Exotic Options
Understand
the intricacies of exotic options, and learn exactly how to use
them in practice.
Course Highlights
The course was interesting and relevant to my job. The course leader is very good at explaining the subject matter and motivating the participants
A.M., Edison Trading
Learn about the theory and practice of a broad spectrum of exotic options and discover how to:
- Identify situations where exotic options should be used
- Develop pricing methodologies for exotic options
- Estimate volatility and correlation and assess their impact on pricing exotics
- Recognise the potential benefits and risks inherent in using each product
- Implement hedging and trading strategies
For details of the course trainer, please download the course brochure
Booking Information
| Dates | Prices | Book This Course | Discount |
|---|---|---|---|
| 09 - 11 Nov 2009 |
£ 2199 |
 |
-
|
Course Programme
The course was interesting and relevant to my job. The course leader is very good at explaining the subject matter and motivating the participants
A.M., Edison Trading
The workshops were all extremely relevant to my job and what I wanted to gain from the course
M.T., Royal Bank of Scotland
Experience and knowledge of speakers was excellent
D.B., Goldman Sachs
A Primer on Option Valuation Techniques
Developing a pricing methodology- An introduction to option pricing theory
- Numerical methods: (Binomial, Trinomial) Lattice models
- 'Arbitrage-free' derivation of binomial option pricing model
- Modelling Path dependent option pay-offs
- The Black-Scholes approach
- Geometric Brownian motion - description of the stochastic price process
- Boundary conditions in option valuation
- Advantages and shortcomings of Black-Scholes
- Assumptions and model inadequacies
- Monte Carlo simulation
Workshop: Implementation of binomial pricing model: Application to European and Path dependent (American) options
Volatility Analysis
In this session, we evaluate the Black Scholes assumptions and consider volatility estimation methods
- Critical analysis of the Black-Scholes model
- Rationalising distortions to the Black-Scholes model framework
- Non-continuous hedging
- Volatility smiles, skews and volatility surfaces
- Kurtosis
- Leverage, Change in Greeks resulting from large standard deviation moves in underlying
- Computing volatility: analysis of data samples; sample sizes; weighting sample data
- Forecasting volatility: GARCHT techniques
- Stochastic volatility
- Volatility term structure effects
- Mean reversion
Option Risk Characteristics
Overview of option risk sensitivities and how they are harnessed in trading strategies
- Option price sensitivities - the "Greeks" ( Delta, gamma, vega, theta, rho)
- Delta hedging
- Gamma and Vega trading - volatility trading
- Interrelationships between option price sensitivities
- Higher order greeks
- Vega convexity
- Active management of portfolio delta, gamma and vega risks
- Assumptions and inadequacies of Vanilla option hedging
- Examination of theoretical hedging assumptions - impact on pricing
- Put-Call parity
- Arbitrage trading: Conversions and Reversals; synthetic forwards and options
- Trading strategies using options
- Risk Reversals
- Spreads
- Calendar trading
- Exploiting risk sensitivities as a function of time
- Straddles, Strangles and Butterflies
The Mechanics of Exotic Options
- Exotic Option classification
- Pay-off structure
- Path dependency (strong and weak)
- Exercise timing
- Order
- Decision dependency
- Multivariate dependencies
- Motivations and applications of exotic options
- Vanilla options and their limitations
- Customised and complex pay-off structures
- Flexibility
- Risk management applications; managing corporate exposures
- Cost comparison (Exotics versus vanilla alternatives)
- End user (corporate treasury, fund manager) sophistication
- When are simple option strategies optimal?
Path Dependent Options - Barrier Options
These options become activated/extinguished when an underlying price crosses a barrier
- Overview of types (knock-ins and knock-outs; single and double barriers)
- Pricing and valuation of Barrier options
- Numerical (tree) methods of Barrier option pricing
- Pricing double barrier options and other variants
- Impact of varying barrier parameters on performance, cost
- Barrier level
- Monitoring frequency
- Volatility term structure shape
- Pricing using volatility surface
- Hedging Barrier options
- Risk sensitivities and their characteristics
- OTM Barriers
- Replication/Hedging
- Change in Greeks through Time
- ITM Barriers
- Replication/Arbitrage bounds
- Change in Greeks through Time
- Double Barriers
- Higher order sensitivities
- Applications of Barrier Options
- Trading and hedging applications (practical examples and term sheets)
- Rationale for barrier options - when to use and when not to use barrier options
- Variations of Barrier Options
- Rebate
- Parisian Options
Workshop: Barrier Options Workshop
Path Dependent Options - Average Rate Options
Asian options - The payoff of the option is determined by the average price
- AROs (Average Rate Options) and ASOs (Average Strike Options)
- Mechanics of average rate options
- Geometric vs. Arithmetic averages
- Pricing of the Asian options:
- Continuous averaging and discrete averaging
- Partial averaging,; weighted and unweighted samples
- Analytical models
- Numerical solutions
- Hedging Asian options
- Risk sensitivities
- Dynamic replication using Vanilla options
- Practical Applications of Asian Options
- Hedging corporate exposures with Asian options
- Practical examples of the motivations and rationale for the use of Asian options
- Asian Tails; Embedded Asian options - e.g. Structured equity linked bonds
Workshop: Asian Options Workshop
Path Dependent Options - Lookbacks, Ladders and Ratchet (Cliquet) Options
- Definitions
- Pay-off types
- Fixed and floating strike
- Discrete and continuous sampling of maximum/minimum
- Pricing and valuation issues
- Numerical (tree) methods
- Motivations for use - applications and examples
Digital (Binary) Options
Digital options - The payoff of the option is discontinuous
- CASH or NOTHING Calls/Puts
- ASSET or NOTHING Calls/Puts
- Pricing of digital options
- Adapting the Black-Scholes analytical approach
- Hedging and risk management of digital options
- Delta hedging; Risk Management Problems
- Gamma, Vega, theta behaviour
- Replication using Call spreads
- Inadequacies of Black-Scholes theory in practice
- Applications of digital options
- Trading applications - motivations for using digital options
- 'Range' structured notes
- Digital caps and floors
- Term sheet examples
- Contingent Premium Options
- Pricing methodology
- Applications - rationale for use in hedging and trading
- Comparison to Vanilla options
Quanto (Quantity Adjusted) Options
Quantity adjusted options - Pay-off of underlying asset is paid in different currency
- Quanto derivatives
- Pricing quanto derivatives
- Replication approach
- Analytical approach
- Pricing parameters - correlation and volatility inputs
- Hedging quanto derivatives
- Correlation risk
- Applications of Quanto options
- Foreign Equity/Domestic Currency Options
- Equity-linked FX Options
- Structured notes with quantoed pay-offs
Rainbow (Multi-Asset) Options
- Rainbow options
- Basket options
- Spread options
- Outperformance options
- "Best of", "Worst of" options
- Pricing methodologies
- Single factor and multi-factor approaches
- Correlation effects
- Theoretical difficulties with modeling underlying
- Impact of basket parameters (volatility, correlation) on pricing
- Hedging rainbow options
- Management of Greeks
- Applications - Portfolio management examples
- Diversification
- Hedging; Dynamic asset allocation
- Structured notes
- Comparison to vanilla option alternatives
Embedded Exotic Option Structures
The application of exotics to the creation of structured notes analysed with the aid of numerous examples and real-life term sheets
- Use and applications of embedded derivatives
- Rationale for issuers and investors
- Yield enhancement - creating new asset structures
- Guaranteed returns; principal protection
- Risks of structured debt instruments:
- Market risks
- Counterparty risk
- Other risks (e.g. reputational risk; suitability)
- Financial engineering; creating and analysing structured debt
- Analysis of a range of structured notes:
- Range FRNs (FX and LIBOR based)
- Capital guarantee Index linked bonds
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