Swaps Fundamentals from edX

Swaps are the most prevalent derivatives used by corporations, and financial institutions to exchange a set of future cash flows with another set. The market participants carry them in balance sheet or off-balance sheet, and their gigantic volume has always been a point of concern for regulatory bodies and central banks. Considering that FRA is based on the exchange of one cash flow with another one, swap is set of FRAs.

In this course, we will discuss the basic financial theories and concepts relevant to swaps. The pricing of swaps will also be explained and demonstrated through many examples. We then look into Interest Rate including Forward and Overnight Index Swap (OIS) swaps, Equity, Cross-Currency, Quanto, Credit Default, and Asset Swaps.

The Credit Default swaps (“CDS”) are now extremely popular and trade billions of dollars every day. While they were originally developed to hedge the risk of fixed income products, they are now used to take a position without trading the underlying which can be a particular bond of a corporation or a country. Interestingly, the size of a particular CDS can many times be larger than the size of the underlying because they are cash-settled. Therefore, we will spend a good portion of our time on this subject.

Credit Default Swaps (“CDS”) allow investors to swap the credit risk of a corporation, index, or a country with other investors. CDS market started in 1990’s and drastically grew until 2007 global crisis to a $60 trillion market. For comparison, the global equity and bond markets are about $80 and $90 trillion respectively. Considering the important role that CDS played in shaping the global crisis of 2007 and also the large trading loss at JP Morgan, the governments introduced more restrictions on the CDS market. CDS which were mainly traded as OTC products between brokers and clients, were then transformed to become more standard contracts clearing via central clearing counterparties.

What's inside

Learning objectives

Understand swaps and their applications in finance.
Learn how to do valuation of swaps as sum of the present value of two legs of swap.
Understand interest rate swap, swap spread, payouts of two legs.

Understand the crisis of 2008, the issue with libor, and switch from libor based swaps to ois swaps.
Understand equity swaps, issues with cash-settled swaps, and a glance at quanto swaps.

Understand swaps and their applications in finance.
Learn how to do valuation of swaps as sum of the present value of two legs of swap.
Understand interest rate swap, swap spread, payouts of two legs.
Understand the crisis of 2008, the issue with libor, and switch from libor based swaps to ois swaps.
Understand equity swaps, issues with cash-settled swaps, and a glance at quanto swaps.

Syllabus

Module 01: Swap Fundamentals

Module 02: Interest Rate Swaps: Basics

Module 03: Interest Rate Swaps: Advanced Topics

Module 04: Equity Swaps

Module 05: Cross-Currency Swaps

Good to know

Know what's good

, what to watch for

, and possible dealbreakers

Explores advanced finance concepts, including interest rate swaps and credit default swaps, which are highly relevant to professionals in banking and finance

Taught by Jack Farmer, who is recognized for his expertise in financial derivatives

Delves into the intricacies of swap pricing, providing learners with the quantitative skills needed to analyze and value these complex financial instruments

Activities

Be better prepared before your course. Deepen your understanding during and after it. Supplement your coursework and achieve mastery of the topics covered in Swaps Fundamentals with these activities:

Review the Prerequisites

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Refresh your understanding of the basics of financial derivatives and swaps to better prepare for this course.

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Review the course syllabus and make a note of any prerequisite knowledge or skills.
Go back and review your notes, old assignments, or textbooks from previous courses that covered these topics.
If you find any gaps in your understanding, do some additional research or seek help from a tutor or instructor.

Follow Online Tutorials on Swaps

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Reinforce your understanding of swaps by following online tutorials that provide step-by-step guidance and examples.

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Search for online tutorials on swaps and financial derivatives.
Choose tutorials that cover the basics of swaps, including pricing, valuation, and different types of swaps.
Follow the tutorials carefully and take notes on key concepts.
Try to apply the concepts you learn to practical examples.

Read 'Interest Rate Swaps: A Primer' by Frank Fabozzi

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Gain a deeper understanding of interest rate swaps by reading a book dedicated to the topic.

View Investment Analysis & Portfolio Management on Amazon

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Purchase or borrow a copy of the book 'Interest Rate Swaps: A Primer'.
Read the book thoroughly and take notes on key concepts.
Complete the practice problems and exercises at the end of each chapter.

Five other activities

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Solve Practice Problems on Swaps

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Solidify your understanding of swap concepts by solving a variety of practice problems.

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Find practice problems on swaps online or in textbooks.
Attempt to solve the problems on your own.
Check your answers and learn from your mistakes.
Repeat the process until you feel confident in your ability to solve swap problems.

Create a Visual Summary of Swaps

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Enhance your understanding and retention of swap concepts by creating a visual summary such as a flowchart, diagram, or infographic.

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Identify the key concepts related to swaps.
Decide on the type of visual summary you want to create.
Design and create the visual summary.
Review and refine your visual summary.

Attend a Workshop on Swaps and Derivatives

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Gain practical knowledge and insights by attending a workshop led by industry experts who specialize in swaps and derivatives.

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Research and find workshops on swaps and derivatives.
Register and attend the workshop.
Actively participate in the workshop and take notes.
Follow up with the workshop organizers or speakers if you have any questions.

Develop a Case Study Analysis on a Real-World Swap Transaction

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Apply your knowledge to a real-world scenario by analyzing a case study on a swap transaction.

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Research and find a case study on a swap transaction.
Read and analyze the case study carefully.
Identify the key factors and concepts related to the swap transaction.
Write a report summarizing your analysis and insights.
Present your analysis to your classmates or instructor for feedback.

Mentor Junior Students Learning About Swaps

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Reinforce your own understanding by helping others who are just beginning to learn about swaps.

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Identify students who are interested in learning about swaps.
Offer your mentorship and support.
Meet with the students regularly to answer their questions and guide their learning.
Provide feedback and encouragement to the students.

Career center

Learners who complete Swaps Fundamentals will develop knowledge and skills that may be useful to these careers:

Trader

Traders buy and sell financial instruments for profit. They analyze financial data to identify trading opportunities, and they execute trades on behalf of their clients. This course would be useful for Traders as it provides a foundation in swaps, which are a common financial instrument used in trading.

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Financial Risk Manager

Financial Risk Managers are responsible for identifying and managing financial risks within companies. They analyze financial data to identify potential risks, and they develop strategies to mitigate those risks. This course would be useful for Financial Risk Managers as it provides a foundation in swaps, which are a common financial instrument used to manage risk.

See salaries and explore the career path for Financial Risk Manager

Investment Banker

Investment Bankers help companies raise capital and provide financial advice. They analyze financial data to make recommendations on mergers and acquisitions, initial public offerings, and other financial transactions. This course would be useful for Investment Bankers as it provides a foundation in swaps, which are a common financial instrument used in these transactions.

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Portfolio Manager

Portfolio Managers manage investment portfolios for individuals and institutions. They analyze financial data to make investment decisions and they develop strategies to meet their clients' financial goals. This course would be useful for Portfolio Managers as it provides a foundation in swaps, which are a common financial instrument used in portfolio management.

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Financial Analyst

Financial Analysts help companies and individuals make financial decisions. They analyze data to forecast financial trends, make recommendations, and assist with investment decisions. This course would be useful for Financial Analysts as it provides a foundation in swaps, which are a common financial instrument. This understanding can help build better models and make better recommendations.

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Quantitative Analyst

Quantitative Analysts (Quants) use mathematical and statistical models to analyze financial data. They use this information to develop trading strategies and make investment decisions. This course may be useful for Quants as it provides a foundation in swaps, which are a common financial instrument used in quantitative finance.

See salaries and explore the career path for Quantitative Analyst

Hedge Fund Manager

Hedge Fund Managers manage investment portfolios for high-net-worth individuals and institutions using advanced investment strategies to generate high returns. They analyze financial data to identify investment opportunities and they develop strategies to meet their clients' financial goals. This course may be useful for Hedge Fund Managers as it provides a foundation in swaps, which are a common financial instrument used in hedge funds.

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Private Equity Investor

Private Equity Investors invest in companies that are not publicly traded. They analyze financial data to identify investment opportunities, and they develop strategies to improve the performance of the companies they invest in. This course may be useful for Private Equity Investors as it provides a foundation in swaps, which are a common financial instrument used in private equity.

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Operations Research Analyst

Operations Research Analysts use mathematical and statistical models to solve business problems. They analyze data to identify inefficiencies and develop solutions to improve operations. This course may be useful for Operations Research Analysts as it provides a foundation in swaps, which are a common financial instrument used in operations research.

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Venture Capitalist

Venture Capitalists invest in early-stage companies with high growth potential. They analyze financial data to identify investment opportunities, and they develop strategies to help the companies they invest in succeed. This course may be useful for Venture Capitalists as it provides a foundation in swaps, which are a common financial instrument used in venture capital.

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Financial Planner

Financial Planners help individuals and families plan for their financial futures. They analyze financial data to identify financial goals, and they develop strategies to achieve those goals. This course may be useful for Financial Planners as it provides a foundation in swaps, which are a common financial instrument used in financial planning.

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Insurance Actuary

Insurance Actuaries analyze financial data to calculate the probability of events that could result in insurance claims. They use this information to set insurance rates and design insurance policies. This course may be useful for Insurance Actuaries as it provides a foundation in swaps, which are a common financial instrument used in the insurance industry.

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Data Scientist

Data Scientists use data to solve business problems. They analyze data to identify patterns and trends, and they develop models to predict future outcomes. This course may be useful for Data Scientists as it provides a foundation in swaps, which are a common financial instrument used in data science.

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Software Engineer

Software Engineers design and develop computer software. They analyze user needs to determine the best way to implement software solutions. This course may be useful for Software Engineers as it provides a foundation in swaps, which are a common financial instrument used in software development.

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Computer Scientist

Computer Scientists research and develop new computer technologies. They analyze algorithms to design efficient and effective solutions to computational problems. This course may be useful for Computer Scientists as it provides a foundation in swaps, which are a common financial instrument used in computer science.

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