Equity Exotic Options: Calibration and Pricing

 

"The course material and the tutor were excellent. I can recommend this course to any quants."

Frederic Marechal - Quantitative Analyst
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Course Outline

This course introduces and applies advanced models for the pricing of equity derivatives. Practical workshops develop a solid understanding of the current frameworks for pricing these instruments and give participants the mathematical and practical background necessary to apply the various pricing methodologies to the market.

All delegates will receive a copy of Wim's book, "Levy Processes in Finance: Pricing Financial Derivatives".

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Who The Course is For

Anyone who wishes to be able to price, use, manage, or evaluate equity derivatives and exotic equity options, including:

  • Quantitative Analysts
  • Risk Managers
  • Financial Engineers
  • Systems Developers
  • Middle Office Managers
  • Compliance Staff
  • Auditors
  • Product Controllers
  • Credit Analysis
  • Credit Risk Managers
  • Traders

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Prior Knowledge

Probability theory, basics of stochastic processes, basic concepts of financial products, binomial tree modelling and the Black-Scholes setting, a good maths background and knowledge of basic maths models, knowledge of basic programming.


This program is eligible for 24 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Introduction

Basics of Model Calibration for Equity Pricing

  • Finding minima and maxima of a function
  • Basics of optimisation
  • The problem with local minima and maxima
  • Some basic search algorithms

Examples

Fast Pricing of Vanilla Options under Advanced Equity Models

  • Advanced pricing formulas
  • Application, pros and cons
  • Fast Fourier Transform (FFT) techniques versus direct integration
  • Modelling stochastic volatility with the Heston and Bates model
  • Other examples of advanced models for pricing (jump models)

Workshop: Fast Pricing of Vanilla options under Heston 

Day Two

Calibration on Option Surfaces

  • Basics
  • Choice of objective functions
  • Choosing good start values
  • Calibration algorithm

Workshop: Calibration implementation for Heston

Model Risk and Calibration Risk

  • Model risk :
    • Impact of model features on exotic option prices illustrated
    • Comparing different models
    • Choosing a pricing model: why you should use multiple models
  • Calibration Risk:
    • Impact of different calibration procedures on exotic option prices
    • Making calibration more robust: using historical data in the calibration procedure
    • Using other market data (VIX and options on VIX) in the calibration procedure

Day Three

Monte Carlo Simulation and Pricing of Exotics

  • Basics of Monte-Carlo Simulation
  • Sampling of Heston paths : Euler and Milstein scheme
  • Advanced simulation schemes
  • Pricing of exotics under Heston using Monte Carlo Simulation

Workshop: Monte-Carlo implementation and pricing of exotics under Heston

Bid and Ask Pricing

  • Introduction to bid-ask pricing
  • Distorted expectations and the concept of acceptability
  • Measuring liquidity and the concept of implied liquidity
  • Model and calibration risk in the light conic finance

Conclusion and Open Discussion

At the end of the course delegates will have:

  • A vanilla FFT pricer
  • Calibration algorithm
  • Monte Carlo exotic pricers on MatLab for the Heston model
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