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
  • Collateralized mortgage obligations
• The function of special purpose vehicles
• Methods for pricing structured products
• Identification of primary risks
• Accounting treatments for structured products
• Detailed pricing mechanisms for structured products

Session 2: Interest Rate Structures

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

Session 3 – Options Contracts

• Overview of options
• Standard options terminology
• Differences between traded and over-the-counter (OTC) options
• Understanding option premiums
• Processes for confirmation and settlement
• The concept of volatility
• Approaches to pricing options –
  • Binomial model
  • Black-Scholes model
  • Alternative methodologies
• The significance of the yield curve

Session 4 – Swaps Contracts

• Overview of swaps
• Definitions and types of swaps
• Understanding the Quality Spread Differential (QSD)
• Interest rate swaps
• Currency swaps
• Pricing interest rate swaps
• Valuation techniques for swaps
• Managing model risk and utilizing accurate pricing feeds
• Procedures for confirmation and settlement
• Assessing counterparty credit risk
• Managing collateral and collateral arrangements

Session 5 – Introduction to Derivatives

• Defining a derivative instrument
• Common concerns regarding derivatives
• Fundamental concepts
• Arbitrage and the original intent of derivatives – facilitating mutual coincidence of wants
• Advantages and applications of derivatives
• Utilizing derivatives for hedging and trading purposes

Session 6 – Foreign Exchange

• Distinctions between banking book and trading book positions
• Industry market conventions
• Terminology specific to foreign exchange
• The mechanics of foreign exchange trading
• Comparing electronic and telephone trading methods
• Controls within the dealing room
• Key currency terms

Session 7 – Forward Transactions

• Overview of forward contracts
• Objectives and use cases for forward contracts
• Pricing forward contracts and the critical role of LIBOR
• Documentation requirements for forward contracts
• Overview of the ISDA framework
• Procedures for confirming and settling forward contracts

Session 8 – Futures Contracts

• Overview of futures contracts
• The function of the futures exchange
• Characteristics of futures contracts
• The role of futures in trading strategies
• Pricing methodologies for futures contracts
• Hedging strategies using futures
• The importance of margin accounting
• Procedures for confirmation and settlement

Session 9: Equity Swaps

• Objectives in fund management
• Applying swaps linked to equity price indices
• Illustrative cash flow structures for equity swaps
• Total return swaps and other credit derivatives

Session 10 – Practical Challenges and Failures

• Scenario modeling and its application to derivatives
• Case study: Bankers Trust
• Case study: Barings
• Case study: Allfirst
• Case study: LTCM (Long-Term Capital Management)
• Case study: Enron

Session 11 – Introduction to Advanced Topics

• Managing interest rate risk
• Overview of collateralized instruments
• Legal risks associated with derivatives
• Value at Risk (VaR) and Exposure at Default (EAD)
• Loss Given Default (LGD) and Probability of Default (PD)
• Stress testing and liquidity risk management
• Advanced scenario modeling techniques
• The influence of international accounting standards, specifically IAS 39 and IFRS 7
• Principles of asset recognition and derecognition