Investment Banking: Introduction to Structured Products Training Course

Session 1 – Structured Products

• Defining structured products
• Classifications of structured products
  • Asset-backed securities
  • Collateralized debt obligations
  • Collateralized mortgage obligations
• The function of the special purpose vehicle
• Methodologies for pricing structured products
• Identification of primary risks
• Accounting treatment 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 indices other than LIBOR
• Extendible and cancellable swaps
• Embedded swaptions

Session 3 – Options Contracts

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

Session 4 – Swaps contracts

• Introduction to swap agreements
• Defining swaps
• Quality Spread Differential (QSD)
• Interest rate swaps
• Currency swaps
• Pricing interest rate swaps
• Valuing swaps
• Model risk and the critical nature of pricing feeds
• Confirmation and settlement processes
• Counterparty credit risk
• Collateral and collateral management strategies

Session 5 – Introduction to Derivatives

• Defining a derivative
• Understanding concerns surrounding derivatives
• Foundational concepts
• Arbitrage and the original intent of derivatives – achieving a mutual coincidence of wants
• Advantages and applications of derivatives
• Hedging versus trading strategies

Session 6 – Foreign Exchange

• Banking book versus trading book
• Market conventions
• The language of foreign exchange
• The foreign exchange trading process
• Electronic and telephone trading platforms
• Controls within the dealing room
• Key currency terminology

Session 7 – Forward Transactions

• Overview of forward contracts
• Objectives of forward contracts
• Pricing forward contracts and the importance of LIBOR
• Documentation requirements for forward contracts
• Overview of the ISDA framework
• 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
• Pricing mechanisms for futures contracts
• Hedging strategies using futures
• The importance of margin accounting
• Confirmation and settlement procedures

Session 9: Equity Swaps

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

Session 10 – What goes wrong in practice

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

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 management
• Advanced scenario modeling techniques
• The impact of international accounting standards, specifically IAS 39 and IFRS 7
• Asset recognition and derecognition principles