Options and structured products

Course objectives

  • Understand yield curve formation and uses
  • Understand the drivers behind structured products
  • Understand option risk management
  • Master the first generation exotics
  • Learn how to structure hedging and investment products

Review of basic concepts

  • Intrinsic value vs. Time value, the role of volatility
  • Put-call parity and implications
  • Drift and American options
  • The Black-Scholes framework
  • Liquidity risk

Case Study: application of put-call parity

Objective: to summarize and apply all the key options concepts to price non-liquid options from liquid ones, using put-call parity

Option risk management

  • Delta-hedging: concept and application
  • Interdependence between Greeks
  • Straddles and strangles

Case Study: Delta-hedging an option position through a number of scenarios

Volatility, smile and skew

  • Historical volatility
  • Implied volatility and volatility smiles
  • Determinants of the smile
  • Deviations from lognormality
  • Supply/demand
  • Volgamma

Case Study: Analysing the shape of the smiles for Equity indices, Oil and FX

Objectives: to understand and illustrate the shape of volatility smiles for various underlyings.

  • Trading the smile: spreads and butterflies

Exotic options and structured products

  • Digital options
  • Barrier options

Case Study: contingent options, ‘European' barrier

Objective: A first approach of breaking down a structured product into its components, for both pricing and risk management.

Case study: cancellable forwards

Objective: to show how ‘building blocks' can be used to obtain a wide variety of payoffs, to acquire the right reflexes when faced with new structured products.

  • Principal-Protected Notes (PPN)

Case Study: Structuring PPNs to suit different investors' needs

Objective: to further use the tools acquired to understand the structuring and pricing of structured products

  • Dual-currency notes

Case Study: CHF/HKD dual-currency note

Objective: to reverse-engineer a dual currency note to understand risk/reward tradeoff

  • Range Accruals

Case Study: Euribor range accrual

Objective: to understand pricing, structuring and risk management of range accrual notes.

  • Inverse floaters

Case Study: Reverse-engineer an inverse floater

Patrice Robin

Patrice Robin

Patrice is an independent consultant on derivatives. Previously, Patrice spent 10 years in trading on interest rate derivatives, then structured products, swaps and vanilla options and became head of interest rate and inflation options in Santander Global Markets in London.

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