Managing Interest Rate Risk

JOHN J. STEPHENS has many years' international business and banking experience. Trained as a lawyer, he subsequently specialised in business related issues and for 10 years was CEO of a management consultancy firm with many large international clients. From 1992 onwards, he worked in the financial services sector for SANLAM and later ABSA Bank, before specialising in futures and options. He now runs a training company specialising in the futures and derivatives markets and is also a non-practicing advocate of the Supreme Court of South Africa.

• PREFACE Modern Risk Management and the Non-Financial Sector The Scope and Purpose of the Book The Methodology Risk Management and Risk Quantification The Role of Pricing Derivatives Structure of the Book CHAPTER 1 INTEREST RATE RISK, INTEREST RATE DERIVATIVES AND THE MANAGEMENT FUNCTION Introduction Fundamentals of Interest Rate Risk Financial Derivatives Interest Rate Derivatives The Interest rate Risk Management Function CHAPTER 2 INTEREST RATE RISK MANAGEMENT IN THE NON-FINANCIAL SECTOR Introduction The Critique of Corporate Risk Management In Defence of Corporate Risk Management Conclusion on Corporate Risk Management Maintaining a Sound System of Control Diversification Hedging With Financial Derivatives CHAPTER 3 INTEREST SPOT AND FRA MARKETS The Spot Interest Rate Market Forward Rate Agreements Case Study 1 Using a FRA to Lock in Future Borrowing Rates CHAPTER 4 INTEREST RATE FUTURES CONTRACTS Introduction to Interest Rate Futures An Exchange Traded Forward Rate Agreement A Standardised Contract - the Minimum Conditions Major Interest Rate Futures Contracts Futures Market Terminology The Role of Basis in Interest rate futures The Futures Hedge Ratio Case Study 2 Hedging a Borrowing Rate with Eurodollar Futures Case Study 3 Hedging an Investment Rate with Eurodollar Futures Discussion of the Case Studies CHAPTER 5 INTEREST RATE SWAPS Introduction to Interest Rate Swaps Principles of Interest Rate Swaps Uses of interest rate swaps Structuring Interest Rate Swaps The Swap Rate Practical Interest Rate Swaps Case Study 4 Hedging a term loan with an interest rate swap. Asset Swaps Interest Rate Basis Swaps Case Study 5 Managing Interest Rate Risk with a Basis Swap CHAPTER 6 INTEREST RATE OPTIONS Introduction The Fundamental Principles of Options Option Pricing The Intrinsic Value of an Option The Time value of an Option The Greeks Exercising Options The Risk of the Parties to an Option OTC Interest Rate Guarantees Case Study 6 Locking in a borrowing rate with an IRG OTC Option Variants Options on Interest rate futures Option Standardisation Option Classification Selling Options on Futures Case Study 7 Hedging an interest bearing investment using options on futures CHAPTER 7 STRATEGIES WITH INTEREST RATE SWAPS, SWAPS BASED DERIVATIVES AND SWAPS MIMICS Introduction Strategies with Standard Interest Rate Swaps Case Study 8 A Debt Market Arbitrage Case Study 9 Arranging an Off-Market Swap Swaps Strategies with special terms Case Study 10 Structuring a Callable Fixed Rate Swap Case Study 11 Hedging a borrowing rate with an adjustable fixed rate swap Swaps as the Underlying Asset of Other Derivatives Futures on Swaps Options on Swaps Case Study 12 Hedging the swap rate on future borrowings using a swaption Strategies Mimicking Swaps Case Study 13 Hedging a borrowing rate with a futures strip CHAPTER 8 STRATEGIES WITH INTEREST RATE OPTIONS AND EXOTIC INTEREST RATE OPTIONS Introduction Cost Reduction Strategies Case Study 14 Locking in a borrowing rate with OTM options on futures Case Study 15 Hedging borrowing rates with an interest rate collar Zero Cost Strategies Case Study 16 Hedging future borrowing rates using a borrower's interest rate lock Case Study 17 Hedging a borrowing rate with a Participating Interest Rate Cap Exotic Options