Derivatives and structured products

An advanced approach

  2 days
Course objectives

  • Understand yield curve formation and uses
  • Understand the drivers behind structured products
  • Understand option risk management
  • Master the first generation exotics
  • Learn how to structure hedging and investment products
Course content

Review of Fixed income basic concepts

  • Zero rates and discount factors
  • Money markets and Forward rates
  • Bond pricing and YTM
  • Deriving the zero curve from par rates
  • Relationship between par, zero and forward rates

Excel Case Study: Bootstrapping of bond curve, forwards, price/ytm

Objective: To ensure a sound knowledge of the different types of rates (par/zero/forwards), spreads (corporate, asset swap spread, z-spread, OAS) and methods for computing them.

Yield Curves

  • Typology of Yield curves
  • Yield Curve theories
  • Implications for structuring FI products
  • Yield curve view formation
  • Trading the yield curve: spreads and butterflies

Case Study: Yield-curve strategic research notes

Objective: To provide the link between technical knowledge acquired throughout the day and macro-economics as expressed in BNPP Research strategic notes.

Swaps : mechanics and use

  • Interest Rate Swaps (IRS)

Case Study: Hedging swaps with bond futures

Objective: To understand the risks resulting from hedging swaps with futures (a common occurrence)

  • Tenor basis swaps
    • Pre-2007 vs. post-2007 levels
    • Implication for pricing: multiple projection curves
  • Cross-currency swaps

Introduction to Equity, FX and commodities markets and no-arbitrage Forwards

  • Equity forwards
  • FX forwards
    • The carry trade: economics common-sense vs. no-arbitrage finance
    • Central banks: Inflation-targeting vs. FX peg
  • Panorama of commodities markets

Case Study: Cost-of-carry pricing of a wide variety of commodities forwards

Objective: To see how the cost-of-carry arbitrage is applied to commodities, to understand the benefits associated with physical ownership (e.g. oil, cobalt) and to see when the relationship breaks down.

Introduction to Inflation markets

  • Fisher parity
  • Breakeven inflation and components
  • Index-linked bonds: mechanics, drivers, market participants
  • Inflation swaps: mechanics, drivers, market participants

Case Study: Quantitative Easing and real yields

Objective: to get used to thinking in ‘real' rather than nominal terms as well as to understand the current low levels of real yieds.

Intrinsic value vs. Time value, the role of volatility

  • Put-call parity and implications
  • Drift and American options
  • The Black-Scholes framework
  • Liquidity risk

Case Study: Application of put-call parity

Objective: To summarize and apply all the key options concepts to price non-liquid options from liquid ones, using put-call parity

Option risk management

  • Delta-hedging: concept and application
  • Interdependence between Greeks
  • Straddles and strangles

Case Study: Delta-hedging an option position through a number of scenarios

Volatility, smile and skew

  • Historical volatility
  • Implied volatility and volatility smiles
  • Determinants of the smile
    • Deviations from lognormality
    • Supply/demand
    • Volgamma

Case Study: Analysing the shape of the smiles for Equity indices, Oil and FX

Objectives: To understand and illustrate the shape of volatility smiles for various underlyings.

  • Trading the smile: spreads and butterflies

Exotic options and structured products

  • Digital options
  • Barrier options

Case Study: Contingent options, ‘European' barrier

Objectives: A first approach of breaking down a structured product into its components, for both pricing and risk management.

Case Study: Cancellable forwards

Objectives: To show how ‘building blocks' can be used to obtain a wide variety of payoffs, to acquire the right reflexes when faced with new structured products

  • Principal-Protected Notes (PPN)

Case Study: Structuring PPNs to suit different investors' needs

Objectives: To further use the tools acquired to understand the structuring and pricing of structured products

  • Dual-currency notes

Case Study: CHF/HKD dual-currency note

Objectives: To reverse-engineer a dual currency note to understand risk/reward tradeoff

  • Range Accruals

Case Study: Euribor range accrual

Objectives: To understand pricing, structuring and risk management of range accrual notes.

  • Inverse floaters

Case Study: Reverse-engineer an inverse floater




Patrice Robin

Patrice is an independent consultant on derivatives. Previously, Patrice spent 10 years in trading on interest rate derivatives, then structured products, swaps and vanilla options and became head of interest rate and inflation options in Santander Global Markets in London.

Patrice Robin also teaches :