Abstracts

• Antonio Castagna,

Cross Smile Building and the Pricing of Options on Several FX Spot Rates


We analyse how FX spot rates are linked via correlation, starting from the basic B&S setting and showing how multi-spot derivatives can be priced. Then we extend the market approaches to price single-spot options to a multi-spot setting and we show which new parameters are needed and which ones are not readily available in the market. Finally we present the application of this extension to the practical problem of deriving the volatility smile of an illiquid pair, given two liquid and actively traded pairs.




• Iain Clark,

Numerical methods for second generation FX options - lookbacks, Asian options, accruals


Models such as stochastic volatility and LSV provide forward skews which are more consistent with FX markets than purely local volatility models. Because of this, they are more natural candidates for pricing strongly path dependent options, where the value at expiry depends on functionals of the observed asset price process. In this talk, I will discuss how the technique of augmented state variables can be used to price such products using PDE methods, in a way which naturally extends from Black-Scholes type models to more complex models.




• Dimitri Reiswich, Frankfurt School of Finance & Management

The FX Volatility Smile


- Delta and at-the-money conventions
- Risk-reversals, strangles/butterflies
- Overview of different calibration methods to FX market quotes
- Robustness of calibration methods
- Arbitrage-free smoothing of the volatility surface
Each topic will be discussed at theoretical and practical levels. The practical part will be supported by exercises with Excel spreadsheets.
This is a joint presentation with Uwe Wystup.




• Nikolaos Skantzos, BNP Paribas-Fortis

Vanna-Volga Methods Applied TO FX Derivatives: From Theory to Market Practice


Our talk will focus on the Vanna-Volga methods which are used to price 1st generation exotic options in the Foreign Exchange market. They are based on a rescaling of the correction to the Black-Scholes price through the so-called `probability of survival' and the ‘expected 1st exit time'. We will first discuss the justification of the core technique for the case of vanilla options and show how to adapt it to the pricing of exotic options. Next we will show how Vanna-Volga models compare to more sophisticated models, and to a collection of indicative market prices. We will finally discuss the calibration issue.
This is a joint presentation with Frédéric Bossens.




• Uwe Wystup, MathFinance

The FX Volatility Smile


- Delta and at-the-money conventions
- Risk-reversals, strangles/butterflies
- Overview of different calibration methods to FX market quotes
- Robustness of calibration methods
- Arbitrage-free smoothing of the volatility surface
Each topic will be discussed at theoretical and practical levels. The practical part will be supported by exercises with Excel spreadsheets.
This is a joint presentation with Dimitri Reiswich.

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