FX EXOTIC OPTIONS

 

"Great course [...]. Uwe has lots of experience and explains the complex material very clearly."

Pak-Nin Tang, Risk Manager, ING Bank
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Course Outline

Foreign Exchange 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 will 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

Traders

Risk managers

Financial engineers

Quantitative analysts

Structurers

Researchers and others who create or deal with foreign exchange.

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Prior Knowledge

Calculus, probability theory, linear algebra, basics of stochastic processes, financial product knowledge up to Hull is also needed, programming skills.


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 of FX Options and Products (For a General Audience)

Fundamentals

  • Components of foreign exchange risk: forwards,Swaps and vanilla options
  • FX options market: who does what and why
  • Software, in particular Reuters Dealing and SuperDerivatives

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
  • 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
  • Exercises

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
  • Forward volatility
  • Workshop: Greeks in terms of deltas, hedging volatility risk, deriving the strike from the delta with smile

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
  • Compound and instalment
  • Asian options: options on the geometric, arithmetic and harmonic mean
  • Power, lookback

Day Two

Structuring and The Traders' Rule of Thumb(For Structurers, Traders and Quants)

Structuring with Vanilla Options

  • Risk reversal and participating forward
  • Spreads and seagulls
  • Straddles, strangles and butterflies
  • Digital options
  • Workshop: rolling series of seagulls

Applications in Structuring

  • Dual currency and other FX-linked deposits
  • Case study: unwinding a DCD
  • Structured forwards: shark forward, bonus forward, range-reset forward, etc.
  • FX-linked cross currency swaps
  • Exotic spot and forward trades
  • Workshop: structuring exercises

The Traders' Rules of Thumb

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

Day Three

Second Generation Exotics, Pricing and Hedging issues (For Structurers, Traders and Quants)

Single Currency Exotics

  • 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
  • Forward start options, step-ups
  • Time options
  • Variance and Volatility Swaps
  • Workshop: structuring and pricing of accumulative forwards

Multi Currency Exotics

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

Quantitative Issues

  • Efficient computation of Greeks using Homogeneity and other Tricks
  • Efficient computation of Greeks for American Options using Leisen-Reimer Trees
  • Workshop: Time Options with Leisen-Reimer Trees
  • Local Volatility model and pricing with the smile using PDEs, application to barrier options
  • Heston's Stochastic Volatility model, pricing, implementation techniques for analytic and Monte Carlo, applications to exotic options
  • Pricing with the smile: e.g. weighted Monte Carlo
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