INTEREST RATE MODELLING - Risk Waters Group

INTEREST RATEMODELLINGCalibration and implementation techniquesLONDON 24 & 25 May 2001NEW YORK 31 May & 1 June 2001COURSE HIGHLIGHTS INCLUDE:● How to select the best pricingtechniques● Analysis of the main models found infinancial institutions● Examination of the theory behindinterest rate modelling● Implementation of a stochastic BGMLibor model● Practical ways to calibrate andimplement interest rate modelsCOURSE TUTORS:Philippe Balland, MERRILL LYNCHAnlong Li, CITADEL INVESTMENTGROUPStephen Dodds, BARCLAYS CAPITALPatrick Hagan, NOMURA SECURITIESProfessor Lane P. Hughston, KING'SCOLLEGE LONDONProfessor Marco Avellaneda, LAMBANALYTICS AND NEW YORKUNIVERSITYRiccardo Rebonato and Mark Joshi,ROYAL BANK OF SCOTLANDDr David Chasman, SEMPRA ENERGYTRADINGYi Tang, GOLDMAN SACHS & CO.www.risktraining.com/interest

C O U R S E T U T O R SProfessor Marco Avellaneda, New York University, Courant Institute of Mathematics (New York course)Professor Marco Avellaneda is currently Director and Professor at the New York University, Courant Institute of Mathematical Sciences. Prior to this he was VicePresident as part of the Derivative Products Group at Morgan Stanley Dean Witter, where he was involved with the quantitative research team supporting the USdollar interest rate derivatives, Brady Bond options and exotic interest rate options. Professor Avellaneda holds a Ph.D. in Mathematics (Probability) from theUniversity of Minnesota and B.S/M.S. Licenciado en Ciencias Matematicas from the University of Buenos Aires. Professor Avellaneda has published over 80research papers in Applied Mathematics and over 15 in quantitative finance.Philippe Balland, Merrill Lynch (London course)Philippe Balland is a Director in the Fixed Income Division at Merrill Lynch, London, where he has the responsibility for developing and implementing stochasticmodels for pricing and hedging complex options. He received his Ph.D. in mathematics from Oxford University.David Chasman, Sempra Energy Trading (New York course)Dr David Chasman directs quantitative analysis at Sempra Energy Trading for North America. His group at Sempra focuses on the hedging of energy optionbooks, the development of models that allow for the hedging of "real options" in the financial markets, and interest rate overlay hedging. Before working atSempra, David worked in the Derivative Quant Group at Bear Stearns. There, he worked on the implementation and calibration on the two-factor RS-HJMmodel for the pricing of interest rate derivatives. Immediately before joining Bear, David was a post-doctoral fellow in the Department of Chemistry at Columbia,where he carried out research on the electronic structure of large molecules - and had the opportunity to learn something about finance. David has a Ph.D. inPhysical Chemistry from MIT and undergraduate degrees in applied math and chemistry from the University of Chicago.Stephen Dodds, Barclays Capital (London course)Stephen Dodds is Director of Research and Development in the Quantitative Analytics Group at Barclays Capital. Stephen started his career on the exoticinterest rate derivatives desk, involved in trading and managing exotic positions, as well as developing and implementing term-structure models for exotics suchas Bermudan swaptions. In addition to his continuing responsibilities on the interest rate side, he is now responsible for model research and development inother asset classes, including commodities, equities and foreign exchange. His areas of interest include practical implementation of Market Models for a widerange of exotics, and their optimal use in hedging. Stephen holds a Ph.D. in theoretical cosmology at the Institute for Astronomy, Edinburgh University, havingspecialised in analytic and numerical models of galaxy formation and evolution, after receiving his first degree in Physics from Oxford University.Gian Marco Felice, Commerzbank (London course)Dr. Gian Marco Felice is a Quantitative Research Specialist at Commerzbank Treasury and Financial Products in Frankfurt where he is currently working onissues associated with interest rate derivative pricing and interest rate models analysis. He holds a Bachelor of Science in Nuclear Engineering from theMassachusetts Institute of Technology and a Ph.D. in Astrophysical Sciences from Princeton University.Patrick Hagan, Nomura Securities International (New York course)Patrick Hagan Ph.D. is currently Head of Quantitative Research at Nomura Securities International in New York where he oversees all the mathematical modellingand numerical algorithms for financial engineering, he also designed the fixed income trading system for pricing and managing interest rate derivatives products.Prior to this he was Gead of Quantitative Research at Numerix, he has also held positions at Banque Paribas and Morgan Stanley. Other professional activitiesinclude Managing Editor of Applied Mathematical Finance. Patrick holds a B.S and Ph.D in Applied Mathematics from the California Institute of Technology.Professor Lane P Hughston, Centre for Financial Mathematics, King's College London (London course)Lane Hughston is Professor of Financial Mathematics at King’s College London. He received his D. Phil. in mathematics from Oxford University. Before joiningKing's he was Director of Derivative Product Risk Management at Merrill Lynch, where he was responsible for managing the development of pricing modelsinterest rate and foreign exchange derivatives, and other products. His research interests include: Mathematical finance and its applications in an investmentbanking context; the pricing and risk management of derivatives; martingale models for interest rates and foreign exchange; the impact of transaction costs;stochastic volatility models; and applications of information geometry and stochastic differential geometry. For more information see: http://www.mth.kcl.ac.uk/Mark S. Joshi, Royal Bank of Scotland (London course)Dr Mark S. Joshi is Senior Quantitative Analyst in the QUARC team of the Natwest group. Here, he is involved with the researching of derivatives pricing, modelvalidation and consulting on quantitative issues within the group. Dr Joshi is currently team leader of QUARC within Group Risk. Previous to this he was anAssistant Lecurer within the Department of Pure Mathematics and Mathematical Statistics at the University of Cambridge. Dr Joshi has published over 20 papersin pure mathematics.Anlong Li, Citadel Investment Group (New York course)Anlong Li Ph.D. is Director of Quantitative Research at Citadel Investment Group, Chicago, IL. Dr. Li was Senior Vice President and head of Structured ProductsGroup for fixed-income derivatives at ABN AMRO North America in Chicago, responsible for structuring, trading and the development of new derivativeproducts, from 1996 to 1999. He was head of Product Development and Derivative Research for Global Derivatives at the First National Bank of Chicago inChicago, IL, from 1994 to 1996. He also worked in derivative products at both Salomon Brothers and Lehman Brothers in New York City, from 1992 to 1993.Mr. Li was a Research Fellow at the Federal Reserve Bank of Cleveland where he worked on the valuation and policy implication of deposit insurance during1990 and 1991. Mr. Li received his Ph.D. in Operations Research from Case Western Reserve University. His work appears in many academic as well asprofession journals. He is a frequent speaker at professional conferences.Riccardo Rebonato, Royal Bank of Scotland (London course)Dr Riccardo Rebonato is Head of Group Market Risk for the Royal Bank of Scotland Group, and Head of The Royal Bank of Scotland Group QuantitativeResearch Centre. He is also a Visiting Lecturer at Oxford University for the Mathematical Finance Diploma and Visiting Fellow at the Applied MathematicalDepartment of Oxford University. He holds Doctorates in Nuclear Engineering and Science of Materials/Solid State Physics. Prior to joining the Royal Bank ofScotland, he was, at the same time, Head of the Complex Derivatives Trading Desk and of the Complex Derivatives Research Group at Barclays Capital, wherehe worked for nine years. Before that he was a Research Fellow in Physics at Corpus Christi College, Oxford, UK. He is the author of the books 'Interest-RateOption Models' (1996, 1998), 'Volatility and Correlation in Option Pricing' (1999) and Modern Pricing of Interest-rate Derivatives (2001). He has publishedseveral papers on finance (interest-rate option models, computational techniques) in academic journals, and is on the editorial board of several journals. He is aregular speaker at conferences world-wide.Yi Tang, Goldman Sachs & Co. (New York course)Yi Tang currently works for Goldman, Sachs & Co. as a Vice President in a Quantitative Group (DCP). Before joining Goldman, he was a Quantitative Analyst atRubicon Financial Systems, Inc./Cambix, Inc. Formerly, he was an Adjunct Assistant Professor of Physics at UCLA. He holds a Ph.D. degree in CondensedMatter Physics from UCLA.Uwe Wystup, Commerzbank (London course)Dr. Uwe Wystup is a Quantitative Research Specialist at Commerzbank Treasury and Financial Products in Frankfurt, Lecturer on Mathematical Finance atGoethe University, Founder and Managing Director of MathFinance and Editor of the MathFinance Newsletter. He holds a Ph. D. in Mathematical Finance fromCarnegie Mellon University.www.risktraining.com/interest

INTEREST RATCalibration and impleDAY ONELondon, Thursday 24 May 20019.00 Registration and breakfast9.30DETAILED EXAMINATION OF THETHEORETICAL INTEREST RATE FRAMEWORKS● Discount bonds and interest rates- market conventions- Libor rates and swap rates- positive interest conditions● Stochastic dynamics for a single risky asset- no arbitrage conditions- derivatives hedging and replication- change of measure, risk neutral valuation● Girsanov's theorem- Martingale representation theorem- extension to multi-dimensional Brownian motion● Stochastic dynamics for multiple risky assets- conditions for no arbitrage and for marketcompleteness.- existence and uniqueness of relative risk process- pricing kernel, Martingale measure, and naturalnumeraire● Price processes for discount bonds, no arbitrageand market completeness conditions- interest rate volatility and correlation● Short rate and instantaneous forward rateprocesses- Heath-Jarrow-Morton (HJM) framework- general methodology for the valuation andhedging of interest rate derivatives● Overview of specific interest rate models- diffusion models- market models- string models and beyondProfessor Lane P. Hughston, Professor of FinancialMathematicsKING'S COLLEGE LONDONThere will be a 30 minute break during this session12.30 Lunch13.45SELECTING THE APPROPRIATE PRICINGTECHNIQUE FOR INTEREST RATE DERIVATIVES● Investigation of main methods for theimplementation of interest rate models- PDEs- Monte Carlo and Martingale measures- binomial, trinomial, bushy trees- finite difference- lattice● Efficient and accurate computation of Greeks● Practical ways to ease implementation- incorporation within interest rate frameworks● Selecting the best model for interest rate productpricing in relation to- accuracy and speed of use- use of parameters- type of markets● Assumed factors when implementing an interestrate model- efficient calibration to observed yield on cost,model risk and risk premiumPhilippe Balland, Director in the Fixed Income DivisionMERRILL LYNCH16.00 Afternoon breakLOND16.30FUNCTIONAL CONSIDERATIONS WHENCALIBRATING AND IMPLEMENTING INTERESTRATE MODELS● Examining calibration issues for interestframeworks● The objectives of calibration● Calibration techniques for multi-factor models● Instrument specific and market specific calibration● Exact and best fit calibration● Overfitting and underfitting● Stability and speed of calibration● Calibration and hedging● Risk measurementDr Uwe Wystup, Quantitative Research Specialist andDr Gian Marco Felice, Quantitative ResearchSpecialistCOMMERZBANK18.00 End of day onewww.risktraining.com/interest

E MODELLINGmentation techniquesDAY TWOLondon, Friday 25 May 20018.30 Registration and breakfast9.00PRACTICAL EXAMINATION OF THEIMPLEMENTATION AND CALIBRATION OF THEMAIN MODELS USED IN FINANCIALINSTITUTIONS● Incorporating volatility skew and smiles in BGMLibor interest rate models● Importance of skew in pricing exotics● Theoretical foundations and hedging implications● Implementing a CEV BGM Libor model forBermudan swaptions● Introduction to the stochastic volatility BGM LibormodelStephen Dodds, Director of Research andDevelopmentBARCLAYS CAPITALDON10.30 Morning break11.00STOCHASTIC VOLATILITY; A PRACTICALAPPROACH● Stochastic BGM models● Using autocalibration to manage the smile risk ofexotic dealsDr Mark S. Joshi, Senior Quantitative AnalystROYAL BANK OF SCOTLAND12.30 Lunch13.45IMPLEMENTATION OF A STOCHASTIC BGMLIBOR MODEL● Review of the deterministic volatility BGM Libormodel● Motivating stochastic instantaneous volatility curves● The displaced-diffusion stochastic volatility BGMLibor model● Fast pricing of exotic options in a stochasticvolatility model- long stepping forward rates- fast and effective pseudo-square rooting ofcovariance matrices● Calibration- rapid production of the caplet volatility surface- instantaneous exact calibration to at-the moneycaplet prices- rapidly pricing at-the-money swaptions- instantaneous calibration to co-terminalswaptions● Examples- fits to the market caplet surfaces- pricing a trigger swapRiccardo Rebonato, Head of Group Market RiskROYAL BANK OF SCOTLANDThere will be a 30 minute break during this session17.00 End of coursePast delegates’ commentsHere are some of the commentsgiven by last year's satisfieddelegates:"Excellent!""Well paced and very clear. I likedthe combination of presentationsand original papers""Excellent selection of speakers andtopics, I was most impressed andwould recommend this course tocolleagues.""A great course, which provided theperfect balance between numericalexamples and pure theory. I wasvery satisfied"www.risktraining.com/interest

INTEREST RATCalibration and impleDAY ONENew York, Thursday 31 May 20018.30 Registration and breakfast9.00DETAILED EXAMINATION OF TERMSTRUCTURE MODELS AND DERIVATIVESPRICING FRAMEWORKS● Understanding the methods behind stripping theyield curve- futures vs. forward- curve smoothing● The “building blocks” of stochastic term structuremodels● Overview of pre-1992 theoretical models● Markovian short rate models- vs. Hull White- vs. Black Derman Troy- vs. Black Karasinski- vs. Gaussian Models- vs. Vasicek- vs. CIR● Post 1992, the dawning of a new era -Contemporary models - 2 & 3 factor models● Forward rate models- vs. HJM- vs. BGM and Lognormal HJM● Critical assessment of current interest rate models- assumptions- which markets and products- calibration issuesProfessor Marco Avellaneda, DirectorLAMB ANALYTICS AND NEW YORK UNIVERSITYNEW YThere will be a 30 minute break during this session12.00 Lunch13.15SELECTING THE APPROPRIATE PRICINGTECHNIQUE FOR INTEREST RATEDERIVATIVES● Selecting the best model for pricing interest rateproducts- type of markets and products- hedging considerations- accuracy vs. speed- flexibility- stability● Investigation of main methods in implementinginterest rate models- PDEs and closed-form solutions- finite difference- lattice: binomial, trinomial, and bushy trees- Monte Carlo- methods in calibration● Practical ways to ease implementation- use of factors and parameters- efficient calibration to observed yield curve- accuracy in calibrating to relevant derivatives- efficient and accurate computation of Greeks● Volatility issues in interest rate models- volatilities: implied vs. historic- volatility smile- stochastic volatility● Overcoming the market fractions in interest ratemodelling Liquidity- transaction cost- risk premium- market noise- model riskAnlong Li, Director of Quantitative ResearchCITADEL INVESTMENT GROUP15.30 Afternoon break16.00FUNCTIONAL CONSIDERATIONS WHENCALIBRATING AND IMPLEMENTING INTERESTRATE MODELS: HITTING THE MARKET PRICEFOR EVERYTHING VS. STABLE CALIBRATIONPARAMETERS● Instruments for calibration and their liquidity● Tradeoffs between various models- which instruments am I calibrating to?- general ease of calibration- stability of calibration parameters- ability to price most instruments in the book● Measures of over-fitting and under-fitting● Parsimony● Instabilites vs. Missing the market: The hazards ofover-fitting and underfitting● Unstable calibration parameters - a workedexample● The perils of an incomplete calibration set - aworked exampleDavid Chasman, Director of Quantitative AnalysisSEMPRA ENERGY TRADING17.30 End of day onewww.risktraining.com/interest

E MODELLINGmentation techniquesDAY TWONew York, Friday 1 June 20018.00 Registration and breakfast8.30EQUIVALENT VOLATILITY FORMULAS FORLOCAL VOLATILITY AND STOCHASTICVOLATILITY MODELSVolatility smiles and skews● Incorporating volatility smiles and skews into theinterest rate model- the limitations of the CEV model- the lognormal distribution- the inclusion of stochastic volatilities- skew and kurtosis● Using local volatility and stochastic volatility modelsto match market smiles/skews● Dynamics of the smile and hedge stability● Managing smile risk via stochastic volatility models● Dynamics of the smile implied by local volatility andstochastic volatility models● Using stochastic volatility models to manage smileriskPatrick Hagan, Head of Quantitative ResearchNOMURA SECURITIES INTERNATIONAL10.00 Morning break● Difficulties in the implementation of multi-factorBGM Libor models● Non-Markovian and multi-factor coupled with therequirement of accuracy, convergence, andcomputation speed● Practical example: Efficient numericalimplementation of multi-factor BGM Libor modelwith the non-exploding bushy tree technique● Introduction to the non-exploding bushy treetechnique which overcomes various difficulties of theconventional bushy tree technique● Efficient and consistent pricing of caps/floors,European and Bermudan swaptions with a 3-factorBGM Libor model implemented by thenon-exploding bushy tree technique● Example on efficient modelling of caplet andswaption volatility skews with a 3-factor BGM LibormodelYi Tang, Vice President in Quantitative Group (DCP)GOLDMAN SACHS & CO.ORKThere will be a 30 minute break during this session17.00 End of course10.30STOCHASTIC VOLATILITY OR JUMP MODELS:A PRACTICAL APPROACH● Stochastic BGM models● Using autocalibration to manage the smile risk ofexotic dealsPatrick Hagan, Head of Quantitative ResearchNOMURA SECURITIES INTERNATIONAL12.30 Lunch13.30IMPLEMENTATION OF MULTI-FACTOR BGMLIBOR MODEL● In-depth analysis of multi-factor BGM Libor models● Martingale approach for modelling● Spot, forward, and annuity arbitrage-free measures● General forms of BGM Libor market model andswap market model● General forms of volatility and correlation structures● Modelling caplet and swaption volatility skewsRisk's ExclusivePre-course Reading:Produced in consultation with thecourse tutors, every delegate willreceive a comprehensivepre-course reading pack to ensurethey obtain maximum benefit fromthe course. Each article has beenselected based upon its relevanceto the topics covered within thepresentations.www.risktraining.com/interest

INTEREST RATE MODELLINGCalibration and implementation techniquesLONDON 24 & 25 May 2001NEW YORK 31 May & 1 June 2001Code : A B C D E F G H I J K L M N O P Q R S T U V W X Y ZTo register for LondonMail Conference Administration,Risk Waters Group,Haymarket House, 28-29 Haymarket,London SW1Y 4RX, UKTel +44 (0)20 7484 9898E-mail conf@riskwaters.comFax +44 (0)20 7484 9800To register for New YorkMail Conference Administration,Risk Waters Group,270 Lafayette Street, Suite 700New York, N.Y. 10012Tel +1 212 925 1864 x 197Toll-Free: 1-877 367-8008 x 197Fax +1 212 925 7585Web www.risktraining.com/interestPlease do not cover this box as it contains important marketing informationVisit the Risk Waters Group web site for an update on our forthcoming conferences andcourses and for information on our magazines and books at www.riskwaters.comRegistration detailsINTEREST RATE MODELLING London 24 & 25 May 2001 £1999 + VAT @ 17.5% (£2348.83)INTEREST RATE MODELLING New York 31 May & 1 June 2001 $2999Your registration fee includes breakfast, lunch and refreshments, pre course reading and your documentation pack. Book online or fax the completed form with your credit card details, orfollow up the provisional reservation with a cheque payable to Risk Waters Group Ltd. In order that we process your registration with maximum efficiency, we request that a copy of thisbooking form accompanies your payment. Please complete the form below in BLOCK CAPITALS.TITLE FIRST NAME FAMILY NAMEJOB TITLE / POSITION DEPARTMENT COMPANYADDRESSCITY POST/ZIPCODE COUNTRYTELEPHONE FAX EMAILAPPROVING MANAGERTRAINING MANAGERPlease tick the description which best fits your company typeCommercial/Investment bankBrokerageBuilding Society/ThriftInsurance companyExchangeAsset/Investment/Fund management coLegalRegulator❑ Tick here to receive e-mails informing you of new eventsAccountancy/AuditConsultancy/BoutiqueGovernment/Public BodySoftware/TechnologyEnergy/UtilityNon-financial corporationOther (please specify)Payment detailsPlease note your place is not guaranteed until payment has been receivedI enclose a cheque payable to Risk Waters Group Ltd.Please debit my: AMEX VISA MASTERCARD DINERS CLUB (please supply ‘valid from’ date _____________________)CRYD106CRYP84CARD NO:EXPIRY DATE:ACCOUNT ADDRESS IF DIFFERENT FROM ABOVESIGNATUREDATE.Risk Waters Group VAT No: GB 681 3190 38 For companies in EU member states only: Please write your VAT/TVA/BTW/IVA/ MCMS/MWST/FPA number herePayment is required prior to the event. If you require an invoice please inform us stating whether you need an original or a fax copy. We accept company cheques, credit cards and bank transfers.Please allow a minimum of seven working days for a bank transfer to reach us and phone or fax us when it has been sent. Please state the event name and delegate name to which it relates.Venue and accommodation detailsLondon:86 Park Lane at The Grosvenor House Hotel, London W1A 3AATel: +44 (0)20 7499 6363For London accommodation call The Event Workshop on +44 (0)118 9869 111.New York:The Millennium Hilton Hotel55 Church StreetNew York, NY 10007Tel +1 212 693 2001 Fax: +1 212 571 2316For accommodation, special rates have been negotiated. Please call the hotel andmention “Risk Training”.Special Group Discounts:When three or more delegates from the same company and cityregister for an event at the same time, they will receive a 15%discount on the registration fee.Customer loyalty: Because we value your custom, any delegate who books onto threeor more Risk events, conferences or courses, in the same calendar year, will receive anautomatic 15% discount.WARNING: Risk is a registered trademark, and the title, contents and style of this brochure are the copyright of RiskWaters Group. We will act on any infringement of our rights anywhere in the world. © Risk Waters Group 1998.CANCELLATIONA refund (less 10% administration fee) will be made if notice of cancellation is received in writing three weeksbefore the event. We regret that no refunds can be given after this period. A substitute delegate is always welcomeat no extra charge.DISCLAIMERThe programme may change due to unforeseen circumstances, and Risk Waters Group reserves the right to alterthe venue and/or speakers. Risk Waters Group accepts no responsibility for any loss or damage to propertybelonging to, nor for any personal injury incurred by, attendees at our conferences, whether within the conferencevenue or otherwise.INCORRECT MAILING, DATA PROTECTIONIf any of the details on the mailing label are incorrect, please return the brochure to the database administrator atRisk Waters Group so that we can update our records and ensure future mailings are correct.Please tick this box and return this page if you do not want to receive details of special offers which may beof relevance to you.