Volatility: Trading and Managing Risk
"I thoroughly enjoyed the course at LFS. Tutors were brilliant and interesting which made the classes even more fun. LFS staff were very friendly. Lunch and refreshments were first class. Location is great. I strongly recommend it to everyone."
Asim Sinha - Developer, BNP Paribas
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Course Outline
The course starts by providing an understanding of how to estimate volatility and the consequences of the various ways of describing volatile asset prices. This leads into sessions on the application of a range of standard volatility derivatives such as volatility futures and options, tradeable volatility products such as VXX, and volatility swaps. The final part of the programme covers the treatment of volatility in the more popular stochastic volatility models used in the industry such as SABR and Heston and provides insights into the most relevant approaches to modelling volatility under current market conditions.
Presented by Simon Acomb and Dr. Ser-Huang Poon.
Who The Course is For
- Derivative traders
- Quants
- Fund managers, fund of funds
- Structured product teams
- Private wealth managers
- Risk managers and regulators
- Finance directors
- Research analysts
- Bank and corporate treasury managers
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Prior Knowledge
Basic econometrics and Black-Scholes. Participants will also need to be competent users of Excel.
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
Black-Scholes Revisit
- A quick revision of Black-Scholes and Ito lemma
- Black-Scholes Greeks
- Black-Scholes Implied Vol and Implied RN Distribution
- Examples of derivatives sentitive to vol Surface
- Stochastic Volatility and SV Option Pricing Models
- Jumps?
Local Vol
- Is Local Vol a Stochastic Vol?
- Dupire Equation
- Implementation
- Local Vol in terms of Implied Vol
- Local Vol as a Conditional Expectation of Instantaneous Vol
- Weaknesses of Local Vol
Workshop - Calibrating local vol and use it to price a Barrier option
Trading on Realised Volatility
- Volatility Skew and Smile
- Extrapolating and Interpolating Volatility Surfaces
- The Greeks
- Trading Skew and Kurtosis
- Trading Implied Volatility
- Variance Swaps and Volatility Swaps
Workshop - Fitting a volatility surface and pricing a variance swap
Day Two
Heston
- The Heston equation
- Problem with complex root
- Derivation and the Heston fundamental PDE
- Derivation through Fourier transform and characteristic function
- FFT, FFFT or Direct Integration?
- Vol Surface Sensitivity to Heston Parameters
- Gatherial’s equations linking Heston Parameters to Black-Scholes Implied
- Implication of the Heston Dynamics on Fair Pricing of Option on Variance Swap
- Simulating the Heston Dynamics
Workshop - Simulating the Heston dynamics and using it to price a Barrier option
Trading on Volatility Indices
- Volatility indices – VIX and VSTOXX
- Volatility as an Asset Class – VXX and VXZ
- Incorporating Volatility into an Investment Portfolio
- Futures and Options on Volatility Indices
- The need for a stochastic volatility model
- Hedging Volatility Indices
- Options on realised variance
Workshop - Finding a risk neutral distribution of volatility. Relating VIX and variance swaps
Day Three
SABR and the Vol Surface
- SABR: Stochastic Alpha, Beta and Rho
- Sticky Strike vs. Stick Moneyness
- SABR Parameters and the Vol Surface
- SABR Calibration
- SABR in Interest Rate Modelling and LMM-SABR
Bergomi Smile Dynamics I, II and III
- Consistent variance Curve
- Dynamics for Forward Volatility
Workshop - Fitting a Vol Surface with SABR and use it to price a Barrier Option
Hedging Volatility Exposure
- Hedging volatility exposure of a book of exotic options
- Static versus Dynamic Hedging
- Impact of Model choice
- Smile risk
- Understanding greeks
- Vega convexity
Workshop - Finding the best vega hedge
