FX Exotic Options

 

"Great diverse course content. Uwe Wystup is a fantastic lecturer with a wealth of knowledge that he is fortunately happy to share."

Indra Bloebaum - Manager - Derivatives Trading
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Course Outline

This advanced three-day course covers the pricing, hedging and application of FX exotics for use in trading, risk management, financial engineering and structured products.

FX exotics are becoming increasingly commonplace in today’s capital markets.  The objective of this workshop is to develop a solid understanding of the current exotic currency derivatives used in international treasury management. This will give participants the mathematical and practical background necessary to deal with all the products on the market.

All delegates receive a copy of Uwe's book FX Options & Structured Products.

Guest speaker

Tino Senge: Quantitative Analytics Group, Barclays Capital

Who The Course is For

  • Quants/ Financial Engineers: To learn how the products are used
  • Traders: To deepen the technical background
  • Risk Managers: To understand the front-office way of thinking
  • Structurers: To learn more about pricing and models
  • Researchers: To understand the practical matters
  • Sales People: To get the overview of product development and smile adjustments

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Prior Knowledge

This course is for anyone new to FX Exotics and those who need to bring their knowledge up to date and learn how the overall FX options market works. However, this is not a basic course on options and understanding of the FX vanilla options market and FX smile is essential to understand exotics.

The programme is also not a pure quantitative modelling seminar, but will provide the necessary mathematics you need to understand to be successful in FX Options.


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

Review of the Fundamentals

Fundamentals

  • Components of foreign exchange risk: forwards, swaps and vanilla options
  • FX options market: who does what and why
  • Software solutions: which vendor offers what: Fenics, SuperDerivatives, Bloomberg, Volmaster, Murex, ICY, Reuters

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, ATM and delta-conventions
  • 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
  • Market Data: rates, forward points, swap points, spreads

Workshop: acquaint yourself with pricing software and market quotes

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: SABR, vanna-volga, Reiswich-Wystup
  • Forward volatility

Workshop: Build you own interpolation tool for volatility smile, calculate Greeks in terms of deltas, hedging volatility risk, deriving the strike from the delta with smile

Structuring with Vanilla Options

  • Risk reversal and participating forward
  • Spreads and seagulls
  • Straddles, strangles, butterflies, condors
  • Digital options

Workshop: Structure your own seagull. Include sales margin. Solve for zero-cost. Calculate delta and vega hedge. Discuss bid-ask spread. Analyze smile effect

Day Two

Structuring and Vanna-Volga-Pricing

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, KIKOs, exotic barrier options
  • Compound and instalment
  • Asian options: options on the geometric, arithmetic and harmonic mean
  • Power, lookback, chooser, paylater

Workshop: Hedging a knock-out with a risk reversa. Build your own semi-static hedging tool, discuss forward volatility risk

Applications in Structuring

  • Dual currency and other FX-linked deposits
  • Structured forwards: shark forward, bonus forward, range-reset forward
  • FX-linked interest rate swaps and cross currency swaps
  • Exotic spot and forward trades

Workshop: Structuring exercises: build structures, solve for zero cost, smile adjustment, bid-ask spreads

Vanna-Volga Pricing

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

Workshop: Pricing of barrier options with smile

Overview of Market Models

  • Stochastic volatility models
  • Heston 93: model properties, calibrations, pricing, pros and cons
  • Local Volatility: properties, pros and cons
  • Stochastic Local Volatility Hybrid models

Super-Replication of barrier options: using leverage constraints and its first order approximation: the barrier shift. Mixing super-replication and vanna-volga

Day Three

Second Generation Exotics, Pricing and Hedging issues

The Pedigree of Barrier and Touch Options

Workshop and Discussion: how to construct the universe of barrier and touch options from key building blocks: vanilla and one-touch. Residual risk and limitations. Static, semi-static and dynamic hedging approaches.

Single Currency Exotics beyond Standard Barrier and Touch Options

  • 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, target redemption forwards (TRFs)
  • Forward start options, step-ups
  • Time options
  • Variance and Volatility Swaps

Workshop: Structure and price your own accumulative forward. Smile adjustment. Simulation tool for TRFs. Discussion of TRF hedging

Multi Currency Exotics

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

Workshop: Pricing and correlation hedging a two-currency best-of: calculate your own sensitivities and hedge vega and correlation risk.

Long Term FX Options (contributed usually by the Guest Speaker)

  • Development of Basis Spreads
  • Product Range,FX-linked bonds, long-term vanilla and PRDCs
  • Modeling approaches
  • Discussion of risk features and modelling requirements
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