Foreign exchange market

Exchange options analysis and risk management

Course objectives

  • Assessing the exchange options and include the construction of a volatility smile

  • Understanding models and their limitations

  • Analyse the strategies adopted by market operators

Vanilla options

  • Black-Scholes formula and Greeks
  • Market conventions
    • Price
    • Delta conventions
    • Strike conventions
    • At-the-money option
    • Risk Reversal 25 and 15 delta
    • Butterfly 25 and 15 delta
  • Volatility smile
    • Approximation
    • Different interpolation methods
    • Exact smile construction using ATM and 25 delta strikes
    • How to take into account 15 delta strikes

Barrier options

  • Black-Scholes framework
    • Semi-analytical formula case simple barrier
    • Semi-analytical formula case double barriers
    • Window options
  • Vanna-Volga model
    • Black-Scholes model limitations
    • Vanna-Volga model approach
    • Vanna-Volga model limitations
  • Local volatility
    • Local volatility formula
    • Discretisation and barrier correction

Exotic options

  • Different types of exotic options
  • Numerical algorithms

Stochastic volatility

  • SABR model
  • Stochastic volatility impact
  • Mixing stochastic and local volatility models

Skander Handous

Skander began his career in 1996 at BNP. He left the BNP Paribas Group in 2007 to found Advanced Derivative Solutions, a software publishing company for risk management of derivatives.

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