Rates Derivatives: Caps and Floors, Swaptions and Strategies

The aim of this course is for learners to explain and analyse the cash flows, pricing and practical use of Interest Rate Options.

They will also examine option strategies and gain an overview of exotic options and their structures

Suitability

This course is for graduate entrants in financial markets . Basic rates derivatives knowledge (e.g. FRAs, futures and swaps) is preferred.

Learning Outcomes

At the end of this course participants will be able to:

  • Define an option and understand basic principle
  • Understand types of interest rate option – hedging uses and functions
  • Define Caps and Floors, illustrate the cash flows and chart profit profiles
  • Describe Cap and Floor exercise and calculate settlement
  • Define swaptions and illustrate their cash flows
  • Understand methods of swaption settlement
  • Calculate swaption cash settlement values
  • Understand option pricing to include the following:
    • Time,
    • Moneyness
    • Volatility
  • Option modelling overview
  • The Greeks
  • Skew
  • The swaption grid
  • Negative rate
  • Know how to hedge options and trade delta
  • Understand option strategies and their applications

Course Content

Option Definition

  • What an option is
  • Opening questions and presentation
  • Basic terms and principles
  • Presentation
  • Types of option
  • Caps and floors
  • Swaptions
  • Caps and floors
  • Illustrate cash flows and profit profiles
  • Whiteboard interaction
  • Calculate settlement
  • Excel exercise
  • Future options in brief
  • Swaptions
  • Illustrate swaption construction and cash flow
  • Whiteboard
  • Settlement methods
  • Calculate cash settlement
  • Excel exercise
  • Option pricing
  • What affects the price of an option
  • Quiz and discussion
  • Probability
  • Time/ underlying / volatility
  • Option modelling overview
  • The Greeks
  • Theta, Delta,Vega, Gamma
  • Skew – Why it is a factor
  • SABR model principles
  • The swaption grid
  • Negative rates
  • Option Strategies
  • Straddles, collars, strangles
  • Q&A – what are you trading or managing here? (the Greeks)
  • Hedging
  • Why hedge an option?
  • Delta hedging
  • Vega hedging
  • Evaluation
  • Case studies
  • What options and strategies to use for hedging rates and other risk management

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