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FX Exotic Options

Day One

Digital and Touch Contracts

  • Digital Contract paying domestic or foreign currency

  • Relationship between digital and vanilla options

  • Corridors and range accruals

  • Exact pricing of foreign- and domestic currency paying digitals

  • Windmill effect: impact of skew on digital price

  • Exact pricing of European barrier options

  • Semi-static hedging argument for one-touch (OT) contracts

  • The importance of forward skew

First-Generation Exotics and Valuation with Smile

  • ISDA 2005 Barrier Options Supplement

  • Pricing of touch contracts and barrier options in the Black-Scholes model

  • Workshop: hedging a knock-out (KO) with a risk reversal; building your own semi-static hedging tool, discuss forward volatility risk

  • Reverse knock-out options: European vs. American, monitoring, legal issues, barrier events

  • Pricing of reverse knock-out (RKO) barrier options

  • Hedging of RKOs, dealing with Greeks, barrier moving and bending, short-selling constraints

  • Impact of barrier option hedging on the spot

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

  • Fluffy barrier options, step barrier options, occupation-time derivatives

  • Double barrier options and their Greeks

  • Parisian, Parasian, forward-start barriers, Two-Touch, James-Bond range

  • Knock-in-knock-out (KIKO) options, Transatlantic barriers, KOAMKIEU

  • Window barrier options

  • DNT / DKO relationship, RKO replication with KO and OT

  • Residual risk and limitations. static, semi-static and dynamic hedging approaches

  • Fixings, sources, monitoring, fixing governance

Traders’ approach to barrier option risk management / vanna-volga pricing

  • Second order Greeks and their relevance for the options trading book: vanna, volga

  • How higher order Greeks influence the price

  • Cost of hedging vanna with Risk Reversals

  • Cost of hedging volga with Butterflies

  • Survival probabilities, various approaches and their pros and cons

  • Case study: one-touch, one-touch moustache

  • Discussion of weaknesses and traps

  • Consistency analysis

  • Mixing super-replication and vanna-volga

  • Vanna-volga Greeks

  • Volunga / Vanunga / Aega / Rega / Sega / Bufga / Revga


Day Two


Overview of Pricing Models for Foreign Exchange Derivatives

Many pricing models are used for FX exotics, most popularly vanna-volga and stochastic-local volatility models. We provide an overview of common approaches in the market and show how some models overprice, and others underprice several exotic derivatives contracts as well as its implication on risk management.

  • Local volatility models (LV), pros and cons and where they fail

  • Stochastic volatility models (SV), pros and cons and where they fail

  • The mixture approach: stochastic-local volatility (SLV)

  • Mixed local volatility (MLV)

  • Advantages of a consistent SLV approach compared to vanna-volga

  • Common market practice

More Exotics

  • Compound and Instalment Options, Forward-volatility-agreements (FVA)

  • Power options

  • Forward-start options

  • Asian options: options on the geometric, arithmetic and harmonic mean

  • Contingent payment contracts: Pay-later

  • Quanto Options: Case Study: EUR-USD-XAU

  • Self-Quant Options: Case Study: Inverse DCI

  • Time options / flexible forwards

  • Tender-linked forwards

  • Variance and Volatility Swaps

Structured Products with Exotics in FX/IR markets

  • FX-linked swaps: Hanseatic swap, corridor swap, turbo swap

  • Wedding cake investment, onions

  • Forward Extra and its variations

  • Case study on IR swap linked to EUR-CHF self-quanto options

  • Power-Reverse Dual Currency (PRDC) bonds and their impact on the USD-JPY skew

Accumulators and Target Forwards

  • Knock-out forward, fader, accumulator

  • Case Study TARF, Profit Target Forward (used for corporates)

  • Case Study Pivot Target Forward (used for private banking)

Multi-Currency Contracts

  • Product overview with applications: quanto options, baskets, spreads, best-ofs, outside barriers

  • Correlation: implied correlations, correlation risk and hedging, currency triangles and tetrahedra

  • Hands-on approach to include the impact of smiles on the basket price via optimal strike decomposition

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

Course Details

Duration

2 Days

Price

GBP 3200

Dates

Check Availability

Location

Live Online

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Onsite

Brochure

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