Course Structure

The course is structured in a logical sequence that allows new topics to build on previous ones. The foundation of the whole course is an introduction, largely in pre-course material, to a common body of practical arithmetic that underlies all money market instruments. This simplifies the whole learning process. Candidates are not faced with a plethora of apparently unrelated instruments, but a range of alternative and complementary tools for achieving common trading and investment objectives. Full use is made of case studies and practical exercises.

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• Treasury Executives

• Corporate Finance Executives

• Relationship Officers

• Money Market Managers

• Foreign Exchange Executives

• Accountants and Auditors

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Day 1

Overview

• What the money market does: liquidity and risk management

• Who are the major market players?

• The Euromarkets

• Distinguishing the money and capital markets

• The interface between the FX and the money markets

Brief Review of Money Market Arithmetic

• Introducing nominal and effective rates; the concepts of nominal payment and effective value.

Exercise: valuing a certificate of deposit (CD); expressing the yield in alternative conventions; restructuring the CD as a discount-paying instrument.

Traditional Cash Instruments

• Comparison of functions; origins, structures, pricing and other calculations; method of quotation and other conventions; spreads, negotiability and marketability, security, underwriting, liquidity, terms and type of return

• Deposits and deposit indices: LIBOR, EURIBOR, Fed funds, overnight indices (eg EONIA)

• Traditional money market securities: treasury bills and bank bills

• Modern money market securities: CD, CP

• Relative yield spreads in the money market. Credit, liquidity and other drivers

• Special determinants and dynamics

Case study: selecting cash money market instruments for liquidity management by analysing the credit and
liquidity components of spreads.

Repo

• The mechanics of a repo, terminology, valuation of collateral

• Margining

• Legal versus economic character

• Credit exposures on repo

• Types of collateral; rights of substitution

• Custody of collateral: delivery, HIC or tri-party

• GC repo and specials

• GC repo rate and spreads to other money markets

• Types of repo: classic repo; sell / buy-backs

• Using repo: borrowing cash; lending securities; lending cash; borrowing securities; trading repo; information

• Specialised use of repo in the derivatives market

• Documentation

Case Study: mobilising a portfolio of collateral in the
repo market to achieve a balance between maximum and cheapest funding.

Day 2
Interest Rate Risk Management in the Money Market

• What is interest rate risk?

• Asset / liability characterisation

• Quantifying interest rate risk by calculating breakeven rates

• Forward rate arithmetic

• Forward rates and forward curves

• Market expectations

Trading Interest Rate Risk

• Forward-forward loans and deposits

• The disadvantages of on-balance sheet risk
  management

• Inventing off-balance sheet instruments and derivative instruments

• Using forward-forward instruments to synthesise longer-term interest rate exposures

• More forward rate arithmetic

• Why synthetic instruments can provide cheaper funds and higher returns

Case Study: maximising returns using synthetic investments as alternatives to cash investments.

Money Market Derivatives: FRA

• The mechanics of FRAs

• Using FRAs to take risk against the forward curve

• Using FRAs to hedge the risk of either a borrower or a lender

• Trading FRAs

Case Study: hedging cash exposures with FRAs and
calculating hedged costs of borrowing or lending.

Money Market Futures

• Definition

• Contrast with OTC markets

• The structure and operation of exchanges

• The role of the clearing house

• Initial margins and variation margins

• Method of price quotation

• Specifications of the main contracts

• Calculating profit / loss using ticks

Day 3
Money Market Futures (continued)

• Using money market futures to take risk on interest rate changes; spread trading

• Using money market futures to hedge risk on interest rate changes for borrowers and investors

• Hedge ratios

• Simple hedging strategies: stack and strip hedges; interpolative and extrapolative hedging

• The problem of basis risk

• The basis: types of basis, convergence, backwardation and contango

• Hedging basis risk with spread trades

• Cash-bucketing / mapping cashflows

Case Study: constructing a rolling interpolative hedge
with basis hedge for a future liability.

Money Market Swaps

• Mechanics; settlement; hedging; pricing

• Standard money market swaps

• IMM swaps

• Structured swaps (eg LIBOR-in-arrears)

• OIS

• Definition and mechanics

• Swap strategies

• The problem of convexity bias against futures

Case Study: hedging funding with OIS.

Interest Rate Options

• Overview of options: mechanics, terminology, pricing and valuation

• Relationship to cash instruments

• When to use options: comparisons with non-optional instruments

• Caps and floors

• Basic option strategies to reduce premium or tailor directional and volatility exposures

Case Study: constructing an option hedging strategy from generic option contracts to express a view on the direction of prices.

Analysing the Money Markets and the Role of the
Central Banks

• Market structure

• Yield curves: construction, theory and practice

• Why central banks intervene in money markets

• The role of central banks in interest rate determination

• How central banks intervene: targets and instruments

• What central banks can do in a crisis

• Comparison of Fed, ECB and Bank of England

• Recent history

• Central bank watching: forecasting and reading
  intervention

Case Study: forecasting euro interest rates in a ‘factional’ scenario selectively reconstructed from past episodes in the history of the ECB.
 

Day 4
Foreign Exchange

• Basic exchange rate conventions

• The structure of the FX market

Forward FX and Currency Risk

• Hedging and pricing a forward FX transaction

• Forward FX arithmetic

• Interest parity theorem and covered interest arbitrage

• Methods of forward FX quotation

• Covered interest arbitrage calculations for borrowers and lenders

• The arbitrage square. Implying interest rates from forward foreign exchange rates

Exercise: identifying and quantifying a covered interest
arbitrage opportunity from market prices.

The Foreign Exchange Swap

• The origins of and rationale for the FX swap

• The mechanics of the swap

• Swaps versus outrights

• FX swap terminology

• Using swaps in hedging and liquidity management

• Overnight and tom / next swaps

• Rolling over spot positions

• Hedging early currency deliveries

• Extending swap positions

• Historic rate swaps

• Trading swaps

Case Study: managing the cashflows on forward currency
transactions with customers using FX swaps.

Forward-Forward Swaps

• Pricing forward-forward swaps

• Taking interest rate risk with FX swaps

• Calculating the P&L

• CFDs; NDFs

• Hedging and pricing synthetic FRAs

Case Study: synthesising (hedging and pricing) an
emerging market FRA from FX swaps.

Currency Options

• Additional considerations

• Structured and exotic currency options

• Currency option trading strategies

Case Study: trading currency volatility by constructing a
strategy from generic options.
 

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