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.

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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