Mastering Exotic Options Training Course
Course Highlights and Agenda
This highly practical course will enable you to learn from a true expert in his field. Through presentation, case studies and group discussion you will gain an insight into a wide variety of current topics. Key concepts will be retained through the use of many illustrative examples. In particular, we will use many spreadsheet examples throughout the training as well as 'stories from the field' to illustrate the relevant points and help you make the transition from theory to practice with outstanding results.
Scroll down for agenda or book onto this course.
Pricing Methods under the Black Scholes Assumptions
A spreadsheet will be shown and given to the delegates which demonstrates how all these methods are equivalent
- General approaches to pricing options
- Closed form solutions
- Numerical techniques (quadrature, iterations)
- Monte Carlo approaches and variance reduction techniques
- Differential equations
- Trees (binomial, trinomial)
- The advantages and disadvantages of the various methods
Excel Workshop: Using the various methods
Developing a Framework for Accurate Risk Measurement
Sensitivity analysis ("Greeks"), scenario analysis and value-at-risk
- How to quantify the risk of an option
- Delta: sensitivity to the asset price
- Gamma: sensitivity of delta to the asset price
- Vega: sensitivity to volatility
- Theta: time premium
- Rho: sensitivity to interest rates
Excel Workshop: Calculate the various Greeks and determine their impact. How are they used in practice? Which are important in specific situations?
Advanced Greeks for Exotic Options
- Vomma and Vanna
- How they are used
- Their importance for barrier options
Value-at-Risk of a Portfolio
- Definition of VaR
- Types of VaR
- Extensions of VaR
PC Exercise: Delegates will calculate the VaR of a sample portfolio using these methods
Scenario Analysis & Stress Testing
- What scenarios should you look at?
- Reasonable yield curve shifts
Discussion: New research – The rise of the humans
State-of-the-art techniques in volatility estimation
- Historical volatility
- Implied volatility
- Different methods of volatility estimation
- Volatility smile and smirk
- Tree with a volatility term structure
- Volatility insensitive products
- All or nothing
- Practical uses of binary options
- Contingent premium structures
- Is this hedging or gambling?
Forward starting options struck at-the-money at some future date
- Applications and delayed options for employee stock incentive plans
- Pricing of the delayed option as the present value of a normal option
- Importance of forward / forward volatility
- Delayed options and building a ratchet swap
Cliquet or Ratchet Options
Allows you to lock in profits at fixed points in time
- Definition and characteristics of cliquet options
- Pricing and hedging of cliquet options
These options become activated / extinguished when an underlying price crosses a barrier ″
- Is it true that a knock-out plus a knock-in equals a European?
- 'Nice' barriers vs. 'nasty' barriers
- Discretely monitored barriers
- Pricing of barrier options
- Can barrier options be priced with trees?
- Legal issues: how can an investor be sure whether a barrier was touched?
- Discretely monitored barriers
- Hedging barrier options
- Static hedging vs. dynamic hedging
Excel Workshop: Barrier option pricing
Double Barrier Options
These options expire worthless if the underlying does not stay within a zone
- Why are they not like two barrier options?
- How can they be priced?
- The effects of double barrier options on the spot market
Asian Options (Average Price)
Options on the average
- The 'Asian' style options: what are they?
- Why they make sense
- How come their price is so low – reduced volatility of the average
- Geometric vs. arithmetic average
- Importance of the "average so far"
- Pricing of the Asian options:
- Continuous averaging and discrete averaging
- Hedging Asian options
Equity Linked Forex Options (Quanto)
A combination of equity and forex options rolled into one
- The different types of options (quanto, flexo etc)
- Pricing of quantos
- Hedging quanto options
The Term Structure of Interest Rates
We discuss many types of interest rates and how they are derived from each other
- Par bond yield curve, the zero coupon curve, forward curve
- Corporate curves and spreads
- What does the spread really measure?
- The Libor interest rate curve
- Does volatility affect the curve?
- Derivation of one curve from another
- Bond stripping and reconstitution
- Gap and multigap analysis
Excel Workshop: convert from one curve to another
Fixed and Floating Rate Instruments
Fixed and floating rate instruments are discussed and compared in this section
- Some popular indices
- Inverse floating rate notes
- How fixed coupon bonds are related to interest rates
- How are floating rate notes related to interest rates
Duration and Convexity
Duration and convexity analysis
- The case of the "Century Bonds"
Interest Rate Products
We will introduce the following products with specific examples and discuss how they are priced and hedged
- Forward Rate Agreements (FRAs)
- Caps and floors
- Collars and zero cost collars
- Interest rate swaps
- Equity swaps
- Currency swaps
Excel Workshop: Build an Excel model to analyse various interest rate products
Interest Rate Models: A Survey
For interest rate options, there are many models currently in use. Rather than focus on the precise "academic" assumptions and mathematical formulas, we look at the practical issues: advantages and shortcomings of the models. How are they calibrated? How difficult are they to implement and use?
- Why are models important?
- The popular models
Interest Rate Models: How Are They Used in Practice?
- Choice of models
- Should you purchase software or develop it internally?
- The calibration of a model
From Concept to CUSIP
Following a structured note on Wall Street as it is created
- The sales team identifies a possible need
- The desk works to come up with ideas
- How do we hedge the risks?
- Convincing the risk committee
- Legal and tax departments
- The use of a product prototype
- Do we need to reprogramme our entire risk management system?
The CBOE New VIX Index
- How is it defined?
- What are "log options" and how are they related to the VIX?
- What are the implications of the new methodology?
- Will it be accepted throughout the world?
- New Research: Variance Swap Volatility Dispersion
Trading Volatility – The New Products
- Volatility swap
- Variance swap
- Corridor variance swap
- Options on volatility/variance
- Futures on realised variance
- Options on the VIX and similar indexes
- How can these products be used to:
- 'Take a view'
- Hedge an exposure
- Connections between the various volatility products
- How do the dealers hedge these products?
- Efficient hedging vs. inefficient hedging
Structured Notes and Reverse Engineering Workshop
In this workshop, we examine several structures. For each structure we cover:
- Definition - what is the structure called
- Example - using a real life example
- Motivation - why would a borrower issue the note? Why would an investor purchase the note? Under what conditions, views or interest rates?
- Pricing - how is this structure priced?
- Sensitivity - how will the note perform under various scenarios (parallel shifts, flattening or steepening of the yield curve, etc.)? What about volatility swings?
- Hedging - how can the bank hedge the option embedded in the note? What solution can the bank provide to a client who has purchased this structure?
- Alternatives - what other structures are there which offer similar behaviour under various possible market conditions?
- The future of the exotic options market
What You Will Learn
"Very good course. It was apparent that he knows the subject inside out. It was great that he had a lot of practical knowledge and not only theory."
"It's a good practical course with real apllications, real examples, real world & what are the current trends-new products."
"Much better than other courses attended, I was impressed by the presenter and content. The risk profile examples were excellent"
"Izzy's knowledge of product is phenomenal."