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Course Calendar Course Calendar

Equity Derivatives 2: Exotic Options and Structured Products

Day One

Barriers and Binaries

  • Types of barrier option – in/out, up/down, call/put
  • Barrier monitoring
  • Role of implied volatility in barrier option pricing
  • Barrier/discontinuity risk
  • Replicating European digitals with vanilla options
  • American digitals – cash at hit and cash at maturity
  • Models for pricing barriers and binaries
  • Risk management for binary options
  • Building a ladder option

Exercise: Investment opportunities with barrier options, building a ladder

Correlation and Baskets

  • Introduction to basket options
  • Correlation and basket option premium
  • Best-of, worst-of and outperformance options
  • Correlation and volatility exposures
  • Dispersion trading
  • Correlation smiles and impact on product risk management
  • FX linkage - quanto and composition options
  • Why quanto options have correlation exposure
  • Ensuring arbitrage free quanto pricing

Exercise: Comparison of basket and quanto option in an investment strategy

Day Two

Exotic Underlyings and Structured Products

  • CPPI and the concept of a dynamic underlying
  • Risk controlled indices and options
  • Risk budget indices
  • Accelerator options
  • Forward starting options and cliquets
  • PRIPs, regulation and the structured products market
  • Capital protected notes
  • Airbags and other participation enhancing structures
  • Yield enhancing structures – reverse convertibles
  • Knock-in reverse convertibles
  • Enhancing yield with worst of structures

Exercise: Using a risk controlled index and looking for arbitrage in the structure products market

Autocallables and Accumulators

  • Autocallable structures
  • Using autocallable for enhanced participation
  • Using autocallable for enhanced yield
  • Common variants of autocallable
  • Defensive autocallables
  • Step-down autocallables
  • Risk management of autocallable structures
  • Role of autocallables in an investment portfolio
  • Accumulators
  • Corporate use of structured products
  • Structured acquisitions and disposals

Exercise: Investigation of autocallable structure and the impact of defensive features

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