Exotic Options

A sound understanding of exotic options is essential in order to exploit the opportunities they present. This course will help you understand the complexities of exotic options and teach you a wealth of practical tools for using exotics in a pricing, hedging and trading context.

Course Highlights

A practitioner-focused guide to pricing, hedging and risk management

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

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
22 - 24 Nov 2010	£ 2299		-

Course Programme

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