Course dates
Course overview
This 3 day workshop gives you 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.
The course evaluates options from a number of different perspectives – from a trader or risk manager’s point of view, focussing on the dynamic risk characteristics of options and the implications for their successful management, as well as from a sales and end user perspective, to gain understanding of the many strategies in which options can be 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.
This is Module 1 of the 'Options School'
You can book to attend Module 1 or Module 2 seperatly, or join the 5-day Options School for a discounted fee.
The 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 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.
Find out more information on Module 2
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
Methodology
The course combines classroom based teaching with computer based simulations and computer based exercises, utilising a range of spreadsheet based software.
Knowledge and skills are best achieved through active participation, via case studies and simulations. 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: Enhance your practical skills with computer-based simulations and workshop case studies on option pricing, risk management and designing option strategies. Delegates will receive free copies of option pricing and risk management software for their own use after the programme.
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
Supporting publication
Day 1
Option valuation – principles and option pricing models
- Continuous stochastic processes; Brownian motion
- The Black-Scholes option pricing model
- Underlying concepts, assumptions and derivation of Black-Scholes
- Option price determinants (strike, underlying price, volatility, term, interest rate, dividend)
- Advantages and shortcomings of the Black-Scholes framework
- Rationalising distortions to the Black- Scholes model framework
- Non-continuous hedging
- Stochastic volatility
- Kurtosis
- Discontinuous movements: limitations of ‘Greeks’
- Numerical methods: Binomial and trinomial lattice models
- Arbitrage-free derivation of a generalised binomial model
- American and other path dependent options
- Volatility and time parameters in the binomial model; value determinants, price sensitivities
- Simulation methods of option valuation - Monte Carlo
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 analysis
- Volatility relative value analysis (Implied vs. realised)
- Volatility cones
- Skew interpretation and analysis
- Volatility properties
- Stochastic volatility
- Mean reversion
- Volatility estimation: GARCH models
- Volatility surfaces
- Volatility smiles and skews
- Volatility term structure effects
- Rationalising distortions to the BSM framework
- Non-continuous hedging
- Volatility skew and Kurtosis
- Problems with fitting the volatility smile dynamically
- Accounting and modelling for Stochastic volatility
- Vanna-Volga approach to constructing volatility surfaces
- Sticky strike and sticky delta approaches
- Quantifying the value of Volga, Vanna risks
- Local volatility modelling (Dupire etc.)
- Stochastic volatility (SV) modelling
- Heston, Bates
- SABR (Hagan et al.)
- Combining local and Stochastic volatility modelling
- Stochastic skew modeling (Carr et al.)
Option risks; hedging and risk management of option positions
- 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
- Expiration effects
- Liquidity risk
- 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
- Gamma
- Interpreting Gamma
- Gamma characteristics of in-, atand out-of-the-money options
- Long and short Gamma - risks and opportunity
- Impact of Gamma on Delta hedge management
- Implied vs. realised volatility exposure
- ‘Shadow’ Gamma
- Maximising profitability from gamma trading and management; gamma ‘scalping’
- 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 smilke (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
- Trading and risk management strategies
- Rationale for using options
Directional trading and arbitrage strategies
- Put-call parity
- Conversions and reversals
- Synthetic forwards and options
- American options; managing assignment risk
- Vertical spreads
- Call and put (Bull and Bear) spreads
- Trading rationale
- Pricing; impact of skew
- Risk characteristics
- Delta hedging
- Gamma
- Skew risk
- Box spreads
- Synthetic lending/borrowing
- Arbitrage
- Risk reversals
- Trading volatility skew
- Management of Vanna risk
Non-directional (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
- Skew and smile effects
- Dynamic management
- Butterflies
- Vega convexity trading
- Management of Volga risk
- Dispersion trading
- Correlation trading
- Monetising implied vs. realised correlation
- Practical challenges in dispersion trading
- Dynamic risk management
- Yield enhancement strategies
- Over and under-writing strategies
- What is an optimal tenor for yield enhancement strategies
Risk management strategies
- Rationale for using options vs. outright hedges
- When is it rational to use options for hedging?
- Structuring tailored hedges with options
- Hedging strategies with options
- Collars
- Spreads
- Seagulls
- Participating forwards
- FX TARNs and target redemption forwards
Case study: Structuring option strategies (spreads, collars, butterflies); examination of risk characteristics and position risk management through time.
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? Avantages 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 pricing
- Option embedded swaps
- Extendible and cancellable swaps
(European, Bermudan styles)
Day 3
FX options
- Fundamental properties of currency options
- Market conventions, terminology, price quotation
- Pricing vanilla FX options
- Volatility surfaces for FX options
- Vanna-Volga approach to constructing volatility surfaces
Equity options
- European and American styles
- Single stock and index options
- Basket (index) options
- Correlation impact on valuation
- Implied vs. realised correlation: Dispersion trading
Commodity options
- Pricing models for commodities
- Backwardation effects and hedging considerations
- Mean reversion effects
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
Hilton Hotel Singapore, Singapore, Singapore
This programme takes place on a non-residential basis at Hilton Hotel Singapore. Non-residential 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.
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Graham Dudlyke
Graham Dudlyke is a highly experienced derivatives consultant who has held senior positions in a number of major financial institutions in London and New York. As Vice President of the Arbitrage Trading Group at Chemical Bank, Graham was responsible for management and marketing of interest rate option trading, managing a portfolio of interest rate caps, floors and swap options. As an Associate Director of Mitsubishi Finance, London, he gained considerable experience in trading portfolios of swaps and options, and in risk management and financial engineering, including structuring new issues of debt and creating 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. Graham lectures internationally on all aspects of derivatives and fixed income and is highly respected for his practical market approach to product structuring and applications. Graham holds an MBA from Imperial College, London and an MA in Chemistry from Oxford University.
Courses run by this instructor
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