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Aug 5, 2022 - 9:46am
Transcending, what's your opinion? Comment below:

Rates trading in general is very broad. You have front end rates traders (short duration), Treasury trading, futures trading, swaps trading, swaptions (vol) desk, and exotics. This is a general order in terms of complexity of product and expertise in technical aspects of derivatives. For more info on quant technicals see my Q&A here

The IR exotics desk is mostly focused on derivative products such as yield curve spread options (YCSO), midcurve options, forward volatility, caps, floors, accrual range notes, and any other exotic structured product a client may want to put on that pertains to rates. The biggest product they focus on is YCSO given the recent popularity in rates markets due to volatility of rates in the current hiking cycle, although midcurves and forward vols are also popular. But if you wanted to just hedge rate vol, you would go to the swaption desk.

Instead, YCSO is an option on a curve trade and hence you can hedge out or speculate on curve vol (the volatility of a curve trade such as 2s10s, 2s30s, 5s10s, 5s30s and so on). I don't want to get too into the technicals here but curve vol will roughly be equal to the square root of the following quantity: volatility of the short tenor squared + volatility of the long tenor squared - 2*short tenor vol*long tenor vol*correlation between short and long tenors. Hence, a big component of YCSOs, from a pricing standpoint depends are the implied correlations between the two points on the curve which changes through time as the volatility changes. This product can be delta hedged with a combination of swaptions and swaps. An understanding of convexity adjustments and constant maturity swaps (CMS) are imperative. You can find brief overviews of the product here and here but these links barely scratch the surface.

So yeah, definitely very technical in terms of education; you could expect either right out of Harvard supporting the main trader or STEM PhD (a masters in financial engineering would also suffice). You should be able to live and breath derivatives in your sleep to get a seat on this desk and definitely know how to code at a high level. It's not uncommon to see very smart MDs code on their free time to build tools for strategies or delta/vega hedgers, machine learning models, etc. 

Best banks are probably the first large BBs that come to your mind. Exit ops not much - either switch to another derivs desk or move to buyside to trade these (or similar) products. Less appealing alternatives would be working as a desk quant / QR or middle office quant.

Traders make markets in these products, understand client flows, keep up with market commentary on what clients are trading / where curve vol is headed. If a client puts on an exotics trade, they'll need to be able to hedge the risks associated with the product which they can do with swaptions, swaps, futures, and so on. They might take slight leans in their positions but mostly this role is focused on execution. Typically the exotics desks, like other IR derivs desks, will have desk analysts that support the trader with ideas and ad hoc analytics. For deeper computing power in pricing/analysis, quant research (QR) will also support this desk so traders will generally have close contact with them, along with the sales people who pitch these products to the clients and rates technology teams. Client communication on their questions, ideas, or strategies will also be involved. 

Aug 29, 2022 - 4:51am
ben87, what's your opinion? Comment below:

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