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Topics Covered
Course Outline ·
Day 1– Morning: Key Ideas in Capital
Structure Arbitrage §
9:00 – 10:30: Models of corporate
structure o
Detailed
introduction to the Merton Model o
Assumptions o
Mathematics o
Consequences for
Trading o
The KMV version of
the Merton Model §
10:30 – 10:45: Break ·
Understanding Equity Derivatives §
10:45 – 12:30: Recap on Equity Derivatives and Convertible Bond Structures o
Pricing Single
Stock Options o
The Volatility
Smile and the Sensitivity of Far OTM Options to it o
Dividend Risk and
Stock Borrow o
Basket Options and
Correlation o
Convertible Bonds o
Convertible Asset
Swaps and CB Options 12:30 – 14:00: Lunch ·
Day 1– Afternoon: Understanding Equity
Derivatives (continued) §
14:00 – 15:30: Market Practicalities:
what instruments are available o
Tenors, Sizes,
Providers o
Key Market
Drivers: Retail Products, Hedging from Corporates, Convertible Arbitrage o
Investment Banks
as Motivated Buyers of Volatility 15:30 – 15:45: Break ·
Understanding Credit Derivatives §
15:45 – 17:00: Recap on Credit
Derivatives o
Default Swaps o
Credit Spread
Options o
Asset Swaps and
Total Return Swaps. The key role of
Funding. o
The Evolution of
Credit Derivatives from single reference bond to multiple deliverables. Documentation Risk. o
Key Legal Issues
and the cases of Railtrack, Conseco and JPMorgan/Mahonia o
Tranche Products
and the Characteristics of Equity Tranches ·
Day 2 – Morning: Understanding Credit
Derivatives (continued) §
9:00 – 10:30: Credit Derivatives Markets:
the Participants and their Needs o
Investors vs.
Protection buyers vs. Flow traders vs. Arbitrage players o
Differing
Accounting and Investment horizon: Banks & Insurers o
Drivers of the
Market: Different views of Pricing; Regulatory; Accounting 10:30 – 10:45: Break §
10:45 – 12:30: Pricing Credit Derivatives o
Default
Probability, Recovery. What is in a
Credit Spread? o
Pricing Default
Swaps using Default Probabilities inferred from Credit Spreads: Methods and Pitfalls. o
Credit spread
migration models. Pricing Credit
Spread Options. o
Actuarial Pricing
and Ratings Transitions o
Models of
Corporate Structure: KMV o
Pricing using KMV
Models. 12:30 – 14:00: Lunch ·
Day 2 – Afternoon: Cross Market and
Capital Structure Arbitrage §
14:00 – 15:30: Why might the Arbitrage
Exist? o
Organisational
issues for investment banks. Drivers
for different views of names between equity and debt markets. o
Sourcing long
dated Volatility in Equity Derivatives o
Senior vs. sub:
key issues in Recovery Risk §
Real World Pitfalls: Understanding them and
Avoiding them o
Movements in the
Smile o
Accounting issues
and Mark To Market o
Factors driving
Credit Spread Movements o
Liquidity Risk o
Activities of
other market participants and their effects 15:30 – 15:45: Break §
15:45 – 17:00:
Typical Transactions in Detail o
Equity Derivative
vs. Default Swap o
CB option vs.
Default Swap o
CDO Equity Tranche
vs. Basket Option o
Questions |
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