Investment Banking: Introduction to Structured Products Training Course

Session 1 – Structured Financial Instruments

• Defining a structured product
• Categories of structured products
  • Asset-backed securities
  • Collateralized debt obligations (CDOs)
  • Collateralized mortgage obligations (CMOs)
• The function of special purpose vehicles (SPVs)
• Methodologies for pricing structured products
• Identification of primary risks
• Accounting treatments for structured products
• Techniques for valuing structured products

Session 2: Interest Rate Structures

• Embedded options and swaps
• Reverse floaters
• Leveraged swap-linked notes
• Bonds tied to interest rates other than LIBOR
• Extendible and cancellable swaps
• Embedded swaptions

Session 3 – Options Contracts

• Fundamentals of options
• Standard options terminology
• Exchange-traded versus Over-the-Counter (OTC) markets
• Understanding option premiums
• Confirmation and settlement processes
• The concept of volatility
• Option pricing models –
  • The binomial model
  • The Black-Scholes model
  • Alternative approaches
• The critical role of the yield curve

Session 4 – Swap Contracts

• Introduction to swaps
• Definitions and types of swaps
• Quality Spread Differential (QSD)
• Interest rate swaps
• Currency swaps
• Pricing interest rate swaps
• Valuation of swaps
• Model risk and the necessity of accurate pricing feeds
• Confirmation and settlement procedures
• Counterparty credit risk
• Collateral requirements and management strategies

Session 5 – Introduction to Derivatives

• Definition of a derivative
• Understanding the concerns surrounding derivatives
• Core concepts
• Arbitrage and the original intent of derivatives – achieving a mutual coincidence of wants
• Advantages and applications of derivatives
• Strategies for hedging and trading

Session 6 – Foreign Exchange

• Distinction between banking book and trading book
• Market conventions
• Terminology of foreign exchange
• The foreign exchange trading process
• Electronic and telephonic trading methods
• Controls within the dealing room
• Standard currency terms

Session 7 – Forward Transactions

• Introduction to forward contracts
• Objectives of forward contracts
• Pricing forward contracts and the significance of LIBOR
• Documentation of forward contracts
• Overview of the ISDA framework
• Confirming and settling forward contracts

Session 8 – Futures Contracts

• Introduction to futures contracts
• The function of the futures exchange
• Characteristics of futures contracts
• Their role in trading activities
• Pricing mechanisms for futures contracts
• Utilizing futures for hedging
• The importance of margin accounting
• Confirmation and settlement processes

Session 9: Equity Swaps

• Objectives of fund management
• Utilizing swaps in conjunction with equity price indices
• Illustration of cash flows in an equity swap
• Total return swaps and other credit derivatives

Session 10 – Practical Challenges and Failures

• Scenario modeling in derivatives
• The Barings Bank case
• The Bankers Trust case
• The Allfirst case
• The Long-Term Capital Management (LTCM) case
• The Enron case

Session 11 – Introduction to Advanced Topics

• Managing interest rate risk
• Overview of collateralized instruments
• Counterparty credit risk in derivatives
• Legal risks associated with derivatives
• Value at Risk (VaR) and Exposure at Default
• Loss Given Default (LGD) and Probability of Default (PD)
• Stress testing and liquidity risk
• Scenario modeling techniques
• The impact of international accounting standards, specifically IAS 39 and IFRS 7
• Asset recognition and derecognition