CISI Diploma: Financial Derivatives - Session 1 Outline

Accredited CISI Training

Session 1 of the CISI Financial Derivatives training course introduces the delegates to the primary financial derivative instruments currently used in the markets. This module is three days in length, and introduces key learning points that are built on in Sessions 2 and 3.

Day 1: Forwards, Swaps and Futures

Linear Forward Interest Rate Contracts

  • Where does the forward interest rate come from?
  • The forward rate agreement (FRA)
  • Locking-in a forward interest rate with an FRA
  • Short-term interest rate futures contracts
    • Understanding the contract specification
    • Locking-in a forward rate
    • Understanding the "basis" and convergence

Multiple-Period Instruments: Swaps

  • The interest rate swap (IRS) market
  • Why the market exists
  • Types of swap
    • Interest rate swaps (IRS)
    • Basis swaps
    • Currency swaps
    • Overnight index swaps (OIS)
  • Relationship between swaps and forwards
  • Market structure
  • Applications of swaps in liability and asset management
  • Non-generic swaps
  • In-arrears swaps
  • Constant maturity swaps
  • Project finance related swaps: accreting; amortising; and roller-coaters
  • Equity swaps

The Instruments: Bond Futures Contracts

  • The major bond futures contracts
  • Bond futures contract specification explained
  • Establishing the deliverable list
    • Price (conversion) factor calculation
    • Cheapest-to-deliver [CTD] explanation
    • Invoice amount formula
  • Locking-in the forward price
  • Futures referenced off the swap curve

Day 2: Non-Linear Derivatives

A Primer on Options

  • Defining an option: call v put
  • Understanding the specification
  • Understanding the terminology
    • Option types defined
    • Intrinsic v time value
  • The payoff profiles explained
  • Interest rate options
    • Exchange-traded options on bond futures
    • Caps, floors and collars
    • Swaptions

Option Trading Strategies

  • Determining the payoff profile for combinations of options
  • Common option strategies
    • Directional trades: call and put spreads; ratio spreads
    • Volatility trades: straddles; strangles; guts; 'flies

Option Arbitrage Relationships

  • Creating synthetic long and short positions
  • Arbitrage relationships:
    • Put/call parity for options on futures with futures style margining
    • Put/call parity for options on non-dividend paying stocks
    • Incorporating dividends
  • The convexity arbitrage: revisiting the butterfly trade
  • The cash arbitrage and the value of early exercise for American call and put options

Day 3: Instruments with Embedded Options and Credit derivatives

Fixed Income Instruments with Embedded Options

  • Callable and puttable bonds
    • The swaption arbitrage
    • Cap and floor arbitrage
  • Convertible & exchangeable bonds

Credit Derivative Instruments

  • Understanding the instruments
    • Total return swaps
    • Credit default swaps
    • Credit-linked notes
  • Common terms
  • Credit default swaps v asset swaps
  • Where determines the credit default swap fee?
  • Finding the market value of a CDS from market data
  • 2009 market developments
    • Standardised terms
    • Central clearing

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