Quant Analyst, we look at constructing, pricing and reporting on Cap/Floor derivatives in Microsoft Excel using opengamma strata.

We, at poc-d, have taken opengamma‘s strata library (which has been developed in java) and extended it for online learning of capital market products for C#, VB.Net, C++, Python, Java and Scala developers as well an Microsoft Excel addin for financial analysts.

The learning is hands on, which means you will be provided a copy of the library to follow along.

Course Curriculum

• Module #1 : Cap/Floor Structure
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• Module #2 : Cap/Floor Pricing
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• Module #3 : Cap/Floor FpML
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• Module #4 : Cap/Floor Risks
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• Provided (for hands on)
  • Microsoft Excel Addin which exposes required opengamma strata financial functions within Excel
• Required
  • Minimum Microsoft Windows 7
  • 4GB of RAM (8GB preferred)
  • Microsoft Excel 2007 onwards

Course Access

This course is broken down into modules (as seen in the graphic above).

You can access all the Capital Market courses based on C#, VB.Net, C++, Python, Java, Scala and Microsoft Excel for one low monthly fee. Currently the membership site houses courses that covers Fixed Rate Bonds, Swaps, Inverse Floaters, Swaptions and Cap/Floors.

• POC-d membership site : POC-D Membership site

Or each module can be purchased individually from

• Udemy : POC-D Udemy Individual modules

Cap/Floor Derivative

An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%.

Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price.

Caps and floors can be used to hedge against interest rate fluctuations. For example, a borrower who is paying the LIBOR rate on a loan can protect himself against a rise in rates by buying a cap at 2.5%. If the interest rate exceeds 2.5% in a given period the payment received from the derivative can be used to help make the interest payment for that period, thus the interest payments are effectively “capped” at 2.5% from the borrowers’ point of view.

Interest rate cap

An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%. They are most frequently taken out for periods of between 2 and 5 years, although this can vary considerably.^[1] Since the strike price reflects the maximum interest rate payable by the purchaser of the cap, it is frequently a whole number integer, for example 5% or 7%.^[1] By comparison the underlying index for a cap is frequently a LIBOR rate, or a national interest rate.^[1] The extent of the cap is known as its notional profile and can change over the lifetime of a cap, for example, to reflect amounts borrowed under an amortizing loan.^[1] The purchase price of a cap is a one-off cost and is known as the premium.^[1]

The purchaser of a cap will continue to benefit from any fall in interest rates below the strike price, which makes the cap a popular means of hedging a floating rate loan.^[1]

The interest rate cap can be analyzed as a series of European call options, known as caplets, which exist for each period the cap agreement is in existence. Unlike other types of option, it is generally not necessary for the purchaser of a cap to notify the seller in order to exercise it, as this will happen automatically if the interest rate exceeds the strike price.^[1] Each caplet is settled in cash at the end of the period to which it relates.^[1]

Interest rate floor

An interest rate floor is a series of European put options or floorlets on a specified reference rate, usually LIBOR. The buyer of the floor receives money if on the maturity of any of the floorlets, the reference rate is below the agreed strike price of the floor.

The text below is an edited version taken from the strata web site : http://strata.opengamma.io/introduction/

Introduction to Strata for the Quant Developer

What is Strata?

Strata is the award-winning open source analytics and market risk library from OpenGamma.

Strata allows quant developers to build or enhance existing applications with standardized, off-the-shelf market risk components. It includes:

• Pricing, financial analytics and curve calibration
• Reporting
• Scenario evaluation
• Trade modelling
• Market data representation
• Financial foundations – currencies, indices, holidays, date adjustments, schedules, time-series

Strata has been built from the ground up to be lightweight and flexible. It does not impose any database, server or middleware requirements; these would be built on top of Strata. It provides a high-quality, open source Java toolkit that is designed to be used both in its entirety, as well as for its individual components.

Who is Strata for?

Firms have long employed expensive resources – quants and quant developers – to build and maintain market risk functionality that  offers no real competitive advantage. Where possible, they wish to leverage existing investments in systems and other in-house technologies, while looking externally for just the components required to fill their solution gaps.

Is there an alternative?

One alternative to building in-house is to look towards out-of-the-box offerings provided by financial software vendors. While these vendors offer solutions to industry business issues, the downside is that many firms have been burned by opaque, closed source vendor models, including vendor lock-in to make or support any changes, and “sledgehammer to crack a nut” software footprints.

Solution

Strata delivers the best of both worlds – industry standard market risk functionality, distributed as open source java software to eliminate vendor dependency and return control back to in-house development teams. With open access to standard market risk components and java source code, firms can accelerate the time-to-market of their solutions.

Developers

Strata is aimed at quant or systems developers tasked with delivering analytic solutions into trading, risk, clearing or prime servicing, or collateral businesses. Strata empowers developers with vetted open source java components that deliver standard market risk functionality, allowing them to focus on the unique aspects of solutions delivery to their business stakeholders.