Investment Banking: Introduction to Structured Products Training Course

Session 1 – Structured Products

• Defining a structured product.
• Categories of structured products
  • Asset-backed securities.
  • Collateralized debt obligations (CDOs).
  • Collateralized mortgage obligations (CMOs).
• The function of the special purpose vehicle (SPV).
• Methodologies for pricing structured products.
• Identification of primary risks.
• Accounting treatment for structured products.
• Techniques for pricing a structured product.

Session 2: Interest Rate Structures

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

Session 3 – Options Contracts

• Overview of options.
• Standard options terminology.
• Exchange-traded vs. Over-the-Counter (OTC) instruments.
• Understanding the option premium.
• Confirmation and settlement procedures.
• The role of volatility.
• Pricing an option –
  • The binomial model.
  • The Black-Scholes model.
  • Alternative approaches.
• The significance of the yield curve.

Session 4 – Swaps contracts

• Overview of swaps.
• Definitions of swap types.
• The Quality Spread Differential (QSD).
• Interest rate swaps.
• Currency swaps.
• Pricing methodologies for interest rate swaps.
• Valuation of swaps.
• Model risk and the importance of accurate pricing feeds.
• Confirmation and settlement processes.
• Counterparty credit risk.
• Collateral and collateral management.

Session 5 – Introduction to Derivatives

• Defining a derivative.
• Common concerns surrounding derivatives.
• Fundamental concepts.
• Arbitrage and the original purpose of derivatives – achieving a mutual coincidence of wants.
• Benefits and applications of derivatives.
• Distinctions between hedging and trading.

Session 6 – Foreign Exchange

• Banking book versus trading book.
• Market conventions.
• The language of foreign exchange.
• The mechanics of trading foreign exchange.
• Electronic versus telephone trading.
• Controls within the dealing room.
• Standard currency terms.

Session 7 – Forward Transactions

• Overview of forward contracts.
• The purpose of forward contracts.
• Pricing forward contracts and the pivotal role of LIBOR.
• Documentation of forward contracts.
• Overview of the ISDA agreement.
• Confirming and settling forward contacts.

Session 8 – Futures Contracts

• Overview of futures contracts.
• The role of the futures exchange.
• The nature of futures contracts.
• Their role in trading strategies.
• Pricing a futures contract.
• Using futures for hedging.
• The importance of margin accounting.
• Confirmation and settlement.

Session 9: Equity Swaps

• Objectives of fund management.
• Utilizing a swap linked to an equity price index.
• Example of cash flows in an equity swap.
• Total return swaps and other credit derivatives.

Session 10 – What goes wrong in practice

• Scenario modelling and derivatives.
• The Bankers Trust case.
• The Barings collapse.
• The Allfirst case.
• Long-Term Capital Management (LTCM).
• The Enron scandal.

Session 11 – Introduction to Advanced Topics

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