ACF Academy : : Derivatives : : Foreign Exchange Options

Category: Derivatives

This is an intensive hands-on seminar taking delegates from the essentials of options through to exotics, showing the practical use of options, as well as the risk management of an options book by the bank. The principal objectives of this intensive two-day seminar are to:

	Give delegates a clear understanding of the behaviour and characteristics of options, and how options differ from other financial products like forwards.
	Explore the practical use of exotic, non-standard, and second generation options.
	Demonstrate how vanilla and exotic options can be combined to build targeted hedges, or to exploit specific views of the market.
	Reconcile the risk-reduction needs of clients buying option products with the risk-management needs of banks selling option products.
	Demonstrate the principles used in the active hedging of derivative instruments and portfolios, and the practical problems faced by traders in managing a book of options.
	Develop within delegates an innovative and pro-active approach to the handling of their own or their clients' FX risk management needs.
	Consolidate delegates’ understanding by providing extensive first-hand experience with computer-based strategy evaluation, graphics, analytics, option pricing, and simulation.

FX options in a volatile environment.

After attending the program, delegates will have mastered the concepts and practices of FX options, be confident in handling products ranging from vanilla options to exotics, and will return able to make an immediate and effective contribution to the management and control of currency risk through the use of FX options.



Principles and Characteristics of FX Options

	FX option trading conventions
	An intuitive insight into option pricing
	FX options pricing workshop
	FX options: American vs. European style
	Call-put parity
	Significance of volatility
	Historic, implied, experienced volatility
	Volatility smiles and skews
	Measures of option price sensitivity – delta, theta, vega, gamma
	“Greeks” workshop
	Quoting FX options using volatility
	Risk reversals
	Implications from risk reversal prices

Building Option Portfolios

	Horizontal, vertical, and diagonal spreads
	Straddles and strangles
	Ratio spreads and backspreads
	Designing your own structure – a fluent transition between payoff diagrams and component parts

Hedging and Financial Engineering with FX Options

	Comparison of using in-, at- and out-of-the-money options
	True cost of options hedging – time value
	Hedging techniques using short option positions
	Creating and using collars or risk reversals
	Creating and using spreads
	Zero-premium hedges
	Creating and using zero-cost collars
	Creating and using participating forwards
	Deferred and embedded premiums
	Creating and using break-forwards
	The “continuum” from in-the-money to out-of-the-money options
	Hedging FX risk
	Financial Engineering with Currency Options

Option Trading Strategies

	Directional vs. volatility trading
	Directional trading strategies
	Near vs. far dates
	Out-of-the-money vs. in-the-money
	Options vs. cash
	Volatility trading strategies
	Directional and volatility trading with currency options



Delta Hedging – Theory and Practice

	Exactly how delta-hedging works
	Why be delta-neutral?
	Buying high and selling low to achieve delta-neutrality
	The link between delta and gamma
	The cost of being negative gamma
	The benefit of being positive theta
	The link between gamma and theta
	The trade-off between implied volatility and experienced volatility
	The link between theta and vega
	“Easy” and “difficult” options to hedge
	Gamma hedging
	Transactions costs
	How often do we re-hedge?
	Market gapping problems
	P&L risks while running an options book
	The cost of hedging and running an options book
	Delta-hedging simulation

Overview of Exotic FX Options

	Introduction to exotic options
	Path-dependent options
	Options with step-like (singular) payouts
	Correlation products
	Other exotics: compound and forward-start

Barrier Options

	Up, down, knock-in, and knock-out – variations on a theme
	Barriers with rebates
	Normal and partial (window) barriers
	Single, double, and multiple barriers
	Outside barriers
	Curvilinear barriers
	Practical issues in monitoring the barrier
	Practical applications for barrier options in hedging financial risk
	Barrier Option Pricing Workshop
	Using FX barrier options
	Risk characteristics of barrier options

Digital Options and the “Digital Cookbook”

	One-touch, all-or-nothing – variations on a theme
	Cash-or-nothing and asset-or-nothing
	Digital options as a basic building block
	Creating a pay-later option
	Creating a reverse contingent option
	Creating a “money back” option
	Creating a stepped-premium option
	Creating enhanced-rate synthetic forwards
	Digital Options Pricing Exercises
	Using Pay Later Options
	Risk characteristics of digitals

Putting it All Together

	Review of structures, barriers, and digitals
	Combining exotics with vanilla options
	Embedding options within a package
	Designing innovative solutions
	Reducing the cost of client hedges
	Exotic options structuring exercise

NB All practical sessions are highlighted like this:
	means a Workshop or Simulation
	means a Case study