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Course Calendar Course Calendar

FX Exotic Options

Day One

Review of the Fundamentals


  • Components of foreign exchange risk: forwards, swaps and vanilla options
  • FX options market: who does what and why
  • Software solutions: which vendor offers what - Fenics, SuperDerivatives, Bloomberg, Volmaster, Murex, ICY, Reuters

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, ATM and delta-conventions
  • 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
  • Market Data: rates, forward points, swap points, spreads

Workshop: Acquaint yourself with pricing software and market quotes


  • 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: SABR, vanna-volga, Reiswich-Wystup
  • Forward volatility

Workshop: Build your own interpolation tool for volatility smile, calculate Greeks in terms of deltas, hedging volatility risk, deriving the strike from the delta with smile

Structuring with Vanilla Options

  • Risk reversal and participating forward
  • Spreads and seagulls
  • Straddles, strangles, butterflies, condors
  • Digital options

Workshop: Structure your own seagull. Include sales margin. Solve for zero-cost. Calculate delta and vega hedge. Discuss bid-ask spread. Analyze smile effect

Day Two

Structuring and Vanna-Volga-Pricing

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, KIKOs, exotic barrier options
  • Compound and instalment
  • Asian options: options on the geometric, arithmetic and harmonic mean
  • Power, lookback, chooser, paylater

Workshop: Hedging a knock-out with a risk reversal. Build your own semi-static hedging tool, discuss forward volatility risk

Applications in Structuring

  • Dual currency and other FX-linked deposits
  • Structured forwards: shark forward, bonus forward, range-reset forward
  • FX-linked interest rate swaps and cross currency swaps
  • Exotic spot and forward trades

Workshop: Structuring exercises: build structures, solve for zero cost, smile adjustment, bid-ask spreads

Vanna-Volga Pricing

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

Workshop: Pricing of barrier options with smile

Long Term FX Options (contributed usually by the Guest Speaker)

  • Development of Basis Spreads
  • Product Range, FX-linked bonds, long-term vanilla and PRDCs
  • Modelling approaches
  • Discussion of risk features and modelling requirements  

Day Three

Second Generation Exotics, Pricing and Hedging issues

Overview of Market Models

  • Stochastic volatility models
  • Heston 93: model properties, calibrations, pricing, pros and cons
  • Local Volatility: properties, pros and cons
  • Stochastic Local Volatility Hybrid models

Super-Replication of barrier options: using leverage constraints and its first order approximation - the barrier shift. Mixing super-replication and vanna-volga

The Pedigree of Barrier and Touch Options

Workshop and Discussion: How to construct the universe of barrier and touch options from key building blocks: vanilla and one-touch. Residual risk and limitations. Static, semi-static and dynamic hedging approaches

Single Currency Exotics beyond Standard Barrier and Touch Options

  • 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, target redemption forwards (TRFs)
  • Forward start options, step-ups
  • Time options
  • Variance and Volatility Swaps

Workshop: Structure and price your own accumulative forward. Smile adjustment. Simulation tool for TRFs. Discussion of TRF hedging

Multi-Currency Exotics

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

Workshop: Pricing and correlation hedging a two-currency best-of: calculate your own sensitivities and hedge vega and correlation risk

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