Exotic Options Trading


Exotic options trading

Although exotic options are not a new subject infinance, the coverage traditionally afforded by many texts iseither too high level or overly mathematical. De Weert'sexceptional text fills this gap superbly. It is a rigoroustreatment of a number of exotic structures and includes numerousexamples to clearly illustrate the principles. What makes this bookunique is that it manages to strike a fantastic balance between thetheory and actual trading practice. ...

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Exotic options trading

Although exotic options are not a new subject infinance, the coverage traditionally afforded by many texts iseither too high level or overly mathematical. De Weert'sexceptional text fills this gap superbly. It is a rigoroustreatment of a number of exotic structures and includes numerousexamples to clearly illustrate the principles. What makes this bookunique is that it manages to strike a fantastic balance between thetheory and actual trading practice. Although it may be something ofan overused phrase to describe this book as compulsory reading, Ican assure any reader they will not be disappointed.

—Neil Schofield, Training Consultant and author ofCommodity Derivatives: Markets and Applications

“Exotic Options Trading does an excellent job inproviding a succinct and exhaustive overview of exotic options. Thereal edge of this book is that it explains exotic options from arisk and economical perspective and provides a clear link to theactual profit and pricing formulae. In short, a must read foranyone who wants to get deep insights into exotic options and starttrading them profitably.

—Arturo Bignardi

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Product Details

  • ISBN-13: 9780470517901
  • Publisher: Wiley
  • Publication date: 4/25/2008
  • Series: Wiley Finance Series , #432
  • Edition number: 1
  • Pages: 212
  • Product dimensions: 6.10 (w) x 9.00 (h) x 0.90 (d)

Meet the Author

About the author

FRANS DE WEERT is mathematician by training. Afterobtaining his masters in Mathematics, specializing in probabilitytheory and financial mathematics at the University of Utrecht, hewent on to do a research degree, M.Phil, in probability theory atthe University of Manchester.

After his academic career he started working as a trader forBarclays Capital in London. In this role he gained experience intrading many different derivative products on European and Americanequities. After two and half years in London, he moved to New Yorkto start trading derivatives on both Latin American as well as USunderlyings.

Frans currently works as a strategy consultant at Booz AllenHamilton and lives in Amsterdam, The Netherlands.

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Table of Contents




1 Introduction

2 Conventional Options, Forwards and Greeks

2.1 Call and Put Options and Forwards

2.2 Pricing Calls and Puts

2.3 Implied Volatility

2.4 Determining the Strike of the Forward

2.5 Pricing of Stock Options Including Dividends

2.6 Pricing Options in Terms of the Forward

2.7 Put-Call Parity

2.8 Delta

2.9 Dynamic Hedging

2.10 Gamma

2.11 Vega

2.12 Theta

2.13 Higher Order Derivatives Like Vanna and Vomma

2.14 Option’s Interest Rate Exposure in Terms of Financingthe Delta Hedge

3 Profit on Gamma and Relation to Theta

4 Delta Cash and Gamma Cash

4.1 Example Delta and Gamma Cash

5 Skew

5.1 Reasons for Higher Realised Volatility in FallingMarkets

5.2 Skew Through Time: ‘The Term Structure ofSkew’

5.3 Skew and Its Effect on Delta

5.4 Skew in FX versus Skew in Equity: ‘Smile versusDownward Sloping’

5.5 Pricing Options Using the Skew Curve

6 Simple Option Strategies

6.1 Call Spread

6.2 Put Spread

6.3 Collar

6.4 Straddle

6.5 Strangle

7 Monte Carlo Processes

7.1 Monte Carlo Process Principle

7.2 Binomial Tree versus Monte Carlo Process

7.3 Binomial Tree Example

7.4 The Workings of the Monte Carlo Process

8 Chooser Option

8.1 Pricing Example Simple Chooser Option

8.2 Rationale Behind Chooser Option Strategies

9 Digital Options

9.1 Choosing the Strikes

9.2 The Call Spread as Proxy for the Digital

9.3 Width of the Call Spread versus Gearing

10 Barrier Options

10.1 Down-and-In Put Option

10.2 Delta Change over the Barrier for a Down-and-In PutOption

10.3 Factors Influencing the Magnitude of the Barrier Shift

10.4 Delta Impact of a Barrier Shift

10.5 Situations to Buy Shares in Case of a Barrier Breach of aLong Down-and-In Put

10.6 Up-and-Out Call

10.7 Up-and-Out Call Option with Rebate

10.8 Vega Exposure Up-and-Out Call Option

10.9 Up-and-Out Put

10.10 Barrier Parity

10.11 Barrier at Maturity Only

10.12 Skew and Barrier Options

10.13 Double Barriers

11 Forward Starting Options

11.1 Forward Starting and Regular Option Compared

11.2 Hedging the Skew Delta of the Forward Start Option

11.3 The Forward Start Option and the Skew Term Structure

11.4 Analytically Short Skew but Dynamically No SkewExposure

11.5 Forward Starting Greeks

12 Ladder Options

12.1 Example Ladder Option

12.2 Pricing the Ladder Option

13 Lookback Options

13.1 Pricing and Gamma Profile of Fixed Strike LookbackOptions

13.2 Pricing and Risk of a Floating Strike Lookback Option

14 Cliquets

14.1 The Ratchet Option

14.2 Risks of a Ratchet Option

15 Reverse Convertibles

15.1 Example Knock-in Reverse Convertible

15.2 Pricing the Knock-in Reverse Convertible

15.3 Market Conditions for Most Attractive Coupon

15.4 Hedging the Reverse Convertible

16 Autocallables

16.1 Example Autocallable Reverse Convertible

16.2 Pricing the Autocallable

16.3 Autocallable Pricing without Conditional Coupon

16.4 Interest/Equity Correlation within the Autocallable

17 Callable and Puttable Reverse Convertible

17.1 Pricing the Callable Reverse Convertible

17.2 Pricing the Puttable Reverse Convertible

18 Asian Options

18.1 Pricing the Geometric Asian Out Option

18.2 Pricing the Arithmetic Asian Out Option

18.3 Delta Hedging the Arithmetic Asian Out Option

18.4 Vega, Gamma and Theta of the Arithmetic Asian OutOption

18.5 Delta Hedging the Asian in Option

18.6 Asian in Forward

18.7 Pricing the Asian in Forward

18.8 Asian in Forward with Optional Early Termination

19 Quanto Options

19.1 Pricing and Correlation Risk of the Option

19.2 Hedging FX Exposure on the Quanto Option

20 Composite Options

20.1 An Example of the Composite Option

20.2 Hedging FX Exposure on the Composite Option

21 Outperformance Options

21.1 Example of an Outperformance Option

21.2 Outperformance Option Described as a Composite Option

21.3 Correlation Position of the Outperformance Option

21.4 Hedging of Outperformance Options

22 Best of andWorst of Options

22.1 Correlation Risk for the Best of Option

22.2 Correlation Risk for the Worst of Option

22.3 Hybrids

23 Variance Swaps

23.1 Variance Swap Payoff Example

23.2 Replicating the Variance Swap with Options

23.3 Greeks of the Variance Swap

23.4 Mystery of Gamma Without Delta

23.5 Realised Variance Volatility versus Standard Deviation

23.6 Event Risk of a Variance Swap versus a Single Option

23.7 Relation Between Vega Exposure and Variance Notional

23.8 Skew Delta

23.9 Vega Convexity

24 Dispersion

24.1 Pricing Basket Options

24.2 Basket Volatility Derived From Its Constituents

24.3 Trading Dispersion

24.4 Quoting Dispersion in Terms of Correlation

24.5 Dispersion Means Trading a Combination of Volatility andCorrelation

24.6 Ratio’d Vega Dispersion

24.7 Skew Delta Position Embedded in Dispersion

25 Engineering Financial Structures

25.1 Capital Guaranteed Products

25.2 Attractive Market Conditions for Capital GuaranteedProducts

25.3 Exposure Products for the Cautious Equity Investor

25.4 Leveraged Products for the Risk Seeking Investor

Appendix A Variance of a Composite Option and OutperformanceOption

Appendix B Replicating the Variance Swap



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