Exotic Options - Pricing, Hedging and Applications
Duration: 3 days
- Modelling Issues and Valuation Methods
- Barrier, Average Rate and Look-back Options
- Binary, Digital and Touch Options
- Compound, Chooser, Power, Log and Shout Options
- Exchange, Rainbow, Basket and Quanto Exotic Options
- Hedging with Exotic Options
- Financial Engineering with Exotic Options
- Managing Risks of Exotic Options Portfolios
The objective of this advanced-level course is to give you a good understanding of the mechanics,
pricing, risk characteristics and applications of exotic options.
We start with a general introduction to exotics options, explaining the differences between
“vanilla” and “exotic” options and giving an overview of exotic options, their pay-off profiles,
and their applications.
Further, we present a general framework for valuing exotic options. Models include analytical as
well as numerical models and Monte Carlo simulation techniques.
We then take a closer look at the various types of exotic options: such as Asian, lookback,
barrier, basket, compound, ladder, clique, chooser, contingent premium and rainbow options. We
establish the pay-off profiles of these options and explain how they can be decomposed into more
basic “building blocks” – such as vanilla options and digital options - for analysis and
structuring purposes.
Further, we explain how the options are priced and hedged, and how the traditional “greeks” –
delta, gamma, vega, theta and rho – as well as higher order sensitivities such as “speed”, “color”
and “charm” - are calculated and interpreted.
We also explain how the individual exotic options can be used for the hedging of commercial foreign
exchange transactions, complex market risk exposures, and as building blocks in “exotic” structured
products.
Finally, we present and discuss ways of effectively managing the risk of a portfolio of exotic
options. We explain how to establish a “risk warehouse” and how this risk warehouse can be managed
using standard derivatives, structured products and dynamic hedging techniques.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 12.00 Introduction to Exotic Options
- What is an “Exotic Option“?
- Types of Exotic Options
- Classification of Exotic Options
- Overview of Applications
Modelling Issues and Valuation Methods
- Review of concepts in option pricing theory
- Black-Scholes Model
- Cox-Ross-Rubinstein binomial model
- Generating Payoffs
- Approaches to Hedging
- Monte Carlo Toolkit
- Small Exercises
12.00 - 13.00 Lunch
13.00 - 16.30 Path-Dependent Options (1): Barrier Options
- Definitions and characteristics
-
Types of Barrier Options
- Knock-in and Knock-out
- Single and Double Barriers
- Modelling Pay-Offs
- Pricing and Hedging
-
Risk Sensitivities
- Delta, Gamma, Vega etc.
- A Closer Look at the Behaviour of “Greeks” Around the Barriers
-
Examples of Applications
- Reducing Hedging Costs with Barrier Options
- Exercise (Double Barrier Option with Rebate)
Day Two
09.00 - 09.15 Recap
09.15 - 12.00 Path-Dependent Options(2): Asian Options
- Average Rate and Average Strike
- Averaging methods
- Modelling pay-offs
- Pricing and Hedging
- Practical Applications and Exercises
Path-Dependent Options(3): Look-Backs, Ladders and Ratchet Options
- Look-Back and Look-Forward Options
- Ratchet (Clique) Options
- Ladder Options
- Pay-offs Types (Sampling of Max/Min)
- Pricing and Valuation Issues
- Cases and Exercises
12.00 - 13.00 Lunch
13.00 - 16.30 Discrete Pay-Off Options
- Euro-Digital Options
- Contingent Premium Options
- One and Two Touch / American Digitals
- Double No-Touch
- Pricing
- Examples of Applications
- Exercise
Other Options
- Compound Options
- Chooser Options
- Pay Later (Contingent Premium) Options
- Delayed Options
- Pricing
- Examples of Applications
- Exercises
Day Three
09.00 - 09.15 Recap
09.15 - 12.00 Multivariate Options
- Basket Options
-
Rainbow Options
- “Best of”/ “Worst of” Options
- Option on the Max or Min of N Assets
- Multi-Strike Options
- Spread Options
- Exchange Options
- Applications of Multivariate Options
- Exercise
Quanto Options
- Definitions and Characteristics
- Types of Quanto Options
- Pricing of Quanto Derivatives
- Examples of Applications
12.00 - 13.00 Lunch
13.00 - 16.30 Financial Engineering with Exotic Options
- Purpose of Constructing of Exotic Structures
- Plain vs. Embedded Exotics
-
Examples
- Range Floaters
- Continuous Accrual Currency Note with a One-Touch Knock-out Range
- Up-and-Out Indexation
- Step-Lock and Clique Structures
Risk Management of Exotic Options
- Effectively Managing the Risks of a Portfolio of Exotic Options
Evaluation and Termination of the Seminar
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