Foreign Exchange Exotic Options, 3-day format

For a two-day format click here.

This practical three-day course covers the pricing, hedging and application of FX exotics for use in trading, risk management, financial engineering and structured products. Presented by Professor Uwe Wystup

THE COURSE

PRIOR KNOWLEDGE

WHO SHOULD ATTEND?

Day I: Review of the Fundamentals of FX Options, Products (For a General Audience)

Fundamentals

• Components of foreign exchange risk: forwards, swaps and vanilla options
• FX options market: who does what and why
• Software, in particular Reuters Dealing and SuperDerivatives

Pricing and Hedging in the Black-Scholes model

• Black-Scholes / Merton model in FX
• Derivation of the value of a call and put option
• Detailed discussion of the formula
• Greeks: delta, gamma, theta, rho, vega, vanna, volga, homogeneity and relationships among Greeks

Vanilla Options

• Put-call parity, put-call symmetry, foreign domestic symmetry
• Quotation conventions in FX
• Dates: trade day, premium payment day, exercise/expiration time, settlement day
• Settlement, spreads, deal processing, counterparty risk
• Exotic features: deferred payment, contingent payment, deferred delivery, cash-settlement, American and Bermudan exercise rights, cut-offs and fixings
• Exercises

Volatility

• Implied vs. historic
• Quotation in terms of deltas
• Volatility cones
• Volatility smile: term-structure, skew, risk reversals and butterflies
• Volatility sources
• Interpolation and extrapolation across the volatility smile surface
• Forward volatility
• Workshop: Greeks in terms of deltas, hedging volatility risk, deriving the strike from the delta with smile

First Generation Exotics: Products, Pricing and Hedging

• Digital options: European and American style, single and double barrier
• Barrier options: single and double, knock-in and knock-out
• Compound and instalment
• Asian options: options on the geometric, arithmetic and harmonic mean
• Power, lookback

Day II: Structuring and The Traders' Rule of Thumb (For Structurers, Traders and Quants)

Structuring with Vanilla Options

• Risk reversal and participating forward
• Spreads and seagulls
• Straddles, strangles and butterflies
• Digital options
• Workshop: rolling series of seagulls

Applications in Structuring

• Dual currency and other FX-linked deposits
• Case study: unwinding a DCD
• Structured forwards: shark forward, bonus forward, range-reset forward, etc.
• FX-linked cross currency swaps
• Exotic spot and forward trades
• Workshop: structuring exercises

The Traders' Rules of Thumb

• How higher order derivatives influence the price
• Vanna-volga pricing approach
• Case study: one-touch
• Discussion of model risk and alternatives: stochastic volatility
• Workshop: pricing of barriers with smile

Day III: Second Generation Exotics, Pricing and Hedging issues (For Structurers, Traders and Quants)

Single Currency Exotics

• Exotic features in (vanilla) options: deferred payment, contingent payment, deferred delivery, cash-settlement, American and Bermudan exercise rights, cut-offs and fixings
• Exotic barrier and touch options
• Faders, corridors, accumulative forwards
• Forward start options, step-ups
• Time options
• Variance and Volatility Swaps
• Workshop: structuring and pricing of accumulative forwards

Multi Currency Exotics

• Product overview with applications: quanto options, baskets, spreads, best-ofs, outside barriers
• Correlation: implied correlations, correlation risk and hedging
• Pricing in Black-Scholes model: analytic, binomial trees and Monte Carlo
• Workshop: pricing and correlation hedging a two-currency best-of

Quantitative Issues

• Efficient computation of Greeks using Homogeneity and other Tricks
• Efficient computation of Greeks for American Options using Leisen-Reimer Trees
• Workshop: Time Options with Leisen-Reimer Trees
• Local Volatility model and pricing with the smile using PDEs, application to barrier options
• Heston's Stochastic Volatility model, pricing, implementation techniques for analytic and Monte Carlo, applications to exotic options
• Pricing with the smile: e.g. weighted Monte Carlo

Order and Contact Information