UCIs – Financial Instruments Valuation

This training is designed to be practical and hands-on. The mathematics will be kept as simple as possible. In addition to the essential theoretical references, participants will receive Excel sample files that will also be covered during the sessions.

The training has been split into three parts focusing on specific topics:

•       Part I: Fixed Income

•       Part II: Equity & FX Derivatives

•       Part III: Interest Rate & Credit Derivatives

By the end of this training, participants will be able to:

• Understand the features of the main financial instruments and their valuation methods
• Know the concept of fair value with reference to the key accounting standards (IFRS, Lux GAAP)
• Understand the main legal and regulatory requirements applying to valuation (product requirements and AIFM requirements)
• Apply the core techniques used to price fixed income instruments and compute interest rate sensitivity measures
• Understand the conceptual framework of arbitrage-free pricing and risk-neutral valuation
• Price common derivatives such as forwards, futures, swaps, options and instruments with embedded features
• Understand key credit risk metrics and the pricing of credit default swaps
  

•       Familiarity with the Luxembourg regulatory framework for investment funds

•       Familiarity with the Luxembourg investment fund ecosystem

•       Familiarity with financial markets and instruments

•       Good knowledge of Microsoft Excel

•       Solid understanding of basic calculus (e.g., concept of derivative) and basic financial mathematics (e.g., present value calculations)

•       Solid understanding of basic probability and statistics (e.g., expected value, variance, standard deviation, normal distribution)

Part I 

1. INTRODUCTION TO TRANSFERABLE SECURITIES

·        Equity, Debt & Hybrid Securities

·        Derivative Securities

·        Securitisations

·        Global Financial Crisis and EU Regulatory Response

2. FIXED INCOME PRICING

·        Compounding & Discounting Regimes

·        Spot & Forward Rates

·        Fixed Rate Bond Pricing

·        Floating Rate Note Pricing

·        Interest Rate Swap Pricing

·        Inflation-Linked Bond Pricing

·        Yield to Maturity, Par Yield & Discount Margin

·        Risk-free rates, Z-spread & Option Adjusted Spread

3. SENSITIVITY MEASURES

·        Macaulay duration and Fisher-Weil duration

·        Modified Duration, Effective Duration & DV01

·        Spread Duration & CS01

·        Modified Convexity, Effective Convexity & Cross-Convexities

Part II

1. FINANCIAL DERIVATIVES & RISK NEUTRAL PRICING

·        Financial derivatives: definition, synthetic leverage, classification by underlying

·        Derivative types: forwards, futures, options (European, American, Bermudan), swaps

·        State Prices & Risk Neutral Probabilities

·        Arbitrage-free Pricing & Risk Neutral Pricing

·        Binomial Pricing

·        Monte Carlo Pricing

2. PRICING FORWARDS, FUTURES & SWAPS

·        Forward vs Futures

·        Forward & Futures Pricing:

o   Equity Forward & Futures

o   FX Forward & Futures

·        Swap Pricing:

o   Equity Total Return Swap

o   FX Swap

3. PRICING OPTIONS

·        Cox-Ross-Rubinstein Model

·        Black-Scholes-Merton Model

·        Sensitivity Measures

·        Option Pricing:

o   Equity & FX Options

o   Warrants

o   Options on Futures

Part III 

1. BLACK-DERMAN-TOY MODEL

·        Equity Derivatives vs Interest Rate Derivatives

·        Equilibrium vs Arbitrage-free Short Rate Models

·        Black-Derman-Toy Model

2. PRICING FIXED INCOME DERIVATIVES

·        Forward Rate Agreement

·        Interest Rate Futures

·        Bond Futures

·        Implied Repo Rate & Cheapest-to-deliver

·        Bond Options

3. PRICING CREDIT DERIVATIVES

·        Risk Neutral Default Probability and hazard rate

·        Recovery Rate

·        Credit Default Swaps (CDS)

·        CDS standardisation

·        CDS pricing (par spread and conventional spread)

·        CDS sensitivities

·        CDS spread replication and bond total return swap spread

Valuation managers, fund accountants, professionals at depositary banks involved in valuation controls, internal and external auditors of investment funds.