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Enhance your knowledge of equity derivatives & FX options
This course represents Module 2 of Advanced Derivatives
Module 2 – Equities, FX, Credit and XVA
- Day 3 Equity and FX options, exotics, structured products and trading the volatility surface
- Day 4 Credit derivatives, CDOs and structured credit
- Day 5 Funding, XVA, and the new regulatory world
The emphasis is on a healthy mix of theory and client applications, and is illustrated throughout with real-life examples and case-studies.
Agenda
Day 3 Options, Exotics and Structured Products
Option fundamentals
- The basic payoff diagrams
- Cash versus physical settlement
- Popular option combinations and strategies
- Volatility - what it is and why it matters
Option pricing
- Intuitive drivers of the premium
- Binomial trees
- Monte Carlo
- Black-Scholes
Option risk-management
- The delta hedge
- The fundamental role of gamma
- Gamma versus theta
Understanding and trading volatility
- Defining implied volatility
- Defining the vol surface, smile and skews
- Hedging smile and skew risk, risk-reversals and butterflies
- The role of stochastic vol in understanding smile and skew
- Quantifying the risk - vanna and volgamma
- Introduction to local and stochastic vol models
Exotics and structured products
- Digitals and range-accruals
- Barrier options and client applications
- Static hedging of barrier options
- Autocallables and accumulators
- Cliquets and the problem of forward vol
Day 4
Credit Derivatives
Mechanics of a CDS contract
- Defining a credit event
- CDS setttlement
Pricing and risk
- The credit triangle – relating credit spreads to default probability (PD), exposure (EAD) and expected recovery (LGD)
- Risky discounting
- Standard contracts, fixed spreads, computing the upfront
- CS01 and convexity
Hedging bond positions
Constructing the hedge – default risk or spread risk?
Trading the cash-CDS basis
Drivers of the basis
CDS indices (iTRAXX and CDX)
- Mechanics and settlement
- Intrinsic spread and skew
- Sub-indices
Tranching and correlation
- Synthetic single-tranche CDOs
- Credit correlation and why it matters
- Understanding the tranche delta
Structured credit trading
- Tranche trading and convexity
- Nth-to-default baskets
Day 5 Counterparty Risk, Funding and XVAs
Key concepts and metrics of counterparty exposure
- When exposure is non-static – why derivative are tricky
- Key metrics of exposure for derivatives: EL, EE, EPE, PFE
From exposure to Expected Loss
- Monte carlo simulation and semi-analytical methods
- Computing EL for some simple positions: IRS, forward FX
Pricing for default risk
- The traditional approach versus the CVA approach
Computing the CVA charge for the most common positions
- Shortcut calculational tricks
- Mitigating the exposure on cross-currency swaps
Wrong-way risk
- Examples of wrong-way (and right-way) risk
- Computing the CVA charge with wrong-way risk
- The new CVA capital charge in Basel III
DVA – adjusting for your own risk
- DVA for some common positions
- Is DVA real? Why it remains controversial
CSAs and collateral
- The importance of netting
- CSA key terms
- The dual role of the CSA – collateral as funding
Building a funding curve
- The choice of OIS as a core discount curve
- What is meant by ‘CSA discounting’
- The ‘cheapest-to-deliver’ option in collateral posting
Understanding the Funding Valuation Adjustment (FVA)
- Adjustment for asymmetric collateral terms
- Avoiding the trap of double-counting FVA and DVA
Other XVA adjustments
The new regulatory world
- Central clearing
- Regulatory legislation: Dodd-Frank, EMIR, MiFiD and the rest
- What can we expect from Basel IV?
Trust the experts
Richard Fedrick
Richard started his career in 1988 in the Derivatives Product Group at Morgan Stanley, which he joined after three years of post-grad research in Theoretical Physics. He spent three years as a rates and FX structurer at Morgan Stanley before moving to a similar role at Deutsche Bank in London. In...
