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

Course review and conclusions

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