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A Trader's Guide to Exotic Options


Objective: a 3-day no "black-box" approach is used to illustrate when and how to consider/structure exotics in the real world to optimally manage P&L, position keeping, and risk management issues, and:

     when exotics are sensible and when they are just a "mathematical fun"

    which exotics are easy to hedge (lower costs) and which are a "bear"

     that much of maths are not really that scary, as well as a qualitative feel for price behaviour

     how to simulate dynamic and static hedging strategies for assessing exotics for investors, hedgers, and market makers

Will learn  to answer questions like:

     why does my barrier option position value "blow-up" when I use a binomial tree?

     why do my clients laugh at me when I try to sell them that latest and most fashionable "double do-hicky cosmic donut-machine option"?

     how do I alter my rebalancing strategy for exotics?

     how do I decide whether an investor would be better off with a compound option or a barrier option?

     how do I asses the hedging costs of a dynamic strategy for a complex exotic structure?

     how do I relate vanilla options to exotic options?

     what is all that N(d1) and N(d2) business anyway?

     how do I decide which mathematical model/method is most appropriate?

Audience: market professionals (some understanding of markets/ products helpful)

      Traders, sales, support,

      Management, treasurers,

      Risk Management

Table of Contents 

1) Review of Vanilla Options: a pedestrian approach to understanding the key concepts

2) Fundamental the types and "whys" of supply/demand as driven by economic need, risk/return preferences, and sometimes "culture".

3) Pricing Exotic Options (A): pricing each of  the "usual suspects": Asian, Digital, Barrier, Lookback, Chooser, Compound, Spread, Quanto, etc with emphasis on closed form solutions and qualitative price behaviour - i.e. what the equations mean rather then how to derive them, the pricing studies are supported by analyses of volatility, as well as insight into real world dangers and possibilities.

3) Pricing Exotic Options (B): extends (A) to include a variety** of exotic options on serial and term-structure products, as well as deeper look into valuation via Monte Carlo, Binomial Tree, and Finite Difference.

Workshop: "comprehensive" pricing exercise (encompassing) all of the client/market/idiosyncratic issues for a barrier option, and for an options on slope of a yield curve.

4) Hedging Exotics: comprehensive approach to position keeping starting with a statement of hedging objective, review and application of sensitivity (Greeks/empirical) methods for dynamic strategies, moving to both static and dynamic profile matching methods.

Workshop: "comprehensive" hedging exercise applied to a digital and a spread option, including the "effectiveness" of Greeks and the benefits of strategy simulation.

5) Trading Strategies and Structuring: application of risk/returns needs of investors, hedgers, and market makers to constructing/implementing trading strategies with exotics, including heuristic risk/return analyses.

7) Portfolio Simulation and Trading Efficiency: an introduction to the methods required for real world hedging and portfolio risk management by constructing strategy  simulations of directional, structured, and hedged exotic options portfolios, as well as techniques for choosing "optimal"  .

Workshop: "comprehensive" hedging/trading exercise in analyses and selection of "optimal" strategies as well as methods for assessing the unexpected (e.g. "the funding game -- or how can a perfectly hedged option still loose money?").

8) VAR, Credit, and Regulatory Issues: an introduction to the some of the key themes and methods in dealing with VAR, credit, and regulatory matters, as applied to exotic options


857 Pages of comprehensive and extensively illustrated Handout Notes (see samples here)

Plus copies of relevant TG2 Books/e-Books

Note: Seminars can be tailored to your trading, risk, client, and systems needs.  Submit your needs, and/or "cut/paste" from other Seminars (see entire "standard" list HERE)

    Get a Syllabus in more detail

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Last modified: July 25, 2011