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:
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Learn the best practice techniques to pricing and hedging exotic options illustrated with practical case studies and simulations
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Get to grips with all the major risk management components
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Master the complexities of a wide rage of exotics, including barrier, Asian, equity-linked, digital and ratchet options
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In addition to uses in foreign currency, you will cover interest rate options and derivatives on volatility
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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 |
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|
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
