Advanced Options Pricing and Hedging Volatility Risk

Overview

This two-day intensive course is ideal for finance professionals seeking to deepen their expertise in options trading and volatility management. The course will cover option pricing and risk management techniques.

Learning Objectives

Exploring differences between physical and cash-settled options
European versus American/Bermudan options, and the implications of deferred premiums.
Examining the role of volatility in option pricing & Managing First-Generation Exotics.

Who the course is for

Derivative traders
Quants and research analysts
Fund managers, fund of funds
Structured product teams
Financial and valuation controllers
Risk managers and regulators
Bank and corporate treasury managers
IT

Richard Fedrick

Richard started his career in 1988 in the Derivatives Product Group (DPG) at Morgan Stanley, which he joined after three years of post-grad research in theoretical particle physics. He trains around the world on most areas of derivatives, with a particular emphasis on interest rates. His clients have included many of the world’s leading financial institutions, in all the major financial centres in Europe, North America, the Middle East and Asia.

Day One

Option Fundamentals

Definitions and payoff diagrams
Exercise mechanics and settlement
Physical versus cash-settled
European versus American/Bermudan
The rise of deferred (back-end) premiums
Intrinsic versus time-value
Put-call parity

Basic Option Strategies

Simple option strategies and their key characteristics
Naked long and short call/puts
Risk asymmetry: limited risk versus unlimited risk strategies
Option spreads
Call spreads and put spreads
Ratio spreads
Calendar spreads
Covered calls (buy-writes)
Protective puts
Straddles and strangles

Option Pricing

The Black-Scholes formula
Modelling asset prices – the fundamental B-S PDE
Briefly on the derivation of the Black-Scholes formula
Shortfalls and limitations of the Black-Scholes approach
Adapting the Black-Scholes approach for futures and FX (Black, Garman-Kohlhagen)
Binomial trees
Constructing and calibrating the tree
Pricing American-style options on the lattice
Monte Carlo simulation
Pros and cons of the different approaches
Stochastic and local vol models
Introduction to SABR

Risk Management – Delta Hedging a Position

First order price risks: Delta, vega, theta, rho, phi
Delta hedging and risk analysis
Dynamic risk management using delta
Delta hedging an option portfolio
Limitations and risks inherent in delta hedging
Gamma; 2nd order option price sensitivity
Interpreting gamma
Gamma characteristics of in-, at- and out-of-the-money options
Long and short Gamma – risks and opportunity
Impact of Gamma on Delta hedge management
Theta; option price time decay
Theta as cost of carry
Inter-relationship between Theta, Gamma
Understanding and actively managing interrelationships between option price sensitivities
Active management of portfolio delta, gamma and vega risks