Interest rates options : Pricing and Risk Management

Caps, floors, swaptions and 1st generation exotics

  2 days
Course objectives

  • Evaluate a cap, floor or swaption

  • Understand interest rate exotic products

  • Understand pricing and management methods of exotic risks

Course content


  • Zero-coupon and yield curves : definition, construction, uses
  • Libor/Euribo and FRA rates
  • Swap rates

Valuing assets under stochastic rates

  • Asset valuation and risk neutral pricing
  • Change of money
  • Forward neutral pricing

Caps and Floors

  • Modeling a Libor rate under its associated measure: Black Scholes model
  • Pricing a cap / floor with Black Scholes
  • Volatility smile for caps

Excel Case Study: VBA programming of BS, Valuing a cap


  • Modeling an IR Swap with the right money: Jamshidian's approach
  • Pricing a swaption with Black Scholes

Excel Case Study: Practical valuation of a swaption: building a payment schedule, calculating the money and pricing via BS

Introduction to IR exotics

  • Structure of a pricing platform for IR exotics
  • Market volatilities: volatility cubes and SABR model
  • Hedging an exotics portfolio
  • Understanding the concept of convexity adjustment

Excel Case Study: Calculating a convexity adjustment in the case of Libor set in arrears

Approaching 1st generation exotics

  • Vanilla option combinations
  • CMS and replication pricing
  • Digitals on Libor and corridors
  • Quantos
  • Spread options

Excel Case Study: Pricing of a Libor Digital, impact of the slope of the smile on the pricing

Zouheir Ben Tamarout

Zouheir has over 18 years of experience within the activities of arbitrage for own account, trading of exotics, structuring for third parties and quantitative research in alternative investments. Zouheir is currently an independent consultant in quantitative finance, alternative strategies and algorithmic trading.

Zouheir Ben Tamarout also teaches :