1
Prerequisites
2
Introduction to the Structured Products Market
2.1
The Structured Products
2.1.1
Introduction
2.1.2
Issuing Wrappers
2.2
The Stakeholders
2.2.1
The Sell Side
2.2.2
The Buy Side
3
Back to Basics!
3.1
Interest Rates
3.1.1
Introduction
3.1.2
LIBOR and Treasury rates
3.1.3
Yield curves
3.2
Bonds
3.2.1
Introduction
3.2.2
Market Price
3.2.3
Bonds’ underlying risks
3.2.4
Zero-Coupon bonds (ZCB)
3.3
Equities
3.3.1
Dividends
3.3.2
Repurchase Agreement (Repo)
3.3.3
Liquidity
3.4
Forwards and Futures
3.4.1
Introduction
3.4.2
Delivery price, Forward price and Forward value
3.4.3
Forward price of a stock
3.5
Swaps
3.5.1
Interest Rate Swaps (IRS)
3.5.2
Cross-Currency Swaps (CCS)
3.5.3
Total Return Swaps (TRS)
3.5.4
Dividend Swaps
3.6
Options
3.6.1
Introduction
3.6.2
Call Options
3.6.3
Put Options
4
A deeper understanding of Options
4.1
The Black-Scholes model
4.1.1
Risk-Neutral Pricing
4.2
European Call Options
4.2.1
Introduction
4.2.2
Buyer’s payoff at maturity
4.2.3
Market Price or Premium
4.3
European Put Options
4.3.1
Introduction
4.3.2
Buyer’s payoff at maturity
4.3.3
Market Price or Premium
4.4
Intrinsic Value and Time Value
4.4.1
Introduction
4.4.2
Time Value of Call Options
4.4.3
Time Value of Put Options
4.5
The Cost of Hedging
4.6
The Call-Put Parity
4.6.1
Introduction
4.6.2
The Call-Put relationship
5
The Greeks
5.1
Introduction to the Greeks
5.1.1
Introduction
5.1.2
Taylor Series
5.1.3
Static and Dynamic Hedge
5.1.4
Summary Table of the Greeks
5.2
Delta
5.2.1
Description
5.2.2
Calls
5.2.3
Puts
5.2.4
Assets to delta hedge
5.2.5
Delta under Black-Scholes
5.2.6
Delta sensitivities
5.2.7
Other factors linked to delta hedge
5.2.8
Delta as a hedge ratio, not a probability
5.2.9
Setting up a small delta-hedging experiment
5.3
Gamma
5.3.1
Description
5.3.2
Gamma under Black-Scholes
5.3.3
Gamma sensitivities
5.3.4
Negative Gamma at maturity is tricky
5.3.5
Gamma P&L
5.3.6
An example
5.3.7
Can volatility be captured by delta-hedging?
5.3.8
Dollar Gamma
5.4
Theta
5.4.1
Description
5.4.2
Theta under Black-Scholes
5.4.3
Some features of Theta
5.4.4
Gamma and Theta are always flirting
5.5
Vega
5.5.1
Description
5.5.2
The Vega Matrix
5.5.3
Vega in the Black-Scholes model
5.5.4
Vega sensitivities
5.6
Rho
5.6.1
Description
5.6.2
Calls
5.6.3
Puts
5.6.4
Rho sensitivities
5.6.5
Rho Hedging
5.7
General Practical Example
5.8
Second-Order Greeks
5.8.1
Volga
5.8.2
Vanna
5.8.3
Charm
5.9
Multi-Asset Greeks
5.9.1
Cross-Gamma
5.9.2
Cega = Correlation Delta
5.10
Computational Methods
5.10.1
Finite-difference approximations
5.10.2
Pathwise method
5.10.3
Likelihood ratio method
6
All about Volatility
6.1
The many flavours of volatility
6.1.1
Some facets of volatility
6.1.2
Realized Volatility
6.1.3
Implied Volatility
6.1.4
Hedging Volatility
6.2
The Volatility Surface
6.2.1
Introduction
6.2.2
Trading the Term Structure of Implied Volatilities
6.2.3
Why a Smile/Skew?
6.2.4
Measuring and Trading the Implied Skew
6.2.5
Skew through Time
6.2.6
Effect of Skew on Delta Hedging
6.2.7
The Smile Curvature
6.2.8
Arbitrage Freedom of the Implied Volatility Surface
6.2.9
Smile implied probability distribution
6.2.10
Implied Volatility Dynamics
6.2.11
Stylized Facts and Modelisation
6.3
Review of Volatility Models
6.3.1
Small Historical Review
6.3.2
Derivation of Black-Scholes PDE
6.3.3
Dupire’s Local Volatility Model
6.3.4
Stochastic Volatility Model : Heston Model
6.3.5
Stochastic Volatility Model : SABR Model
7
Classic Options
7.1
European Options
7.2
American Options
7.2.1
American Calls
7.2.2
American Puts
7.3
Digital Options
7.3.1
European Digitals
7.3.2
American Digitals
8
Options Strategies
8.1
Call Spreads
8.2
Put Spreads
8.3
Straddles
8.4
Strangles
8.5
Risk Reversals
8.6
Butterfly Spreads
8.7
(Iron) Condor Spreads
9
Asian Options
9.1
Asian-In and Asian-Out
9.1.1
First case
9.1.2
Second case
9.2
Geometric Average vs Arithmetic Average
9.3
Numerical Application
9.4
Risk Analysis : The Greeks
9.4.1
Delta Hedging
9.4.2
Vega, Gamma and Theta
10
Quanto Options
10.1
Description
10.1.1
Example
10.2
Additional sensitivities : correlation risk and FX volatility
10.2.1
Correlation between underlying’s price and FX rate
10.2.2
FX Volatility
10.3
Hedging FX Exposure
11
Compo Options
11.1
Description
11.1.1
Example
11.2
Additional sensitivities : correlation risk and FX volatility
11.3
Hedging FX Exposure
12
Barrier Options
12.1
Description
12.2
Knock-Out Options
12.2.1
Some sensitivities
12.3
Knock-In Options
12.3.1
Some sensitivities
12.4
In-Out Parity for barrier options
12.5
Review of Payoffs
12.6
Deeper into Risk Analysis
12.6.1
Leading Example : Down-and-In Put (DIP)
12.6.2
Counter-example : Call Up-and-Out (CUO)
12.7
Double Barrier Options
13
(Barrier) Reverse Convertibles
13.1
Reverse Convertibles
13.1.1
Payoff
13.1.2
Risk Analysis
13.2
Barrier Reverse Convertibles
13.2.1
Payoff
13.2.2
Risk Analysis
14
Certificates
14.1
General Description
14.2
Tracker Certificates
14.2.1
Payoff
14.2.2
Risk Analysis : The Greeks
14.2.3
Bear Tracker Certificates
14.3
Discount Certificates
14.3.1
Payoff
14.3.2
Risk Analysis : The Greeks
14.3.3
Deep-discount Certificates
14.4
Bonus Certificates
14.4.1
Payoff
14.4.2
Risk Analysis : The Greeks
14.5
Capped Bonus Certificates
14.5.1
Payoff
14.5.2
Risk Analysis : The Greeks
14.6
Airbag Certificates
14.6.1
Payoff
14.6.2
Risk Analysis : The Greeks
14.7
Outperformance Certificates
14.7.1
Payoff
14.7.2
Risk Analysis : The Greeks
14.8
Outperformance Bonus Certificates
14.8.1
Payoff
14.8.2
Risk Analysis : The Greeks
14.9
Twin-Win Certificates
14.9.1
Payoff
14.9.2
Risk-Analysis : The Greeks
15
Multi-Asset Options
15.1
Introduction
15.2
Correlation
15.2.1
Realized/Historical Correlation
15.2.2
Correlation Matrices
15.2.3
Portfolio Variance
15.2.4
Implied Correlation
15.2.5
Correlation Skew
15.2.6
Copulas
15.3
Basket Options
15.3.1
Description
15.3.2
Cega, sensitivity to correlation
15.3.3
Pricing methods / Modelling
15.4
Rainbow Options
15.4.1
Description
15.4.2
Risk Analysis
15.5
Worst-Of options
15.5.1
Worst-Of Put
15.5.2
Worst-Of Call
16
Autocallables
16.1
Description
16.2
Payoff
16.3
Risk Analysis
16.3.1
Equity / Interest Rate Correlation
16.4
Memory Feature
16.4.1
Autocall Incremental
16.4.2
Phoenix memory
16.5
Put Feature
16.6
Smoothing the autocall barrier
16.7
Multi-Asset: Worst-Of
16.8
Other variants
16.8.1
Autocall Twin-Win
16.8.2
Autocall with one star feature
17
Variance Swaps
17.1
Introduction
17.2
Liquidity
17.3
Uses of Variance Swaps
17.4
Mechanics
17.5
The Contract
17.5.1
P&L for a long variance swap
17.5.2
Vega Notional / Variance Notional
17.6
Convexity
17.7
Mark-to-Market
17.8
Forward Variance
17.9
Contract Specifications
17.10
Observations from historical prices
17.11
Variance Swaps and Option Implied Volatilities
17.12
Pricing Rules of Thumb
17.13
Drivers of Variance Swaps levels
17.14
Are variance swaps good predictor of future volatility?
17.15
Is Variance Swap Convexity fairly priced?
17.16
Variance Term Structure
17.17
From Options to Variance Swaps
17.18
Sensitivity to Skew and Convexity
17.19
Greeks
17.19.1
Gamma
17.19.2
Theta
17.19.3
Vega
17.19.4
Delta
17.19.5
Convexity
17.20
Setting up a replicating portfolio
17.21
Replicating and Hedging in Practice
17.22
Effects of Variance Swaps Hedging
17.23
Why not Volatility Swaps?
17.24
Third Generation Products
17.24.1
Gamma Swaps
17.24.2
Corridor Variance Swaps
17.24.3
Conditional Variance Swaps
The Derivatives Academy
Chapter 8
Options Strategies
coming soon…
8.1
Call Spreads
8.2
Put Spreads
8.3
Straddles
8.4
Strangles
8.5
Risk Reversals
8.6
Butterfly Spreads
8.7
(Iron) Condor Spreads
