This intermediate course covers fixed income options. The uses of fixed income options are examined with specific focus on portfolio and risk management. Hedging strategies are explored in depth and will cover protective puts, put spreads, collars and option writing. Caps, floors and collars are also defined and how they are used to manage interest rate risk is explored. Different trading strategies are analyzed, such as spread and volatility trading and trades to increase yield. The course participant will use software specifically designed to analyze different options positions. Option pricing and valuation will be covered in depth. Probability is introduced leading into a discussion of the binomial pricing model. Volatility and its importance to option pricing is explained. Historical volatility, implied volatility and volatility curves are explored. Finally, the Greeks are interpreted and what role they have in option valuation is analyzed. Specially designed software will be used to manage a dynamic delta hedge.

Objectives

By the end of the course, the participant will be able to:

• Describe how fixed income options are used in portfolio and risk management
• Implement hedging strategies such as protective puts, put spreads, collars and option writing
• Explain caps, floors and collars and how they are used to manage interest rate risk
• Examine how interest rate options are embedded in fixed income securities
• Explain different trading strategies, such as spread and volatility trades and trades to increase yield
• Price and value options
• Describe and interpret probability of returns and standard deviation
• Explain the binomial pricing model and how it is used to price options
• Examine historical volatility, implied volatility and volatility smiles
• Discuss the concept of mean reversion
• Interpret and analyze the option Greeks
• Use computer software to dynamically manage an options position and delta hedge
• Identify Bloomberg functions used by market practitioners

This course is designed for

• Fixed Income portfolio managers
• People supporting an fixed income portfolio
• Auditors and examiners for fixed income portfolios using options