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| The second day of the program starts by looks at options pricing principles. Delegates then get involved in understanding how options can be combined to produce various structures, and how these structures can be used to create effective hedging programs. In the final section, we will explain swaptions, and how flexibility can be added to a standard swap contract by embedding one or more swaptions. |
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| Options Pricing Principles |
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An intuitive insight into option pricing |
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Closed-form pricing models |
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Binomial pricing models |
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Monte Carlo pricing models |
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Option pricing workshop |
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Put-call parity |
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American options and early-exercise |
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Volatility – historical, implied experienced |
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Volatility and option prices |
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Volatility smiles and skews |
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Measures of price sensitivity |
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Delta – the hedge ratio |
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Gamma – the change in delta |
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Theta – the decay of time value |
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Vega – the sensitivity to volatility |
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Greeks workshop |
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| Building Option Portfolios |
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Horizontal, vertical, and diagonal spreads |
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Straddles and strangles |
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Ratio spreads and backspreads |
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Strips of options – caps and floors |
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Designing your own structure – a fluent transition between payoff diagrams and component parts |
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| Option Strategy and Hedging Structures |
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Protective puts & calls / caps & floors |
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Price enhancement strategies |
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Selling options within a hedging program |
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Collars, corridors, and participations |
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Reduced-cost and zero-cost structures |
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Combining options, futures, and swaps |
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Hedging customer energy exposure |
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| Swaptions |
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Swaptions – calls and puts |
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Combining swaptions with swaps |
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Extendable and cancellable swaps |
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Embedding swaptions |
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Pricing a cancellable swap |
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The final day of the program starts by explaining how options themselves are hedged, and the links between volatility, pricing, risk, and profitability. Delegates then look at practical trading strategies, and the dynamics of the energy options market. Next, we review second-generation options, concentrating especially on those which can be used to create practical real-world solutions for clients wishing to hedge their energy exposures more effectively.
The last afternoon is then devoted to an intensive session where delegates, working in teams, are required to identify, measure, and analyse the energy risks of a specific client, assess the client’s needs, design innovative and value-added solutions to meet those needs, and then make their pitch for the client’s business in competition with other teams. This last session will combine all the important learning points, and provide a link with the practical problems faced by clients. |
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| Delta Hedging |
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How delta-hedging works |
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Buying high and selling low to achieve delta-neutrality |
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The link between delta and gamma |
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The cost of being negative gamma |
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The benefit of being positive theta |
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Gamma and theta as mirror-images |
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The trade-off between implied volatility and experienced volatility |
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How traders price and trade vol |
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The link between theta and vega |
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Gamma hedging |
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| Trading Strategies with Options |
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Directional vs. Volatility trading |
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Choice of option |
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Options vs. Cash |
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Energy option trading simulation |
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| Second-Generation Options |
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Introduction to exotic options |
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A taxonomy of exotics |
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Path-dependent options |
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Options with step-like (singular) payouts |
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Everyday exotics: barriers and digitals |
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Other exotics: compound, average rate and average strike, lookback, chooser, contingent, forward-start, correlation products |
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Exotic option workshop |
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| Adding Value for Clients – Energy Derivatives Strategies that Work |
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Identifying and quantifying energy risk |
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Spotting opportunities |
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Establishing client objectives – what does the client really want? |
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Determining client preferences, pain thresholds, and view |
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Tailoring the structure to match the need |
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Designing innovative and pro-active solutions |
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Cross-product ideas |
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Communicating with the client |
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Energy risk hedging case |
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