps
  • Swap Trading and Settlement
    • Swap execution facilities (SEF) versus bilateral negotiations
    • Cleared swaps compared to bilateral contracts
    • Dodd-Frank requirements for trading and clearance and exemptions

INTEREST RATE SWAPS

  • Interest Rate Swap (IRS) Basics
    • Fixed for floating IRS: contract features, concepts and terminology
    • Swap counterparties: fixed rate payer and fixed rate receiver
    • Notional amounts, tenors and settlement frequencies
    • Determinants of contract terms and typical ranges of each
    • Fixed rate leg coupon and floating leg index rate
    • Settlement values for fixed and floating rate legs
  • Pricing Par (At-Market) Interest Rate Swaps
    • Fixed leg coupon set to give contract initial value of zero
    • Present value of the cash flows for the fixed and floating legs are equal
    • Fixed coupon a blend rate – spot and forward rates over swap tenor
    • Forward rates can be hedge by dealer using Eurodollar futures
  • Interest Rate Swap Risk Management Strategies
    • Altering liability from fixed to floating or floating to fixed
    • Altering asset from floating to fixed or fixed to floating
    • Altering a floating rate – basis swap
    • Hedging fixed income security or portfolio
  • Variations in Interest Rate Swap Contract Structure
    • Amortizing swaps
    • Accreting swaps
    • Rollercoaster swaps
  • Standardized Interest Rate Swaps
    • Common roll (payment and maturity) dates
    • Settlements – fixed rate leg semiannual, floating rate leg quarterly (USD)
    • Market Agreed Coupon (MAC) swaps

CURRENCY SWAPS

  • Interest Rate Swaps with a Twist
    • Two notional, one for each of the two contract currencies
    • Interest rates of two legs denominated in different currencies
  • Structure of Contracts
    • Notional related at current spot exchange rate
    • Possible exchange of notional – at initiation and/or termination of contract
    • Interest rates – fixed/fixed, fixed/floating or floating/floating (basis swaps)
  • Risk Management Applications of Cross Currency Swaps
    • Moving interest rate exposure between currencies
    • Exchange rate risk of foreign currency denominated assets or liabilities

EQUITY SWAPS

  • Characteristics of Equity Swaps
    • Smaller notional and shorter tenors compared to IRS
    • One or both legs tied to equity market exposure
    • Equity leg versus floating interest rate leg most common structure
    • Equity leg: one or more indexes, individual equities or equity portfolios
    • Equity leg: usually valued on total return, but can be based on index points
    • Usually bilateral contracts but can be cleared
    • Illustration of contract periodic settlement cash flows
  • Pricing and Valuation of Equity Swaps
    • Quoted as index rate plus spread versus equity return
    • Interest rate leg reflects return on hedged position in equity
    • Converting between a fixed and floating rate interest leg
    • Dealer hedging of equity swap exposures
  • Attractions of Equity Swaps Versus Alternate Means of Equity Market Exposure
    • Advantages of swaps versus trading underlying equity
    • Advantages of swaps versus equivalent futures contracts
  • Risk Management Applications of Equity Swaps
    • Market exposure
    • Synthetic short positions
    • Altering asset allocation between asset classes or market segments

CREDIT DEFAULT SWAPS (CDS)

  • Economics of CDS
    • Quick History Lesson (2008)
    • Unique derivative – focused on impact on value of credit risk
    • Analogous to insurance, but legally defined as not insurance
  • CDS contract features
    • Notional amount, tenor/term/maturity and payment frequency
    • Credit event(s) and reference issues or issuer
    • Settlement – cash settlement or security delivery
    • Index and single name CDS
  • Trading and Risk Management Applications of CDS
    • Risk/reward profile of credit protection buyer and seller
    • Reducing credit exposure (buyer)
    • Gaining exposure to markets/asset classes, with leverage (seller)
    • Shorting underlying credit (seller not long underlying)
  • Standardized CDS Contracts
    • Common payment/maturity dates (20th of Mar, Jun, Sep and Dec)
    • Standard coupons on payment leg (1% or 5% on North American CDS)
    • Seller pays buyer accrued coupon at contract initiation
    • Credit events (failure to pay or declaration of bankruptcy)
    • Recognition of credit events by ISDA Determination Committee
    • Settlement value established by ISDA auction among regional dealers

Instructor

  • Russell joined TABB Group in July 2018 after almost a decade at Cboe Global Markets where he finished his time there as the Director of Education at The Cboe Options Institute. His career before joining Cboe included positions at a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, Balyasny Asset Management, …
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