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
• Methodologies for pricing structured products
• Identification of primary risks
• Accounting treatment for structured products
• Practical approaches to pricing structured products

Session 2: Interest Rate Structures

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

Session 3 – Options Contracts

• Foundational concepts of options
• Standard options terminology
• Differences between traded and OTC options
• Understanding option premiums
• Procedures for confirmation and settlement
• The concept of volatility
• Option pricing models –
  • Binomial model
  • Black-Scholes model
  • Alternative methodologies
• Significance of the yield curve

Session 4 – Swaps Contracts

• Basics of swap agreements
• Definitions of swap types
• Quality Spread Differential (QSD)
• Interest rate swaps
• Currency swaps
• Pricing mechanisms for interest rate swaps
• Valuation of swaps
• Model risk and the critical role of pricing feeds
• Confirmation and settlement processes
• Counterparty credit risk assessment
• Collateral requirements and management

Session 5 – Introduction to Derivatives

• Defining a derivative instrument
• Reasons for concern regarding derivatives
• Core theoretical concepts
• Arbitrage principles and the original intent of derivatives – achieving mutual coincidence of wants
• Advantages and applications of derivatives
• Distinctions between hedging and trading

Session 6 – Foreign Exchange

• Banking book versus trading book classifications
• Established market conventions
• Terminology specific to foreign exchange
• The mechanics of forex trading
• Electronic versus telephone trading methods
• Controls within the dealing room
• Standard currency terms

Session 7 – Forward Transactions

• Overview of forward contracts
• Objectives of forward contracts
• Pricing forwards and the pivotal role of LIBOR
• Documentation standards for forward contracts
• Introduction to the ISDA framework
• Confirmation and settlement of forward contracts

Session 8 – Futures Contracts

• Overview of futures contracts
• Functions of the futures exchange
• Characteristics of futures contracts
• Roles in trading strategies
• Pricing futures contracts
• Utilizing futures for hedging purposes
• Importance of margin accounting
• Confirmation and settlement procedures

Session 9: Equity Swaps

• Objectives of fund management
• Application of swaps linked to equity price indices
• Cash flow examples for equity swaps
• Total return swaps and related credit derivatives

Session 10 – Practical Challenges and Failures

• Scenario modeling in derivatives contexts
• Case study: Bankers Trust
• Case study: Barings
• Case study: Allfirst
• Case study: LTCM
• Case study: Enron

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 (EAD)
• Loss Given Default (LGD) and Probability of Default (PD)
• Stress testing and liquidity risk management
• Advanced scenario modeling techniques
• Impact of international accounting standards, specifically IAS 39 and IFRS 7
• Principles of asset recognition and derecognition