Foreign Exchange and Interest Rate Derivatives

By the end of this course, participants will:

• Understand the fundamentals and drivers of the foreign exchange and interest rate derivatives markets
• Develop practical skills in using forwards, swaps, options, and structured derivatives for client risk management solutions
• Gain insights into market conventions, pricing methodologies, hedging and trading strategies
• Learn how banks manage the risk that comes with trading FX and interest rate products with clients

Liquidity Management Introduction

• Objective: Provide an overview of the FX spot market
• Topics:
  • Why are the FX markets so important?
  • FX market participants and flows
  • Floating pegged
  • Drivers of the spot FX market: macroeconomic news and data, interest rates and the carry trade, hedging flows, correlations, sentiment and positioning
• Case Study:
  • Analysis of a currency pair chosen by the attendees

Forwards and Futures

• Objective: Build knowledge of FX forwards and their use cases
• Topics:
  • Mechanics and pricing of FX forwards
  • FX forward use cases
  • FX futures

• Activity:
  • Outright forward profit and loss calculation

FX Swaps

• Objective: Understand the FX swap product and it’s various use cases
• Topics:
  • FX swap cashflows – swapping one currency for another
  • Quoting and trading FX swaps
  • FX swap use cases: borrowing and lending currencies, quoting forwards, daily treasury funding, reducing risk for investors, corporate hedging, trading interest rate differentials
  • The FX basis

Cross Currency Swaps

• Objective: Explore cross currency swaps (XCSs) and their use cases
• Topics:
  • XCS introduction
  • Cross currency basis swaps and the interest rate basis as a measure of USD funding stress
  • XCS use cases: borrowing and lending currencies, hedging long-term foreign currency funding, reducing risk for investors, corporate hedging, central bank swap lines

FX Options

• Objective: Discover the peculiarities of FX vanilla and exotic options
• Topics:
  • Vanilla options: terminology, pricing, forward vs spot premium, quoting conventions (vol vs. premium)
  • Options risk: the Greeks, delta hedging on inception, quoting conventions revisited
  • Common exotic options: average rate options, European and American barriers,
  • European and American digitals, basket options
  • Option use cases: corporate hedging, investor hedging, spot-directional trading, volatility trading, correlation trading, bank options-desk hedging

FX Derivative Risks

• Objective: Appreciate some of the risks that come from trading FX derivatives
• Topics:
  • Market risk: Risk limits, VaR and CVaR, the Greeks, stress tests
  • Counterparty risk and XVA adjustments
  • Operational risk, compliance and reputation: execution, mis-selling, how much leverage is appropriate, the moral hazard of long-dated structures, rogue trading

Client Solutions

• Objective: Put the new knowledge into practice
• Topics:
  • Design and present a variety of possibilities to hedge the FX risk for an investment client
  • Construct and present a specific FX hedging solution for a corporate client

FX Structured Products – Optional Module

• Objective: An optional module to cover if there is spare time at the end of the day. A brief introduction to some structured products used by FX hedgers and investors.
• Topics:
  • FX structured products for wealth management (DCDs, range accruals, autocallables)
  • FX notes as a funding vehicle for the bank
  • FX structured products for corporate hedging (KO forward strips, TARFs)

Interest Rates, Yield Curves, and Interest Rate Risk

• Objective: Review the interest rates and yields that are seen in the capital markets and money markets.
• Topics:
  • Interest rates in the market: central bank rates, IBOR, risk-free rates (SOFR etc), bond yields
  • Yield curves: risk-free vs credit curves
  • Risk measurements: DV01, convexity, CV01
• Activity:
  • Present and debate: What are the major yield curves telling us at the moment?

Interest Rate Swaps

• Objective: Build upon basic IRS knowledge and understand how IRSs are used for trading and hedging
• Topics:
  • Vanilla IRS mechanics
  • Swap pricing and valuation
  • Swap spreads
  • Basis swaps
  • IRS use cases: hedging for corporate borrowers, hedging for fixed-income investors, Asset Swap construction, interest rate trading, hedging for banks
• Activity:
  • Design an interest rate hedge for a fixed-rate loan or bond portfolio

Caps and Floors

• Objective: Learn about loan market optionality.
• Topics:
  • Introduction to caps and floors
  • Interest rate collars
  • Use cases: borrower and lender use cases, asset and liability management for banks

Hedging for corporates

• Objective: Utilize interest rate derivatives to hedge corporate interest rate risk
• Group Activity:
  • Design and compare several interest rate hedging strategies for a corporate borrower, using the OTC derivatives discussed on this course

Swaptions – Optional Module

• Objective: An optional module to cover if there is spare time at the end of the day. Introduce optionality for the swaps market.
• Group Activity:
  • Introduction to swaps
  • Quoting and pricing conventions
  • European swaptions and Bermudan swaptions
  • Use cases: hedging for borrowers, hedging for investors, cancellable swaps, interest-rate directional trading, interest-rate volatility trading

Course Summary and Q&A

• Objective: Recap the key lessons from the course.
• Topics:
  • Review of major concepts: FX markets and FX derivatives, interest rate derivatives, product uses and risks
  • Q&A

Erste Bank, FX and IRD

• Topic: In-house speaker to discuss topics specific to Erste 90 mins.