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 analysing the role of volatility in the current financial markets including the causes and impact of volatility smiles on a variety of financial products. This leads into sessions on the application of a range of 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 and gamma trading·
Why do we have a volatility surface?·
Examples of derivatives sensitive to vol Surface·
Black-Scholes implied volatility and implied risk neutral distributions·
Introduction to stochastic volatility and jumps.

Local Vol

Is Local Vol a Stochastic Vol?·
Local vol as a conditional expectation of instantaneous vol·
Local Vol in terms of BS Implied Vol·
Features of Local Vol: “Rule of 2”
Local Vol Dynamics· Local Vol: Implementation Choices

Workshop - Calibrating local vol and use it to price a Barrier option

Trading on Realised Volatility

Building a Volatility Surface·
Extrapolating and Interpolating Volatility Surfaces·
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

Heston and the Vol Surface
Impact of Heston parameters on vol smile
Calibrating Heston to vol surface
Simulating the Heston Dynamics
Heston: Distribution of instantaneous vol
- Heston: Volatility reaching zero
Stochastic Local Vol

Workshop - Simulating the Heston dynamics and using it to price a Barrier option

Trading on Volatility Indices

Volatility indices
Construction of the VIX and VST OXX
Volatility index futures· Volatility as an asset class
Incorporating volatility into an investment portfolio
The need for a stochastic volatility model
VIX options
Options on realised variance

Workshop - Finding a risk neutral distribution of volatility. Relating VIX and variance swaps

Day Three

SABR, Bergomi and volatility derivatives in hedging

SABR: Stochastic Alpha, Beta and Rho
- SABR: Perturbation Expansion of European Options
SABR Parameters and Calibration
Sticky Strike or Sticky Moneyness?
SABR & Libor Market Model
Consistent Pricing and Volatility Model
SABR & Volatility Derivatives· Market VIX Smile
Heston Variance Swaption· Bergomi's Smile Dynamics

Workshop - Fitting a Vol Surface with SABR and use it to price a Barrier Option

Hedging Volatility Exposure

Models and dynamic hedges
Black-Scholes a broken model
Static versus dynamic hedging
Model Choice
Hedging in a multi-model world
Finding the best vega hedge
Managing vega convexity

Workshop - Finding the best vega hedge