Investment Banking: Introduction to Structured Products

Introduction to Structured Products

The purpose of the course is to provide delegates with an introduction to the Structured Products used in investment banking. On completion of the course all delegates will have a working knowledge of the subject and will be able answer

1. What are structured products?
2. Why issue them?
3. How do issuers and investors benefit?
4. How do you structure and price a range of derivative products?
5. What are the risks and costs of producing structured financial products?
6. What are embedded derivatives?
7. What are exotic options?
8. What are the pricing and hedging considerations?

Session 1 – Structured Products

• What is a structured product?
• Types of structured product
  • Asset back securities
  • Collateralised debt obligations
  • Collateralised mortgage obligations
• The role of the special purpose vehicle
• How to price structured products
• What are the key risks?
• Accounting for structured products
• How to price a structured product

Session 2: Interest Rate Structures

• Embedded options & swaps
• Reverse floaters
• Leveraged swap linked notes
• Bonds linked to rates other than libor
• Extendible and cancellable swaps
• Embedded swaptions

Session 3 – Options Contracts

• Introduction to options
• Options terminology
• Traded vs OTC
• Option premium
• Confirmation and settlement
• Volatility
• Pricing an option –
  • Binomial model
  • Black Scholes
  • Other approaches
• The importance of the yield curve

Session 4 – Swaps contracts

• Introduction to swaps
• Swap definitions
• Quality spread differential
• Interest rate swaps
• Currency swaps
• Pricing interest rate swaps
• Swap valuations
• Model risk and the importance of pricing feeds
• Confirmation and settlement
• Counterparty credit risk
• Collateral and collateral management

Session 5 – Introduction to Derivatives

• What is a derivative?
• Why are people worried about derivatives?
• Key concepts
• Arbitrage and the original purpose of derivatives – the mutual coincidence of wants
• Benefits and uses of derivatives
• Hedging and trading

Session 6 – Foreign Exchange

• Banking book v trading book
• Market conventions
• Language of foreign exchange
• The process of trading foreign exchange
• Electronic and telephone trading
• Dealing room controls
• Currency terms

Session 7 – Forward Transactions

• Introduction to forward contracts
• Purpose of forward contracts
• Pricing a forward contract and the importance of Libor
• Documenting a forward contract
• Introduction to the ISDA
• Confirming and settling forward contacts

Session 8 – Futures Contracts

• Introduction to futures contracts
• The role of the futures exchange
• The nature of futures contracts
• The role in trading
• Pricing a futures contract
• Hedging with futures
• The importance of margin accounting
• Confirmation and settlement

Session 9: Equity Swaps

• Fund management objectives
• Using a swap with an equity price index
• Example of cash flows of an equity swap
• Total return swaps and other credit derivatives

Session 10 – What goes wrong in practice

• Scenario modelling and derivatives
• Bankers Trust
• Barings
• Allfirst
• LTCM
• Enron

Session 11 – Introduction to Advanced Topics

• The management of interest rate risk
• Introduction to collateralised instruments
• Counterparty credit risk and derivatives
• Legal risk and derivatives
• Value at risk and Exposure at default
• Loss given default and probability of default
• Stress testing and liquidity risk
• Scenario modelling
• The impact of international accounting standards, IAS 39 and IFRS 7
• Asset recognition and derecognition