Exotic Options and Hybrids A Guide to Structuring, Pricing and Trading

by Bouzoubaa, Mohamed; Osseiran, Adel

• ISBN13: 9780470688038
• ISBN10: 0470688033
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-05-17
• Publisher: Wiley

Summary

Toxic waste . . . it is a sad day when derivatives are described as toxic waste. Are these financial products really so, particularly those of exotic nature, or is it in fact people's grasp and usage of them that is the source of toxicity? While the use of derivatives increased in recent years at astounding rates, the crash of 2008 has revealed that people's understanding of them has not rivalled their spread.Exotic Options and Hybrids is the first book to guide practitioners on how to structure, price and trade modern exotic and hybrid derivatives, without complicating matters with the use of maths. Starting from the unique practical setting of being in a derivatives operation, the book focuses on the three main parts of a derivative's life: the structuring of a product, its pricing and its hedging. He book will take readers through all the applications, strengths and limitations of various models, focussing on the products and their risks rather than the model implementations. Readers can thus understand how models work when applied to pricing and hedging. The book covers a multitude of structures and encompasses many of the most up-to-date and promising products, including hybrid derivatives and dynamic strategies. Each structure is analysed with a utility based approach to its structuring, and an insightful risk based approach to its pricing and hedging. As well as providing comprehensive coverage of exotic options, this book will also dedicate a number of chapters to hybrid derivatives, looking at their nature and at the construction of hybrid products.By discussing exotic options and hybrids in a practical, non-mathematical and highly intuitive setting, this book will blast the misunderstandings and the stigma, and stand strong as the only book in its class to make these "exotic" concepts truly accessible.

Author Biography

Mohamed Bouzoubaa is an experienced practitioner in the world of derivatives, and is currently Head of Derivatives Trading and Structuring at CDG Capital. His professional expertise spans the spectrum of topics in exotic options and hybrids having held positions in Equity Derivatives Sales at Societe Generale in Paris, as a Risk and Fund Management expert at Sophis specializing in the risks involved in equity, credit and fixed income derivatives, and as a derivatives structurer at Bear Stearns/JP Morgan Chase in London and Equity Structured Products Manager at First Gulf Bank in Dubai. Mohamed holds masters degrees in Financial Engineering and in Applied Mathematics.
Adel Osseiran is a mathematician by training. His work as a financial practitioner in derivative pricing includes working in front office roles as a quantitative analyst and as a derivatives structurer in London. He studied Mathematics at the University of Oxford and to PhD level in Financial Mathematics at Imperial College London.

Table of Contents

List of Symbols and Abbreviations

Preface

Foundations

Basic Instruments

Introduction

Interest Rates

Equities and Currencies

Swaps

The World of Structured Products

The Products

The Sell Side

The Buy Side

The Market

Example of an Equity Linked Note

Vanilla Options

General Features of Options

Call and Put Option Payoffs

Put-call Parity and Synthetic Options

Black-Scholes Model Assumptions

Pricing a European Call Option

Pricing a European Put Option

The Cost of Hedging

American Options

Asian Options

An Example of the Structuring Process

Volatility, Skew and Term Structure

Volatility

The Volatility Surface

Volatility Models

Option Sensitivities: Greeks

Delta

Gamma

Vega

Theta

Rho

Relationships between the Greeks

Volga and Vanna

Multi-asset Sensitivities

Approximations to Black-Scholes and Greeks

Strategies Involving Options

Traditional Hedging Strategies

Vertical Spreads

Other Spreads

Option Combinations

Arbitrage Freedom of the Implied Volatility Surface

Correlation

Multi-asset Options

Correlation: Measurements and Interpretation

Basket Options

Quantity Adjusting Options: "Quantos"

Trading Correlation

Exotic Derivatives and Structured Products

Dispersion

Measures of Dispersion and Interpretations

Worst-of Options

Best-of options

Dispersion Options

Rainbow Options

Individually Capped Basket Call (ICBC)

Outperformance Options

Volatility Models

Barrier Options

Barrier Option Payoffs

Black-Scholes Valuation

Hedging Down-and-in Puts

Barriers in Structured Products

Digitals

European Digitals

American Digitals

Risk Analysis

Structured Products Involving European Digitals

Structured Products Involving American Digitals

Outperformance Digital

Autocallable Structures

Single Asset Autocallables

Autocallable Participating Note

Autocallables with Down-and-in Puts

Multi-asset Autocallables

More on Exotic Structures

The Cliquet Family

Forward Starting Options

Cliquets with Local Floors and Caps

Reverse Cliquets

More Cliquets and Related Structures

Other Cliquets

Multi-asset Cliquets

Napoleons

Lookback Options

Mountain Range Options

Altiplano

Himalaya

Everest

Kilimanjaro Select

Atlas

Pricing Mountain Range Products

Volatility Derivatives

The Need for Volatility Derivatives

Traditional Methods for Trading Volatility

Variance Swaps

Variations on Variance Swaps

Options on Realized Variance

The VIX: Volatility Indices

Variance Dispersion

Hybrid Derivatives and Dynamic Strategies

Asset Classes (I)

Interest Rates

Commodities

Asset Classes (II)

Foreign Exchange

Inflation

Credit

Structuring Hybrid Derivatives

Diversification

Yield Enhancement

Multi-asset Class Views

Multi-asset Class Risk Hedging

Pricing Hybrid Derivatives

Additional Asset Class Models

Copulas

Dynamic Strategies and Thematic Indices

Portfolio Management Concepts

Dynamic Strategies

Thematic Products

Appendices

Models

Black-Scholes

Local Volatility Models

Stochastic Volatility

Jump Models

Hull-White Interest Rate Model and Extensions

Approximations

Approximations for Vanilla Prices and Greeks

Basket Price Approximation

ICBC/CBC Inequality

Digitals: Vega and the Position of the Forward

Postscript

Bibliography

Index

Table of Contents provided by Publisher. All Rights Reserved.