Course dates
Course overview
Constant innovation within the derivatives marketplace continues to see the evolution of new, exotic derivatives, fuelled in part by the growth of structured products across traditional and alternative asset classes, and the increasing use of exotic derivatives within corporate and institutional applications.
Exotic derivatives have become commonplace in the engineering of such innovative structures, lowering costs and increasing the flexibility in tailoring risk profiles to suit end user views and expectations. Exotic options present some unique challenges in respect of pricing and valuation models and methods, transparency, and in their risk characteristics and risk management techniques.
This unique 2-day course will provide a robust and practical understanding of exotic options – price modelling issues, hedging and replication techniques and application to hedging, trading and financial engineering of structured products.
The course will review the flaws of simple pricing models in their failure to consider the far reaching effects of stochastic volatility, and the correlation between price movements and volatility, which together provide a rationalisation of the observed patterns of volatility surfaces, and will examine a number of the alternative approaches to addressing such issues. In addition, the programme will also provide a practical context to all instruments covered, evaluating their application in hedging and trading strategies as well as in the engineering of a variety of structured products.
This is Module 2 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.
This school 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 1
Summary of course content
- Classification of exotic option types
- Pricing problems in valuation of exotics
- Alternative modelling approaches: stochastic and local volatility models
- Exotic FX, interest rate and equity options
- Risk management of exotic options; dynamic replication strategies
- Limitations in the use of local risk sensitivities
- Practical applications of exotic options: risk management, trading strategies
- Exotic options in structured products
Methodology
The course combines classroom based teaching with computer based simulations and exercises, to augment and reinforce the learning experience, and to better replicate the day to day realities of financial markets and market behaviour.
PLUS: Enhance your practical skills with computer-based simulations and workshop case studies on exotic option pricing and design, modelling and pricing of structured products. 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
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)
- When are simple or exotic option strategies optimal?
- Pricing exotic options
- Practical problems in modelling exotic option pay-offs
- Path dependency
- Skew risk and pricing effects
- Model calibration: How to adjust for smile and skew effects
- Vanna-Volga approach to constructing volatility surfaces
- Local volatility models
- Advantages and shortcomings
- Stochastic volatility models
- Exotic option risk characteristics
- Hedging higher order moments of risk
- Skew sensitivity in exotics
- Discontinuous risk behaviour; limitations of using ‘Greeks’ in hedgin
Barrier options
- 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
- 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
- Higher order sensitivities
- Applications of Barrier options
- Trading and hedging applications
- Rationale for barrier options - when to use and when not to use barrier options
- Structured barrier option strategies
- Barrier structures (forward plus)
- Knock-in cylinders
- Knock-out forwards
- Knock-out collars
- Applications of barrier options in
structured notes
– Equity bonus notes and certificates
– Twin-win certificates
– Reverse convertibles
Case Study: Constructing and pricing Barrier option structured hedging strategies; Structured
product embedded barrier options.
Digital (binary) options
- European and American ‘one touch’ styles
- Contingent premium options
- Pricing of digital options
- Adapting the Black-Scholes analytical approach
- Hedging and risk management of digital options
- Dynamic Delta hedging - limitations
- Gamma, Vega, Theta behaviour
- Higher order moments of risk; skew risk
- Replication using risk reversals
- Inadequacies of Black-Scholes theory in practice
- Applications of digital options:
- Trading applications - motivations for using digital options
- Contingent premium options
- ‘Range accrual’ structured notes; range accrual swaps
- Digital caps and floors
- Term sheet examples (interest rate, FX, hybrid examples)
Path dependent options - average rate options
- 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 bond
Case Study: Pricing Asian options; structured product applications
Day 2
Path dependent options - lookback, cliquet and reverse cliquet options
- Definitions
- Pay-off types:
- Fixed and floating strike
- Discrete and continuous sampling of maximum/minimum
- Pricing and valuation issues
- Motivations for use - applications and examples
Multi-asset options
- Basket options
- Spread options
- Outperformance, ‘Best of’’ and ‘Worst of’ option styles
- Pricing methodologies
- Single factor and multi-factor approaches
- Impact of basket parameters (volatility, correlation) on pricing
- Where can we find correlation data from? Sources of implied correlation
- Hedging and risk management of multi-asset options
- Risks characteristics
- Cross Gamma - correlation risk
- Dynamic management of correlation risk
- Uses and applications of multi-asset options
- Basket options
- Hedging and trading spread risk
- Minimising cost and maximising yield enhancement with multi-asset options
- Structured product applications:
- CMS Spread linked notes
- ‘Best of’ and ‘Worst of’ structured products
- Altiplanos
- Multi reverse convertibles
- Hybrid structured products
Quanto options
- Pricing quanto options
- Replication approach
- Analytical approach
- Pricing parameters - correlation and volatility inputs
- Hedging quanto derivatives
- Correlation and volatility risks
- Dynamic correlation risk management
- Applications of Quanto options
- Foreign equity/domestic currency options
- Structured notes with quantoed payoffs
Embedded exotic options - structured products
- Rationale for issuers and investors
- Yield enhancement
- Capital protection
- Tailored investment strategies
- Financial engineering; creating and analysing structured debt
- Interest rate linked structured products
- Callable/puttable bonds
- Range accrual structures
- Exotic path dependent structured notes (LIFTs, Snowballs etc.)
- TARNS and other path dependent structures
- Equity linked structures
- Bonus certificates
- Multi-asset structures
- Reverse convertibles
- Hybrids
- FX structured products
- Forward plus, knock out forwards, knock in cylinders
- PRDCs
- Range accrual structures
Case study: Delegates will reverse engineer a number of structured products as well as creating and pricing a range of structured product types, across all main asset classes.
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.
-
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
Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.
Course dates