Mastering Exotic Options Training Course

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)
  - Approximations
• 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

Volatility

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

Digital/Binary Options

• All or nothing
• Practical uses of binary options
• Contingent premium structures
• Is this hedging or gambling?

Delayed Options

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

Barrier 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

• Duration
• Convexity
• 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
• Marketing
• Pricing
• 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?

Final Discussion

• Conclusions
• The future of the exotic options market

A practitioner-focused guide to pricing, hedging and risk management of exotic options.

Attend this intensive course and you will:

• Learn the best practice techniques to pricing and hedging exotic options illustrated with practical case studies and simulations
• Get to grips with all the major risk management components
• Master the complexities of a wide rage of exotics, including barrier, Asian, equity-linked, digital and ratchet options
• In addition to uses in foreign currency, you will cover interest rate options and derivatives on volatility
• Gain knowledge from one of the leading pioneers in his field; the instructor is a member of the
• New Product Committee at the Chicago Board Options Exchange (CBOE) and is noted for his cutting-edge knowledge in the exotics arena