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Structured Finance







Structured Finance Techniques can be intimidating to the uninitiated.  This course explains the Drivers of Structured Finance Transactions, their Basic Building Blocks, and how these are assembled into trades.  Three examples are presented in detail.

Topics Covered

  • Drivers of Structured Finance Transactions
  • Building Blocks of a Trade: Interest Rate and Cross Currency Swaps, Credit Derivatives, Equity Derivatives
  • Interaction Between the Components
  • Meeting the Requirement for Market Risk, Credit Risk and Operational Risk
  • Introduction to Tax, Accounting and Regulatory Issues
  • Detailed Examples

Course Outline

             Day 1 Morning: Key Ideas in Capital Structure Arbitrage

       9:00 10:30: Introduction to Structured Finance

o What are Structured Finance Trades?

o What distinguishes them from plain vanilla structures?

o Key drivers for clients: tax, regulatory and accounting issues

o How Structuring Can Add Value

       10:30 10:45: Break

            Building Blocks 1: Equity Derivatives

       10:45 12:30:  Recap on Equity Derivatives and Convertible Bond Structures

o Pricing Single Stock Options

o Volatility Issues

o Dividend Risk and Stock Borrow

o Basket Options and Correlation

o Exotic Equity Derivatives

o Convertible Bonds

o Convertible Asset Swaps and CB Options

12:30 14:00: Lunch

             Day 1 Afternoon: Building Blocks 2: Interest Rate Derivatives

       14:00 15:30: Recap on Interest Rate and Foreign Exchange Derivatives

o The Yield Curve

o Interest Rate Swaps and Options

o Cross Currency Swaps and FX Options

o Issues with Exotic Currencies

15:30 15:45: Break


            Example 1: Convertible Asset Swaps

       15:45 17:00: Detailed Example

o Synthetic FRN Buyers Requirements

o CB Option Buyers Requirements

o The key role of Funding.

o How the Structure Works

o Pricing and Risk Management

o Call Risk

            Day 2 Morning:  Building Blocks 3: Credit Derivatives

       9:00 10:30: 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

10:30 10:45: Break

       10:45 12:30: Introduction to Pricing and Risk Management of 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 Actuarial Pricing and Ratings Transitions

o Documentation Issues.

o Example: Using Default Swaps in place of synthetic FRNs

12:30 14:00: Lunch

             Day 2 Afternoon: Example 2: On Demand Capital

       14:00 15:30: Contingent Capital Structures

o What is capital?  Need for contingent capital Solutions

o Example Contingent Capital Structure

o Regulatory Issues with Contingent Capital

15:30 15:45: Break

       15:45 17:00: Constraints on Effective Structures

o Tax Issues

o Accounting Issues

o Regulatory Issues

15:30 15:45: Break

            Example 3: Achieving Effective Accounting

       15:45 17:00: Restructuring to Achieve Accounting Advantages

o Insurance vs. Accrual vs. Mark to Market Accounting

o Introduction to the changes to FAS 133

o Restructing a Trade to Optimise Accounting Treatment

o Questions



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Last modified: July 30, 2003