Guide to Exotic Options
"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
exotics are sensible and when they are just a "mathematical fun"
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
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)
how do I decide which mathematical model/method is most
market professionals (some understanding of markets/ products helpful)
Traders, sales, support,
· Management, treasurers,
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
3) Pricing Exotic
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
3) Pricing Exotic
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.
"comprehensive" hedging exercise applied to a digital and a
spread option, including the "effectiveness" of Greeks and the benefits
of strategy simulation.
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.
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?").
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
comprehensive and extensively illustrated Handout Notes (see samples
Plus copies of relevant TG2 Books/e-Books
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"