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Options School (Modular Course)
US$7,150.00
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The Modular based 'Options School' provides a comprehensive and detailed analysis of options looking at pricing, risk characteristics, and their dynamic behaviour in the context of the management of a portfolio of options. Attend both modules on 16-20 June 2014 and save US$1,690! Just contact us at training@euromoneyasia.com to register and enjoy this special offer.

  • Course Instructor

    The course director is a highly experienced derivatives consultant who has held senior positions in a number of major financial institutions in London and New York. He lectures internationally on many aspects of derivatives and fixed income markets and brings a unique practitioner’s perspective and insight to financial training in the areas of Derivative Instruments and Markets, Portfolio Strategy and Risk Management.


Course overview

'Options School' provides you with a comprehensive and detailed analysis of options – pricing, risk characteristics, and their dynamic behaviour in the context of the management of a portfolio of options. The course is a combination of proprietary risk strategies combined with flow trading and market making responsibilities. The primary focus is to examine the dynamic risk characteristics of options from a trader/market maker’s perspective, addressing issues at the sales - client interface, operating in a professional and pro-active capacity in advising and executing client orders.

Module 1: Options Trading Workshop

This 3 day workshop gives delegates a comprehensive and practical analysis of options – pricing, risk characteristics and risk management. It explains the varied applications of options in corporate exposure management, portfolio hedging and tactical asset allocation, trading and investment applications, and in the engineering of structured products. This course evaluates options from a number of different perspectives – from a trader or risk manager’s point of view, focussing on the dynamic risks of options and the implications for their management, as well as from a sales and end user perspective, to gain understanding of the many strategies in which options are used to efficiently manage risk or monetise specific views and expectations, or achieve specific objectives.

The agenda covers all of the main asset classes – FX, equity, rates and commodities, and in addition examines closely related volatility products – variance swaps and listed volatility futures. The course assumes a general familiarity with derivative instruments and basic mathematical fluency.

Summary of course content

  • Build option pricing and valuation models
  • Gain practical understanding of option risks and dynamic hedging
  • Design option strategies for hedging and risk management
  • Understand how options can be used to monetise market views
  • Examine volatility trading and strategies used to exploit volatility expectations
  • Use options in financially engineered structured products
  • Understand FX, interest rate, equity and commodity options

Module 2: Advanced FX Options and Structured Products

The agenda of this course will offer delegates a thorough and practical understanding of currency option pricing and risks and will explain how options can be used in directional and non-directional strategies, together with their dynamic hedging implications.

The programme will also focus on analysing, structuring and decomposing hedging, trading and investment strategies utilising both vanilla and exotic options. Delegates will construct and examine a wide variety of directional and non-directional strategies, formulate strategies to meet client exposure management and other objectives, and decompose a range of structured option strategies into their component parts. The impact of changing market conditions on the pricing and performance of these strategies will also be examined.

Particular emphasis is placed on the dynamic interaction between option price determinants, the impact on portfolio risk of higher order risk properties of vanilla and exotic options (e.g. Vanna, Volga) and their pricing and risk management. Particular attention will be placed on higher order volatility risks Vanna and Volga, and their management within portfolios of vanilla and exotic option types.

The programme will then focus on exotic options and a range of the more commonly executed structured FX products as well as their pricing and risk characteristics, in order to understand the motivations and rationale for their usage in a variety of different hedging and trading applications.

Computer Exercises

The training will comprise classroom-based teaching combined with computer based (Excel™ based) simulations and exercises. The course assumes a general understanding of ‘vanilla’ equity derivative instruments and does require basic mathematical fluency.

Attend this intensive 2-day course and gain a comprehensive and detailed analysis of foreign exchange option derivatives. In particular, you will learn:

  • The pricing, risk characteristics, and the dynamic behaviour of FX options in the context of the management of a portfolio of options
  • How to analyse FX vanilla and exotic options
  • To construct pricing an valuation models for currency option
  • The use of FX options in a variety of directional and non-directional strategies
  • Different hedging and trading applications for FX options

Methodology

This course combines classroom based teaching with computer based simulations and computer based exercises, utilising a range of spreadsheet based software. Delegates will spend much of the course completing computer based case studies and exercises that replicate the day to day realities of financial markets and market behaviour. Pre-course reading material will be distributed to delegates prior to attendance at the course.

PLUS: Delegates will receive free copies of option pricing and risk management software for their own use after the programme.

Prerequisite

The course assumes a general understanding of 'vanilla' equity derivative instruments and requires basic mathematical fluency.

Who should attend this training course?

  • Traders and dealers
  • Derivatives sales personnel
  • Structurers
  • Risk managers and risk controllers
  • Corporate account officers
  • Asset managers
  • Corporate treasury personnel

You can attend the comprehensive course which runs from 16-20 June 2014 and save US$1,690 or pick from the following modules.

Options School (Modular Course)
16-20 June 2014, Singapore

Module 1: Options Trading Workshop
16-18 June 2014, Singapore

Module 2: Advanced FX Options and Structured Products
19-20 June 2014, Singapore

Supporting publication:

 

Options School: M1 - Options Trading Workshop

Day 1

Option valuation – principles and option pricing models

  • Fundamental concepts and properties of options:
    • Key terminology
    • Put-Call parity
  • Intuitive understanding of option pricing principles and price determinants
    • Intrinsic value and time value
    • European styles vs. American style options
  • Continuous stochastic processes; Brownian motion
  • Analytical models: The Black-Scholes option pricing framework
  • Underlying concepts, assumptions and derivation of the Black-Scholes pricing model
  • Advantages and shortcomings of the Black-Scholes framework
  • Rationalising distortions to the Black-Scholes model framework
    • Discontinuous market behaviour
    • Stochastic volatility
    • Imperfections in modelling assumptions
  • Numerical methods: Binomial and trinomial lattice models
  • Arbitrage-free derivation of a generalised binomial model
  • Valuing American and other path dependent options
  • Simulation methods of option valuation – Monte Carlo simulation

Case study: Building option pricing models; valuation of European, American option styles.

Volatility

  • Understanding volatility; the role of volatility in option pricing
  • Volatility as an 'asset class'
  • Historic, implied and realised volatility measures
  • Volatility surfaces
    • Volatility smiles and skews
    • Volatility term structure effects
  • Rationalising and interpreting volatility surfaces
    • Skewness and Kurtosis
    • Vanna-volga approach to constructing volatility surfaces
  • Volatility analysis
    • Volatility relative value analysis (Implied vs. realized)
    • Volatility cones
    • Skew interpretation and analysis
  • Local volatility models
  • Stochastic volatility modelling
    • Heston stochastic volatility model

Option risks; hedging and risk management of option positions

  • First order price risks: Delta, vega, theta, rho, phi
  • Delta hedging and risk analysis
    • Dynamic delta risk management
    • Delta hedging an option portfolio
    • Limitations and risks inherent in delta hedging
      • PIN risk
      • Expiration effects
      • Liquidity effects
  • Gamma
    • Interpreting gamma
    • Gamma characteristics of in-, at- and out-of-the-money options
    • Long and short gamma – risks and opportunity
    • Impact of gamma on delta hedge management
    • Implied vs. realized volatility exposure
    • 'Shadow' gamma
    • Maximising profitability from Gamma trading and management; Gamma 'scalping'
  • Vega
    • Implied volatility risk
    • Vega characteristics
    • Smile and skew risks: sega and rega
  • Theta; option price time decay
    • Theta as cost of carry
    • Inter-relationship between theta, gamma
  • Rho; interest rate sensitivity
  • Understanding and actively managing interrelationships between option price sensitivities
  • Active management of portfolio delta, gamma and vega risks
  • Other higher order risks
    • Delta time decay (charm)
    • Gamma sensitivity speed, colour)
    • Vanna and volga risks
    • Management of higher order risks
    • Risk reversals in management of skew (vanna) risk
    • Butterflies in management of smile (volga) risk
  • Limitations of option 'Greeks'
    • Discontinuities in market price behaviour, option risks
    • Expiration trading
    • Strategies for managing risk when 'Greeks' experience large, discrete changes
    • Stress testing and portfolio scenario analysis; identifying potential future risks

Case study: Dynamic management of option risks in a single option position/portfolio context; Delta hedging and the analysis of trading p/l over a trading horizon. Exercise will involve managing position gamma in order to attempt to maximise profitability.

Day 2

Option strategies – hedging and risk management

  • Risk reduction strategies with options
  • Using options in corporate FX, rates and commodity risk exposure management
  • Option based hedging strategies in portfolio management
    • Simple hedging strategies
      • Vanilla Call/Put hedges
      • Tailoring client objectives and constraints using strike variation
      • Costs and benefits of options vs. outright forward hedges
    • Structuring tailored hedges with options
      • Zero cost collars/cylinders and range forwards
      • Option spreads and participating forwards
      • Seagulls
      • Extendible flat forwards
  • Tailoring structures to meet client expectations, objectives and constraints:
    • Strike selection
    • 'Pain thresholds' – minimum/maximum strike levels
    • Budget constraints: zero cost strategies
    • Impact of market factors (swap points, volatility surfaces) on economics of strategies
    • Incorporating covered option sales into hedging strategies
  • Rationale for using non-linear (options) vs. linear hedges
    • When is it rational to use options for hedging?
    • Comparative analysis of risk management strategies
    • Advantages/shortcomings of risk management solutions: cost/benefit analysis
    • Tailoring strategies to client risk management policy, constraints and expectations
    • Using options in hedging contingent risks

Case study: Delegates will conceive, structure and price a range of vanilla and structured option based hedging strategies to meet varying objectives and constraints. Delegates will be presented with a range of different 'client' circumstances nd background information (market data, financial reporting data, additional anecdotal client information) and will be responsible for analysis and evaluation, preparation and pricing of a number of proposed alternative hedging strategies.

Option strategies – trading, investment and arbitrage strategies

  • Overview of trading applications of options
    • Directional trading
    • Volatility trading
    • Distinguishing vega from gamma trading strategies
    • Higher order volatility trading strategies
      • Convexity trading
      • Dispersion trading
    • Arbitrage strategies
    • Limited vs. unlimited risk strategies
    • Premium generation (yield enhancement) strategies
  • Put-Call parity and arbitrage strategies
    • Conversions and reversals
    • Synthetic forwards
    • Box spreads
  • Directional trading: vertical spreads
    • Call and Put (Bull and Bear) spreads
    • Trading rationale
    • Pricing; impact of skew
    • Risk characteristics
      • Delta hedging
      • Gamma
      • Skew risk
  • Volatility trading strategies
  • Calendar spreads
    • Rationale
    • Volatility term structure (calendar skew) impact
    • Sensitivities; volatility/time decay exposure
  • Straddles and strangles
    • Structure and rationale
    • Risk characteristics
    • Vega and gamma trading
    • Skew and smile effects
    • Dynamic risk management
  • Risk reversals
    • Skew trading using risk reversals
    • Using risk reversals to manage vanna (skew) risk
  • Butterflies
    • Volatility trading with butterflies
    • Using vega neutral butterflies to manage and trade smile risk
    • Management of volga risk
  • Yield enhancement strategies
    • Over and under-writing strategies
    • Rationale for covered call/put strategies
    • What are the risks in premium generation strategies?
    • What is an optimal tenor/strike for yield enhancement strategies?
  • Dispersion trading
    • Correlation trading
    • Monetising implied vs. realised correlation
    • Practical challenges in dispersion trading
    • Rationale for dispersion trading

Embedded option strategies

  • Embedding options into structured products
  • Long and short volatility structured products
  • Yield enhancement structured products
    • Callable bonds and notes
    • Reverse convertibles
    • Inverse FRNs
  • Capital guaranteed notes

Interest rate options

  • Generic European style interest rate caps and floors
  • Conventional pricing methods: Black (1976) model
  • Why do markets use this model? Advantages and disadvantages
  • Calibration to a volatility surface
  • Pricing and hedging caps and floors
    • Stochastic term structure models (BDT, LIBOR market model)
    • SABR model
  • Risk management
    • Delta hedging caps and floors
    • Gamma and vega management; risk bucketing
  • Practical applications
    • Asset and liability risk management
    • Embedded caps and floors; capped FRNs, minimax FRNs,
    • Reverse FRNs
  • Swaptions
    • Pricing swaptions: Black vs. term structure models
    • European and Bermudan style swap options
    • Calibration of swaption volatility surfaces
    • Compatability and consistency with Cap/Floor volatilities
    • Option embedded swaps
      • Extendible and cancellable swaps (European, Bermudan styles)

Day 3

FX options

  • Market conventions, terminology, price quotation quotation of FX options
  • Adapting the Black-Scholes framework to FX options: Garman-Kohlhagen (1983) model
  • Building volatility surfaces for FX options: risk reversals and butterflies
  • Accounting for stochastic volatility
  • Using the Vanna-Volga method to fit volatility surfaces
  • Stochastic Volatility (SV) modelling techniques for FX options
  • Applications of FX options in hedging currency exposure:
    • Transaction (cash flow) and translation (balance sheet) exposures
    • Hedging forecast and contingent FX risk exposures
  • Common vanilla option hedging strategies:
    • Zero cost collars
    • Participating forwards, Seagulls etc.
    • Effect of risk reversals on importer and exporter hedging strategies
  • Trading strategies
    • Directional trading strategies
    • Volatility trading strategies
    • Risk reversals
    • Butterflies - Vega convexity strategies
  • Exotic FX options
    • Barrier options, digitals, Asian option styles
  • Structured barrier option strategies
    • Barrier structures (forward plus)
    • Knock-in cylinders
    • Knock-out forwards
    • Knock-out collars

Equity options

  • European and American styles
  • Single stock and index options
  • Incorporating dividend assumptions into pricing models
  • Correlation dependency of basket and index options
  • Analysing relative value of index options: Implied vs. realised correlation patterns
  • Monetizing implied vs. realised correlation discrepancies: dispersion trading
  • Practical implementation of dispersion trading strategies

Commodity options

  • Pricing of commodity derivatives:
    • Backwardations and contango markets
    • A breakdown of arbitrage-free pricing constraints?
    • How can conventional pricing methods be adapted to commodity markets
    • Modelling forward curves for energy and cyclical commodity markets
  • Pricing models for commodities:
    • Stochastic modelling approaches
    • Mean reversion and seasonality in spot and forward prices
    • Multi-factor jump-diffusion models
  • Commodity linked structured products
    • Investment rationale
    • Principal protected structures
    • Hybrid structured products

Volatility and variance products

  • Volatility and variance swaps
    • Mechanics of variance swaps
    • Pricing and hedging
    • Skew sensitivity
    • Listed option strike availability
  • Volatility (VIX, VSTOXX) futures
  • Conditional and corridor variance swaps
    • Definition; specifications
    • 'Upside' and 'Downside' variance swaps
    • Impact of skew on pricing; hedging considerations
  • Uses and applications of variance swaps
    • Volatility trading
    • Dispersion trading
    • Managing conditional volatility exposure (skew risk)
    • Convexity trading

Case study: Pricing variance swaps; calculation of profit/loss for unconditional and conditional variance swaps.

Options School: M2 - Advanced FX Options & Structured Products

Day 1

FX Option Pricing and Valuation – Models and Methods

  • Standard market models: adapting the Black-Scholes framework to currency options – Garman-Kohlhagen (1983)
  • Constructing volatility surfaces for FX spot rates; risk reversals and butterflies
  • Alternative model implementation methods
  • Numerical methods and simulation techniques (Monte Carlo etc.)
  • Accounting and modeling for Stochastic Volatility
    • Vanna-Volga approach to constructing volatility surfaces
    • An explanation of sticky strike and sticky delta approaches
    • Quantifying the value of Volga, vanna risks
  • Local volatility modeling (Dupire et al.)
    • Problems with implementation
    • Hedging (Delta, Vega inaccuracies)
  • Stochastic volatility (SV) modeling techniques for FX options
  • Modelling cross rate options
    • Constructing cross rate volatility surfaces
    • Limitations of using triangulation method
    • Cupola functions
    • Local (LV) and stochastic volatility (SV) modeling approaches
    • Determination of correlation parameters; correlation skew

Applications of Vanilla FX options in Currency Risk Exposure Management

  • Risk reduction (Hedging) strategies with options
  • Using options in corporate FX risk exposure management
    • Simple hedging strategies
      • Vanilla Call/Put hedges
      • Tailoring client objectives and constraints using strike variation
      • Costs and benefits of options versus outright forward hedges
    • Structuring tailored hedges with options
      • Zero cost Collars/Cylinders and Range Forwards
      • Option spreads and Participating Forwards
      • Seagulls
      • Extendible flat forwards
  • Tailoring structures to meet client expectations, objectives and constraints:
    • Strike selection
    • 'Pain thresholds' – minimum/maximum strike levels
    • Budget constraints: zero cost strategies
    • Impact of market factors (swap points, volatility surfaces) on economics of strategies
    • Incorporating covered option sales into hedging strategies: finding client target or 'indifference' levels
  • Rationale for using non-linear (options) Vs. linear hedges
    • When is it rational to use options for hedging?
    • Comparative analysis of risk management strategies
    • Advantages/shortcomings of risk management solutions: cost/benefit analysis
    • Tailoring strategies to client risk management policy, constraints and expectations
    • Using options in hedging contingent and forecast exposures

FX Exotics

  • Exotic Option classification
  • Pay-off structure
  • Motivations and applications of exotic options

Exotic Options - Barrier Options

  • Overview of types (knock-ins and knock-outs; reverse knock-in/out)
    • DOWN and OUT/IN
    • UP and OUT/IN
  • Pricing and valuation of Barrier options
    • Analytic solutions
    • Parity relationships (European = knock-out plus a knock-in)
    • Numerical methods of Barrier option pricing
    • Pricing double barrier options and other variants
    • Impact of varying barrier parameters on performance, cost
  • Hedging Barrier options
    • Risk sensitivities and their characteristics
    • Static replication of barrier option risks
    • Managing Greeks close to barriers; managing sign changes
  • Risks of hedged positions
  • Higher order sensitivities
    • Vanna, Volga sensitivities
    • Skew risk
    • The importance of higher order sensitivities in the management of barrier options
  • Applications of Barrier Options
    • Trading and hedging applications
    • Trading optionality with barrier options – when to use and when not to use barrier options
    • Structured Barrier option strategies:
      • Forward plus/extra
      • Knock-in cylinders
      • KO Forwards
      • KO Collars
      • FX TARNs and Target Redemption Forwards

Case Study: Barrier options workshop; construction of trading strategies

Day 2

Digital and One Touch Options

  • CASH or NOTHING Calls/Puts
  • 'One Touch' digitals and Rebates
  • Contingent premium 'pay later' options
  • Pricing of digital options
  • Hedging and risk management of digital options
    • Delta hedging; Risk Management Problems
    • Dicontinuous Greeks
    • Pricing using a Volatility surface
    • Gamma, Vega, theta behaviour
    • Replication using spreads, risk reversals

Quanto (Quantity Adjusted) Options

  • Quanto derivatives
  • Pricing quanto derivatives
    • Replication approach
    • Analytical approach
    • Pricing parameters – correlation and volatility inputs
  • Hedging quanto derivatives
    • Correlation risk management
  • Applications of Quanto options
    • Hedging FX translation exposure
    • Foreign Equity/Domestic Currency Options
    • Structured notes with quantoed pay-offs

Average rate (Asian) options

  • Mechanics of average rate options
  • Pricing and risk management characteristics
  • Motivations and rationale for the use of Asian options – Hedging with Asian options (Practical examples)

Second Generation Exotic Options

  • Exotic Barrier options
    • Digital barriers
    • 2KO and KIKO barriers
    • Parisian barriers
    • Outside barriers
  • Corridors, Faders and Accumulators
  • Multi-asset options
    • Spreads and baskets
    • Best-of and Worst-of options

Structured FX Products

  • Structured FX hedge instruments
    • Barrier structures (Forward plus)
    • Knock-in Cylinders
    • Knock-out Forwards
    • Fader and Accumulator Forwards
  • Currency Linked Notes
    • Principal protected and non-protected structures
    • Dual Currency Deposits
    • Reverse Dual Currency Notes
    • Power Reverse Dual Currency Notes (PRDCs)
  • Range Accruals
    • Single and basket structures
    • One touch structures
  • FX hybrids

Case Study: Structuring, pricing and risk management of a range of FX structured products

Option Risks; Hedging and Risk Management of Vanilla and Exotic Options

  • First order price risks: Delta, vega, theta, rho, phi
  • Delta hedging and risk analysis
    • Dynamic risk management using delta
    • Delta hedging an option portfolio
    • Limitations and risks inherent in delta hedging
      • PIN risk
      • 'Sticky strike' effects
      • Expiration effects
      • Discontinuities; corrections
  • Gamma; 2nd order option price sensitivity
    • Interpreting gamma
    • Gamma characteristics of in-, at- and out-of-the-money options
    • Long and Short Gamma – risks and opportunity
    • Impact of Gamma on Delta hedge management
    • Implied Vs. realized volatility exposure
    • Gamma and 'Shadow' Gamma
    • Maximising profitability from Gamma management
  • Theta; option price time decay
    • Theta as cost of carry
    • Inter-relationship between Theta, Gamma
  • Vega; implied volatility risk sensitivity
  • Rho; Interest rate sensitivity
  • Understanding and actively managing interrelationships between option price sensitivities
  • Active management of portfolio delta, gamma and vega risks
  • Higher order risks
    • Delta time decay (Charm)
    • Gamma sensitivity (Speed, Colour)
    • Using risk reversals and butterflies in management of skew (Vanna) and smile (Volga) risks
  • Limitations of option 'Greeks'
    • Discontinuities in market price behaviour
    • Expiration trading
    • Strategies for managing risk when ‘Greeks’ experience large, discrete changes
    • Stress testing and portfolio scenario analysis; identifying potential future risks
  • The course director is a highly experienced derivatives consultant whose career boosts a wealth of practical experience, spanning in excess of 25 years within the financial markets, holding senior positions in a number of major financial institutions in London and New York.

    He worked with JP Morgan Chase within the Arbitrage trading group in both London and New York, with responsibility for management of interest rate option trading, marketing and structuring. At Mitsubishi UFJ he managed OTC derivatives trading of swaps and options across European currency markets, financial engineering, and synthesis of structured assets. As Manager of SE Banken's Global Derivatives Trading Group, he held overall responsibility for swaps, options and fixed income portfolio trading and risk management, new product development, and corporate and institutional marketing of structured debt products.

    He now lectures and consults internationally on all aspects of derivatives and capital markets and is highly respected for his practical market approach, working with commercial and investment banks, institutional investors and hedge fund managers, central banks and other official institutions.

    The course director holds an MBA from Imperial College, London and an MA from Oxford University.

    Courses run by this instructor

    4-5 Star Hotel in Singapore, Singapore,

    All of our courses are held in 4 – 5 star hotels, chosen for their location, facilities and level of service. You can be assured of a comfortable, convenient learning environment throughout the duration of the course.

    Due to the variation in delegate numbers, we will send confirmation of the venue to you approximately 2 weeks before the start of the course. Course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.