Managing Exotic Risk
"... definitely something exotics traders should attend. It has a good mix of the practical challenges that need to be borne in mind while designing a complex derivatives analytics infrastructure as well as some of the theoretical implementation issues involved. The in class exercises were insightful and Simon presented the concepts very concisely."
Ani Banerjee - Multi-Asset Exotics, Citigroup
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Course Outline
New market conditions have changed forever the way in which managers need to think about complex risk. In this course we look at lessons from the recent financial crisis and how to avoid explosions of risk from illiquid and complex products during times of financial stress. Lessons learned call for a re-assessment of tools available for the management of exotic risk. More than ever, it is necessary for managers to gain a handle on complexity and understand the most common mistakes made by traders and financial engineers when they model and hedge exotic structures. This workshop will explore through practical real-life examples and PC-based exercises strategies and techniques for robustly managing these risks on a day to day basis.
Presented by Simon Acomb.
Who The Course is For
- Trading floor managers
- Risk managers
- Traders, managers of trading desk
- Structured product teams, financial engineers
- Middle office, product control
- Quantitative researchers, model validation and control
- Bank and corporate treasury managers
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Prior Knowledge
- Basic knowledge of financial markets and derivative instruments
- Elementary mathematics and statistics (probability distributions mean, variance and correlation)
- Microsoft Excel
This
program is eligible for 16 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
- Arbitrage free pricing and model greeks
- Moving beyond vanilla options
- Reducing the volatility of your P&L
- Modelling a volatility surface
- Understanding how a volatility surface changes with the underlying
- Sticky, floating and more exotic forms of delta
Managing Delta outside of Black-Scholes
- A taxonomy of exotic pricing models
- The relationship between model choice and delta
- Managing delta when you only use a single model
- Delta risk management with multiple models
- Coping with slow numerical methods
Hedging Vega
- How do you define vega for exotic products?
- Choosing a hedging instrument - Option, Var Swap, or VIX
- Alternative ways of measuring volatility sensitivities
- Calculating a best volatility hedge
- Principal component analysis and vega hedging
- Parameter sensitivities and vega hedging
Correlation Risk
- Products with correlation risk exposure
- Measuring equity / equity correlation
- What is a correlation smile
- Measuring explicit correlation risk
- Hidden correlation risk
- Hedging correlation exposure
Day Two
Managing risk with scenarios
- Difference between scenarios and stresses
- Impact of liquidity - ensuring futures risks can be managed
- Relationship between scenarios and greeks
- Ensuring consistency of your scenarios
- Scenarios and barrier features
- Fat tails and hedging extreme events
Managing Risk with Var
- Risk drivers and Var calculations
- Greek based Var and simulation based Var
- What to do with risk not captured in Var
- Impact of liquidity
Hybrid and cross risk
- Measuring hybrid risk between an asset and interest rates
- Explicit and implicit credit risk
- Impact on one risk factor on another
- Examples of cross risk in cliquet products
- Switching risk
Stochastic Volatility and Volatility Convexity
- When do you need a stochastic volatility model?
- Reporting volatility convexity
- Hedging volatility convexity
- Managing a book of volatility products
