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

by Mohamed Bouzoubaa, Adel Osseiran

Overview

"An intermediate to advanced comprehensive treatment of derivative products, from the simplest options to the most complex ones. It provides a good theoretical grounding and some practical insights as well as very relevant examples. This book will become a reference for practitioners."

—Stephane Junod, ex-Head of Hybrids Trading and Structuring at Citigroup in London, Head of the Global Hedging Units, Zurich Insurance, Zurich

"Striking an outstanding balance between theory and (good) practice, this comprehensive book is very informative, smart and useful. From vanilla option pricing and hedging to exotic options, complex structured products and sophisticated dynamic strategies, readers will learn and enjoy most of what is required of an option-oriented financial engineer. A valuable addition to an already well stocked pack."

—Professor Patrice Poncet, Sorbonne University and ESSEC Business School

"This is a new and different book about structured products. Readers get detailed coverage of all major types of structured notes across all types of assets. This guide is a practical reference and a great complement to anybodys financial library.

—Mimoun Nadir, Head of Exotic Equity Derivatives, Calyon, Paris

"Exotic Options and Hybrids is a refreshing book about getting the reader familiar with modern structured products and the rational behind their creation. More importantly, the emphasis on revealing the embedded risks will be well appreciated by anyone interested in structuring, pricing or trading these products."

—Abdelkerim Karim, Head of Equity Structured Products, Nomura, London

"Mohamed Bouzoubaa and Adel Osseiran, highly regarded senior structurers, have come up with a thorough study of exotic options and hybrids, covering the subject from all possible structuring, pricing and trading angles, both from theoretical and practical standpoints. An essential and exciting read for financial professionals and students."

—Bruno Pannetier, former Head of Structured Products at CIC, former Senior Managing Director and Co-Global Head of Equity and Hybrid Structuring at Bear Stearns, Division Director and Head of Structuring at Macquarie Bank

Product Details

ISBN-13:	9780470710081
Publisher:	Wiley
Publication date:	03/30/2010
Series:	The Wiley Finance Series , #505
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	400
File size:	4 MB

About the Author

MOHAMED BOUZOUBAA is an experienced practitioner in the world of derivatives, and is currently Head of Derivatives Trading and Structuring at CDG Capital. His professional expertise spans the spectrum of topics in exotic options and hybrids having held positions in Equity Derivatives Sales at Société Générale in Paris, as a Risk and Fund Management expert at Sophis specializing in the risks involved in equity, credit and fixed income derivatives, and as a derivatives structurer at Bear Stearns/JP Morgan Chase in London and Equity Structured Products Manager at First Gulf Bank in Dubai. Mohamed holds masters degrees in Financial Engineering and in Applied Mathematics.

ADEL OSSEIRAN is a mathematician by training. His work as a financial practitioner in derivative pricing includes working in front office roles as a quantitative analyst and as a derivatives structurer in London. He studied Mathematics at the University of Oxford and to PhD level in Financial Mathematics at Imperial College London.

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Table of Contents

List of Symbols and Abbreviations.

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.