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

Preface.

PART I FOUNDATIONS.

1 Basic Instruments.

1.1 Introduction.

1.2 Interest Rates.

1.3 Equities and Currencies.

1.4 Swaps.

2 The World of Structured Products.

2.1 The Products.

2.2 The Sell Side.

2.3 The Buy Side.

2.4 The Market.

2.5 Example of an Equity Linked Note.

3 Vanilla Options.

3.1 General Features of Options.

3.2 Call and Put Option Payoffs.

3.3 Put–call Parity and Synthetic Options.

3.4 Black–Scholes Model Assumptions.

3.5 Pricing a European Call Option.

3.6 Pricing a European Put Option.

3.7 The Cost of Hedging.

3.8 American Options.

3.9 Asian Options.

3.10 An Example of the Structuring Process.

4 Volatility, Skew and Term Structure.

4.1 Volatility.

4.2 The Volatility Surface.

4.3 Volatility Models.

5 Option Sensitivities: Greeks.

5.1 Delta.

5.2 Gamma.

5.3 Vega.

5.4 Theta.

5.5 Rho.

5.6 Relationships between the Greeks.

5.7 Volga and Vanna.

5.8 Multi-asset Sensitivities.

5.9 Approximations to Black–Scholes and Greeks.

6 Strategies Involving Options.

6.1 Traditional Hedging Strategies.

6.2 Vertical Spreads.

6.3 Other Spreads.

6.4 Option Combinations.

6.5 Arbitrage Freedom of the Implied Volatility Surface.

7 Correlation.

7.1 Multi-asset Options.

7.2 Correlation: Measurements and Interpretation.

7.3 Basket Options.

7.4 Quantity Adjusting Options: "Quantos".

7.5 Trading Correlation.

PART II EXOTIC DERIVATIVES AND STRUCTURED PRODUCTS.

8 Dispersion.

8.1 Measures of Dispersion and Interpretations.

8.2 Worst-of Options.

8.3 Best-of options.

9 Dispersion Options.

9.1 Rainbow Options.

9.2 Individually Capped Basket Call (ICBC).

9.3 Outperformance Options.

9.4 Volatility Models.

10 Barrier Options.

10.1 Barrier Option Payoffs.

10.2 Black–Scholes Valuation.

10.3 Hedging Down-and-in Puts.

10.4 Barriers in Structured Products.

11 Digitals.

11.1 European Digitals.

11.2 American Digitals.

11.3 Risk Analysis.

11.4 Structured Products Involving European Digitals.

11.5 Structured Products Involving American Digitals.

11.6 Outperformance Digital.

12 Autocallable Structures.

12.1 Single Asset Autocallables.

12.2 Autocallable Participating Note.

12.3 Autocallables with Down-and-in Puts.

12.4 Multi-asset Autocallables.

PART III MORE ON EXOTIC STRUCTURES.

13 The Cliquet Family.

13.1 Forward Starting Options.

13.2 Cliquets with Local Floors and Caps.

13.4 Reverse Cliquets.

14 More Cliquets and Related Structures.

14.1 Other Cliquets.

14.2 Multi-asset Cliquets.

14.3 Napoleons.

14.4 Lookback Options.

15 Mountain Range Options.

15.1 Altiplano.

15.2 Himalaya.

15.3 Everest.

15.4 Kilimanjaro Select.

15.5 Atlas.

15.6 Pricing Mountain Range Products.

16 Volatility Derivatives.

16.1 The Need for Volatility Derivatives.

16.2 Traditional Methods for Trading Volatility.

16.3 Variance Swaps.

16.4 Variations on Variance Swaps.

16.5 Options on Realized Variance.

16.6 The VIX: Volatility Indices.

16.7 Variance Dispersion.

PART IV HYBRID DERIVATIVES AND DYNAMIC STRATEGIES.

17 Asset Classes (I).

17.1 Interest Rates.

17.2 Commodities.

18 Asset Classes (II).

18.1 Foreign Exchange.

18.2 Inflation.

18.3 Credit.

19 Structuring Hybrid Derivatives.

19.1 Diversification.

19.2 Yield Enhancement.

19.3 Multi-asset Class Views.

19.4 Multi-asset Class Risk Hedging.

20 Pricing Hybrid Derivatives.

20.1 Additional Asset Class Models.

20.2 Copulas.

21 Dynamic Strategies and Thematic Indices.

21.1 Portfolio Management Concepts.

21.2 Dynamic Strategies.

21.3 Thematic Products.

APPENDICES.

A Models.

A.1 Black–Scholes.

A.2 Local Volatility Models.

A.3 Stochastic Volatility.

A.4 Jump Models.

A.5 Hull–White Interest Rate Model and Extensions.

B Approximations.

B.1 Approximations for Vanilla Prices and Greeks.

B.2 Basket Price Approximation.

B.3 ICBC/CBC Inequality.

B.4 Digitals: Vega and the Position of the Forward.

Postscript.

Bibliography.

Index.