Exotic Options and Hybrids : A Guide to Structuring, Pricing and Trading.
Title:
Exotic Options and Hybrids : A Guide to Structuring, Pricing and Trading.
Author:
Bouzoubaa, Mohamed.
ISBN:
9780470970546
Personal Author:
Edition:
1st ed.
Physical Description:
1 online resource (394 pages)
Series:
The Wiley Finance Series ; v.505
The Wiley Finance Series
Contents:
Exotic Options and Hybrids -- Contents -- Exotic Options and Hybrids -- List of Symbols and Abbreviations -- Preface -- PART I FOUNDATIONS -- 1 Basic Instruments -- 1.1 Introduction -- 1.2 Interest Rates -- 1.2.1 LIBOR vs Treasury Rates -- 1.2.2 Yield Curves -- 1.2.3 Time Value of Money -- 1.2.4 Bonds -- 1.2.5 Zero Coupon Bonds -- 1.3 Equities and Currencies -- 1.3.1 Stocks -- 1.3.2 Foreign Exchange -- 1.3.3 Indices -- 1.3.4 Exchange-traded Funds -- 1.3.5 Forward Contracts -- 1.3.6 Futures -- 1.4 Swaps -- 1.4.1 Interest Rate Swaps -- 1.4.2 Cross-currency Swaps -- 1.4.3 Total Return Swaps -- 1.4.4 Asset Swaps -- 1.4.5 Dividend Swaps -- 2 The World of Structured Products -- 2.1 The Products -- 2.1.1 The Birth of Structured Products -- 2.1.2 Structured Product Wrappers -- 2.1.3 The Structured Note -- 2.2 The Sell Side -- 2.2.1 Sales and Marketing -- 2.2.2 Traders and Structurers -- 2.3 The Buy Side -- 2.3.1 Retail Investors -- 2.3.2 Institutional Investors -- 2.3.3 Bullish vs Bearish, the Economic Cycle -- 2.3.4 Credit Risk and Collateralized Lines -- 2.4 The Market -- 2.4.1 Issuing a Structured Product -- 2.4.2 Liquidity and a Two-way Market -- 2.5 Example of an Equity Linked Note -- 3 Vanilla Options -- 3.1 General Features of Options -- 3.2 Call and Put Option Payoffs -- 3.3 Put-call Parity and Synthetic Options -- 3.4 Black-Scholes Model Assumptions -- 3.4.1 Risk-neutral Pricing -- 3.5 Pricing a European Call Option -- 3.6 Pricing a European Put Option -- 3.7 The Cost of Hedging -- 3.8 American Options -- 3.9 Asian Options -- 3.10 An Example of the Structuring Process -- 3.10.1 Capital Protection and Equity Participation -- 3.10.2 Capital at Risk and Higher Participation -- 4 Volatility, Skew and Term Structure -- 4.1 Volatility -- 4.1.1 Realized Volatility -- 4.1.2 Implied Volatility -- 4.2 The Volatility Surface.
4.2.1 The Implied Volatility Skew -- 4.2.2 Term Structure of Volatilities -- 4.3 Volatility Models -- 4.3.1 Model Choice and Model Risk -- 4.3.2 Black-Scholes or Flat Volatility -- 4.3.3 Local Volatility -- 4.3.4 Stochastic Volatility -- 5 Option Sensitivities: Greeks -- 5.1 Delta -- 5.2 Gamma -- 5.3 Vega -- 5.4 Theta -- 5.5 Rho -- 5.6 Relationships Between the Greeks -- 5.7 Volga and Vanna -- 5.7.1 Vega-Gamma (Volga) -- 5.7.2 Vanna -- 5.8 Multi-asset Sensitivities -- 5.9 Approximations to Black-scholes and Greeks -- 6 Strategies Involving Options -- 6.1 Traditional Hedging Strategies -- 6.1.1 Protective Puts -- 6.1.2 Covered Calls -- 6.2 Vertical Spreads -- 6.2.1 Bull Spreads -- 6.2.2 Bear Spreads -- 6.3 Other Spreads -- 6.3.1 Butterfly Spreads -- 6.3.2 Condor Spreads -- 6.3.3 Ratio Spreads -- 6.3.4 Calendar Spreads -- 6.4 Option Combinations -- 6.4.1 Straddles -- 6.4.2 Strangles -- 6.5 Arbitrage Freedom of the Implied Volatility Surface -- 7 Correlation -- 7.1 Multi-asset Options -- 7.2 Correlation: Measurements and Interpretation -- 7.2.1 Realized Correlation -- 7.2.2 Correlation Matrices -- 7.2.3 Portfolio Variance -- 7.2.4 Implied Correlation -- 7.2.5 Correlation Skew -- 7.3 Basket Options -- 7.4 Quantity Adjusting Options: "Quantos" -- 7.4.1 Quanto Payoffs -- 7.4.2 Quanto Correlation and Quanto Option Pricing -- 7.4.3 Hedging Quanto Risk -- 7.5 Trading Correlation -- 7.5.1 Straddles: Index versus Constituents -- 7.5.2 Correlation Swaps -- PART II EXOTIC DERIVATIVES AND STRUCTURED PRODUCTS -- 8 Dispersion -- 8.1 Measures of Dispersion and Interpretations -- 8.2 Worst-of Options -- 8.2.1 Worst-of Call -- 8.2.2 Worst-of Put -- 8.2.3 Market Trends in Worst-of Options -- 8.3 Best-of Options -- 8.3.1 Best-of Call -- 8.3.2 Best-of Put -- 8.3.3 Market Trends in Best-of Options -- 9 Dispersion Options -- 9.1 Rainbow Options -- 9.1.1 Payoff Mechanism.
9.1.2 Risk Analysis -- 9.2 Individually Capped Basket Call (ICBC) -- 9.2.1 Payoff Mechanism -- 9.2.2 Risk Analysis -- 9.3 Outperformance Options -- 9.3.1 Payoff Mechanism -- 9.3.2 Risk Analysis -- 9.4 Volatility Models -- 10 Barrier Options -- 10.1 Barrier Option Payoffs -- 10.1.1 Knock-out Options -- 10.1.2 Knock-in Options -- 10.1.3 Summary -- 10.2 Black-Scholes Valuation -- 10.2.1 Parity Relationships -- 10.2.2 Closed Formulas for Continuously Monitored Barriers -- 10.2.3 Adjusting for Discrete Barriers -- 10.3 Hedging Down-and-in Puts -- 10.3.1 Monitoring the Barrier -- 10.3.2 Volatility and Down-and-in Puts -- 10.3.3 Dispersion Effect on Worst-of Down-and-in Puts -- 10.4 Barriers in Structured Products -- 10.4.1 Multi-asset Shark -- 10.4.2 Single Asset Reverse Convertible -- 10.4.3 Worst-of Reverse Convertible -- 11 Digitals -- 11.1 European Digitals -- 11.1.1 Digital Payoffs and Pricing -- 11.1.2 Replicating a European Digital -- 11.1.3 Hedging a Digital -- 11.2 American Digitals -- 11.3 Risk Analysis -- 11.3.1 Single Asset Digitals -- 11.3.2 Digital Options with Dispersion -- 11.3.3 Volatility Models for Digitals -- 11.4 Structured Products Involving European Digitals -- 11.4.1 Strip of Digitals Note -- 11.4.2 Growth and Income -- 11.4.3 Bonus Steps Certi.cate -- 11.5 Structured Products Involving American Digitals -- 11.5.1 Wedding Cake -- 11.5.2 Range Accrual -- 11.6 Outperformance Digital -- 11.6.1 Payoff Mechanism -- 11.6.2 Correlation Skew and Other Risks -- 12 Autocallable Structures -- 12.1 Single Asset Autocallables -- 12.1.1 General Features -- 12.1.2 Interest Rate/Equity Correlation -- 12.2 Autocallable Participating Note -- 12.3 Autocallables with Down-and-in Puts -- 12.3.1 Adding the Put Feature -- 12.3.2 Twin-Wins.
12.3.3 Autocallables with Bonus Coupons -- 12.4 Multi-asset Autocallables -- 12.4.1 Worst-of Autocallables -- 12.4.2 Snowball Effect and Worst-of put Feature -- 12.4.3 Outperformance Autocallables -- PART III MORE ON EXOTIC STRUCTURES -- 13 The Cliquet Family -- 13.1 Forward Starting Options -- 13.2 Cliquets with Local Floors and Caps -- 13.2.1 Payoff Mechanism -- 13.2.2 Forward Skew and Other Risks -- 13.3 Cliquets with Global Floors and Caps -- 13.3.1 Vega Convexity -- 13.3.2 Levels of These Risks -- 13.4 Reverse Cliquets -- 14 More Cliquets and Related Structures -- 14.1 Other Cliquets -- 14.1.1 Digital Cliquets -- 14.1.2 Bearish Cliquets -- 14.1.3 Variable Cap Cliquets -- 14.1.4 Accumulators/Lock-in Cliquets -- 14.1.5 Replacement Cliquets -- 14.2 Multi-asset Cliquets -- 14.2.1 Multi-Asset Cliquet Payoffs -- 14.2.2 Multi-asset Cliquet Risks -- 14.3 Napoleons -- 14.3.1 The Napoleon Structure -- 14.3.2 The Bearish Napoleon -- 14.4 Lookback Options -- 14.4.1 The Various Lookback Payoffs -- 14.4.2 Hedging Lookbacks -- 14.4.3 Sticky Strike and Sticky Delta -- 14.4.4 Skew Risk in Lookbacks -- 15 Mountain Range Options -- 15.1 Altiplano -- 15.2 Himalaya -- 15.3 Everest -- 15.4 Kilimanjaro Select -- 15.5 Atlas -- 15.6 Pricing Mountain Range Products -- 16 Volatility Derivatives -- 16.1 The Need for Volatility Derivatives -- 16.2 Traditional Methods for Trading Volatility -- 16.3 Variance Swaps -- 16.3.1 Payoff Description -- 16.3.2 Variance vs Volatility Swaps -- 16.3.3 Replication and Pricing of Variance Swaps -- 16.3.4 Capped Variance Swaps -- 16.3.5 Forward Starting Variance Swaps -- 16.3.6 Variance Swap Greeks -- 16.4 Variations on Variance Swaps -- 16.4.1 Corridor Variance Swaps -- 16.4.2 Conditional Variance Swaps -- 16.4.3 Gamma Swaps -- 16.5 Options on Realized Variance -- 16.6 The VIX: Volatility Indices -- 16.6.1 Options on the VIX.
16.6.2 Combining Equity and Volatility Indices -- 16.7 Variance Dispersion -- PART IV HYBRID DERIVATIVES AND DYNAMIC STRATEGIES -- 17 Asset Classes (I) -- 17.1 Interest Rates -- 17.1.1 Forward Rate Agreements -- 17.1.2 Constant Maturity Swaps -- 17.1.3 Bonds -- 17.1.4 Yield Curves -- 17.1.5 Zero Coupon, LIBOR and Swap Rates -- 17.1.6 Interest Rate Swaptions -- 17.1.7 Interest Rate Caps and Floors -- 17.1.8 The SABR Model -- 17.1.9 Exotic Interest Rate Structures -- 17.2 Commodities -- 17.2.1 Forward and Futures Curves, Contango and Backwardation -- 17.2.2 Commodity Vanillas and Skew -- 18 Asset Classes (II) -- 18.1 Foreign Exchange -- 18.1.1 Forward and Futures Curves -- 18.1.2 FX Vanillas and Volatility Smiles -- 18.1.3 FX Implied Correlations -- 18.1.4 FX Exotics -- 18.2 Inflation -- 18.2.1 Inflation and the Need for Inflation Products -- 18.2.2 Inflation Swaps -- 18.2.3 Inflation Bonds -- 18.2.4 Inflation Derivatives -- 18.3 Credit -- 18.3.1 Bonds and Default Risk -- 18.3.2 Credit Default Swaps -- 19 Structuring Hybrid Derivatives -- 19.1 Diversification -- 19.1.1 Multi-asset Class Basket Options -- 19.1.2 Multi-asset Class Himalaya -- 19.2 Yield Enhancement -- 19.2.1 Rainbows -- 19.2.2 Inand Out-barriers -- 19.2.3 Multi-asset Class Digitals -- 19.2.4 Multi-asset Range Accruals -- 19.3 Multi-asset Class Views -- 19.4 Multi-asset Class Risk Hedging -- 20 Pricing Hybrid Derivatives -- 20.1 Additional Asset Class Models -- 20.1.1 Interest Rate Modelling -- 20.1.2 Commodity Modelling -- 20.1.3 FX Modelling -- 20.2 Copulas -- 20.2.1 Some Copula Theory -- 20.2.2 Modelling Dependencies in Copulas -- 20.2.3 Gaussian Copula -- 20.2.4 Pricing with Copulas -- 21 Dynamic Strategies and Thematic Indices -- 21.1 Portfolio Management Concepts -- 21.1.1 Mean-variance Analysis -- 21.1.2 Minimum-variance Frontier and Efficient Portfolios.
21.1.3 Capital Asset Pricing Model.
Abstract:
The recent financial crisis brought to light many of the misunderstandings and misuses of exotic derivatives. With market participants on both the buy and sell-side having been found guilty of not understanding the products they were dealing with, never before has there been a greater need for clarification and explanation. Exotic Options and Hybrids is a practical guide to structuring, pricing and hedging complex exotic options and hybrid derivatives that will serve readers through the recent crisis, the road to recovery, the next bull market and beyond. Written by experienced practitioners, it focuses on the three main parts of a derivative's life: the structuring of a product, its pricing and its hedging. Divided into four parts, the book covers a multitude of structures, encompassing many of the most up-to-date and promising products from exotic equity derivatives and structured notes to hybrid derivatives and dynamic strategies. Based on a realistic setting from the heart of the business, inside a derivatives operation, the practical and intuitive discussions of these aspects make these exotic concepts truly accessible. Adoptions of real trades are examined in detail, and all of the numerous examples are carefully selected so as to highlight interesting and significant aspects of the business. The introduction of payoff structures is accompanied by scenario analysis, diagrams and lifelike sample term sheets. Readers learn how to spot where the risks lie to pave the way for sound valuation and hedging of such products. There are also questions and accompanying discussions dispersed in the text, each exploited to illustrate one or more concepts from the context in which they are set. The applications, the strengths and the limitations of various models are highlighted, in relevance to the products and their risks, rather than the model
implementations. Models are de-mystified in separately dedicated sections, but their implications are alluded to throughout the book in an intuitive and non-mathematical manner. By discussing exotic options and hybrids in a practical, non-mathematical and highly intuitive setting, this book will blast through the misunderstanding of exotic derivatives, enabling practitioners to fully understand and correctly structure, price and hedge theses products effectively, and stand strong as the only book in its class to make these "exotic" concepts truly accessible.
Local Note:
Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2017. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.
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