Course description
This advanced three-day course covers the pricing, hedging and application of FX exotics for use in trading, risk management, financial engineering and structured products.
FX 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 participants will receive a copy of the latest edition of Professor Wystup's reference book "FX Options and Structured Products", published by Wiley.
Who The Course is For
- Quants/ Financial Engineers: To learn how the products are used
- Traders: To deepen the technical background
- Risk Managers: To understand the front-office way of thinking
- Structurers: To learn more about pricing and models
- Researchers: To understand the practical matters
- Sales People: To get the overview of product development and smile adjustments
Prior Knowledge
This course is for anyone new to FX Exotics, and those who need to bring their knowledge up to date and learn how the overall FX options market works. However, this is not a basic course on options and understanding of the FX vanilla options market and FX smile is essential to understand exotics.
The programme is also not a pure quantitative modelling seminar, but will provide the necessary mathematics you need to understand to be successful in FX Options.
Upcoming start dates
Who should attend?
London Financial Studies is registered with CFA and GARP Institute as an Approved Provider of continuing education programs.
Training content
Day One
Review of the Fundamentals
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
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: 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-PricingFirst 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 reversa. 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
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
Day Three
Second Generation Exotics, Pricing and Hedging issues
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
Long Term FX Options
- Development of Basis Spreads
- Product Range, FX-linked bonds, long-term vanilla and PRDCs
- Modelling approaches
- Discussion of risk features and modelling requirements
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