Demystifying Exotic Products Interest Rates, Equities and Foreign Exchange

by Tan, Chia

• ISBN13: 9780470748152
• ISBN10: 047074815X
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-01-19
• Publisher: Wiley

Summary

One reason for the current financial crisis is investors misusing and misunderstanding exotic products. However, proper understanding of the structures of exotic options would have avoided these failures. Demystifying Exotic Products contains the fundamentals on exotic products in relation to Interest rates, equity and FX exotics. This practical guidebook discusses how the product is structured, exists, works, as well as the risks involved, focusing on the essential information, like warning signs and aspects of a complex derivative. This reference equips investors with the proper understanding to make informed decisions.

Author Biography

CHIA CHIANG TAN is currently a quantitative analyst in Global Markets at Deutsche Bank. Prior to this he has held positions at CIBC, Barclays Capital and Dresdner Kleinwort. His work has spanned a multitude of asset classes, including interest rates, equities and foreign exchange. In his various roles, he has seen first-hand how a myriad of derivatives solutions have emerged to satisfy client demands resulting from the prevailing economic environment, as well as how some of these purported solutions have at times gone badly wrong. Chia has an undergraduate degree in Mathematics from University College London and a Master of Mathematical Finance from the University of Toronto.

Table of Contents

Foreword	p. ix
Preface	p. xi
Acknowledgements	p. xv
Notes	p. xvii
Derivatives in their Golden Days (1994 to 2007)	p. 1
Uses of Derivatives	p. 2
Structured Notes	p. 5
Themes in Constructing Exotic Products	p. 13
Principal Protection	p. 13
Upside-Only Participation	p. 16
Protected Selling of Optionality for Yield	p. 18
Betting Against the Forward Curve	p. 22
Diversification	p. 23
Some Considerations in Hedging	p. 24
Basics of Derivatives	p. 27
The Forward Contract	p. 27
The Plain Vanilla Option	p. 29
No-Arbitrage Pricing	p. 31
The Black-Scholes Model	p. 33
The Volatility Surface	p. 36
Correlation	p. 39
Modelling Considerations	p. 42
Barriers	p. 45
Digitals	p. 45
Knockouts and Reverse Knockouts	p. 47
One-Touches and No-Touches	p. 53
Double Barriers and More	p. 55
Quantoes	p. 57
Some Motivation	p. 57
Multi-Currency Products	p. 58
Non-Deliverable Products	p. 59
Self-Quantoes (Auto-Quantoes)	p. 60
Quantoes	p. 62
Swaps, Constant Maturity Swaps and Spreads	p. 65
The Swap	p. 65
Natural Payment Time and the Libor-in-Arrears	p. 71
The Swaption	p. 74
The Constant Maturity Swap	p. 77
Spread between Two CMS Rates	p. 85
Callable CMS	p. 88
Range Accruals	p. 89
Motivation	p. 89
Single Reference Accruals	p. 91
Multiple Reference Accruals	p. 94
Early Termination	p. 95
The Mindset of a Benchmark Investor	p. 95
Callables	p. 96
Triggers (Autocalls)	p. 99
The Target Redemption Note	p. 102
Puttables	p. 104
Early Termination and Contingent Cashflows	p. 106
Pathwise Accumulators	p. 109
The One-Way Floater	p. 109
Skylines	p. 112
Snowballs	p. 116
Power Reverse Dual Currencies	p. 121
The Carry Trade	p. 121
Long-Dated Foreign Exchange	p. 125
Normal PRDCs	p. 127
The Redemption Strike	p. 131
Chooser PRDCs	p. 132
Baskets and Hybrids	p. 135
Baskets and the Benign Effect of Averaging	p. 135
Hybrid Baskets	p. 138
"Best of" Products and Hybrids	p. 139
Hybrids and Conditional Coupons	p. 145
Multiplying Assets	p. 147
Some Exotic Equity Products	p. 149
A Historical Perspective	p. 149
The Cliquet	p. 152
The Himalaya	p. 154
The Altiplano	p. 157
The Atlas	p. 159
The Everest	p. 160
Principal Protection or Lack Thereof	p. 163
Volatility and Correlation Products	p. 163
Variance and Volatility Swaps	p. 163
Options on Variance Swaps	p. 169
Correlation Swaps	p. 170
Fund Derivatives	p. 173
Fund Derivatives Products	p. 173
Constant Proportion Portfolio Insurance	p. 175
The Ideal Underlying Fund	p. 178
The Products Post-2008	p. 179
The Products Likely to Survive the Credit Crunch	p. 179
Incorporating Some Lessons Learned	p. 187
Credit Considerations	p. 189
Some Final Thoughts	p. 193
Glossary	p. 195
Appendices	p. 203
Bibliography	p. 239
Index	p. 243
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