CISI Diploma: Financial Derivatives - Session 3 Outline

Accredited CISI Training

This final session of the programme brings together the key learning points from session 1 and 2 by looking at the common uses of derivatives and derivative products in today's capital markets (3 days).

Day 1: Hedging with Futures and Options

Using Equity Derivatives to Manage Equity Exposures

  • Setting up the hedge ratio
    • Should we use the futures price or cash price?
    • Taking into account the portfolio beta
  • Calculating the locked-in portfolio value
  • Changing the portfolio beta
  • Creating a synthetic equity position
  • Using equity options to manage risk:
    • Buying puts
    • Selling calls
    • Combo strategies

Hedging with Short-Term Interest Rate Futures

  • Determining the target rate
  • Setting up the hedge ratio
  • Hedging exposures on non-expiry days
    • Understanding the basis risk
    • Managing the basis risk
    • Types of hedge identified
      • Spot, interpolated and extrapolated
  • Strip v stack hedges

Hedging with Bond Futures

  • What characteristics define a good hedge instrument?
  • Understanding duration and basis point value (BPV)
  • Inferring the BPV of the bond futures contract
  • Defining the hedge ratio
  • Deriving the hedge for non-delivery dates and for different maturities
  • Why might the hedge go wrong?
    • Government bond futures and the net basis
    • Managing credit bond exposures

Day 2: Managing Swap Book Risk and Derivatives Risk

Representing and Hedging Swap Book Exposures

  • Traditional approaches to hedging swap exposures
    • Hedging with STIR futures strip
    • Hedging with government bond futures contracts
    • Using Swapnote┬« as a hedge instrument
  • The cash flow approach to hedging
    • Cash flow matching hedge approach
    • Cash bucketing
    • Hedging an FRA and swap
    • Applying the technique to currency swaps

Value at Risk

  • VAR, relative VAR, marginal VAR, and incremental VAR
  • Overview of risk methodologies
    • Models based on distributional assumptions
      • Parametric methods
      • Monte Carlo simulation
    • Models based on empirical distributions: historical simulation
  • Portfolio considerations: diversified v undiversified exposures
  • Application of VAR to derivative books
    • Taking into account non-linear derivative positions
  • Worse case risk measures

Day 3: Structured Products

Using Swaps in Structured Products

  • The financial engineering process
    • Rationale
    • Role of the intermediary
  • Constructing an asset swap
  • Taking advantage of falling rates: inverse floating rate notes
    • Reverse engineering: using swaps to hedge the issuer's exposure
    • Worked example
    • Market environment conducive to issuance

Structured Equity Wholesale Investment Products

  • Range notes
  • Constructing a range note with digital options
  • Range accrual notes

Structured Retail Investment Products

  • Constructing capital protected notes
  • Introducing a cap
  • Creating products on several indices or stocks: using basket options
  • High income products: reverse convertibles
    • Writing put options to enhance yield
    • Identifying the target market
  • Regulating retail market products

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