Volatility: Trading and Modelling

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 VIX futures and options 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
• 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 and Local Vol

• A quick revision of Black-Scholes and Ito lemma
• Black-Scholes Greeks
• Black-Scholes Implied Vol and Vol Surface
• Stochastic Volatility and Stochastic Vol Option Pricing Models
• Jumps?
• Local Vol – Dupire vs. Derman/Kani
• Gatherial’s analysis of Local Vol
• Practical Issues with the Local Vol Model

Workshop - Estimating local vol and using it to price a Barrier option

 

Trading on Realised Volatility

• Simple Contracts -Vanilla Options
• Using Risk Neutrality To Price Option
• Volatility Skew and Smile
• 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 square root process
• Heston Semi-closed form Solution for European Options
• Characteristic Function
• Market Price of Volatility Risk?
• Complex Root and Fast Fourier Transform
• Simulating the Heston Dynamics
• Implication of the Heston Dynamics on Fair Pricing of Option on Variance Swap

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

 

Trading on Volatility Indices

• Volatility indices
• CBOE construction of the VIX
• VIX futures
• The need for a stochastic volatility model
• VIX options
• Options on realised variance
• Hedging the VIX

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

Day Three

SABR and the Vol Surface

• Sticky Strike vs. Stick Moneyness
• SABR: Stochastic Alpha, Beta and Rho
• SABR Parameters and the Vol Surface
• SABR Calibration and Pitfalls
• Vol Surface Dynamics and PCA
• Calibrating the Vol Surface using Gatheral’s Asymptotic Approximation
• Using VIX, and Futures and Options on VIX to guide the Vol Surface

Workshop - Fitting a Vol Surface and using 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