Standard and Exotic Interest Rate Options: Advanced Pricing and Book Management Techniques

Option valuation principles
  • History: Brown, Bachelier, Merton
  • Brownian motion
  • Hypothesis of the Black & Scholes model
  • Option valuation model of Black & Scholes
  • Black 76 (options on futures)
  • Practical workshop
  • Elaborate a Black & Scholes pricer using EXCEL™
  • Modelling and computation of the main sensitivities (Greeks) : delta, theta, vega
  • Second derivatives: gamma, vanna, volga
  • Short-term and long-term management of option books
Options in the OTC Market
  • Yield curve analysis
  • Applying the Black & Scholes model to caps/floors and swaptions
  • Practical workshop
  • Set up an EXCEL™ pricer for caps, floors and swaptions using a recent swap curve
  • Notion of variability
  • Limits of models: normal and lognormal distribution
  • Smile skew and kurtosis
  • Presentation of the SABR model
  • Caps / floors: flat and forward volatilities
  • Managing an option book
Pricing and Sensitivities of Exotic Options
  • Digitals: pricing and replication
  • Quanto (swaps and options)
  • CMS (swaps and options): convexity adjustment and pricing with replication
  • Steepener, Ratchet
  • American: American futures options, Bermudan, flexi-caps
  • Path dependent options
  • Practical workshop
  • Monte Carlo simulation (examples using EXCEL™)
  • Spread options
  • Latest exotic products

  • Price standard options and the main exotic options
  • Calculate the different sensitivities: delta, gamma, theta, vega/kappa
  • Build in EXCEL™ a pricing spreadsheet and calculate sensitivities for standard and exotic options
  • Know how to compute the sensitivities of American, Bermudan, Digital options and cap spreads
  • Price CMS and quanto swaps
  • Master the EDP and the Monte Carlo method
  • Know how to build volatility smile models
  • Price the main interest rate options, using EXCEL™
  • Obtain an operational know-how in terms of management techniques
  • Assimilate techniques used by interest rate options market-makers
  • Detailed analysis of new sensitivity parameters related to the book management of smile and volatility
  • Fixed-income fund managers
  • Junior traders
  • Derivatives senior sales
  • Bond origination and primary market professionals
  • Finance departments
  • Risk managers
  • Support staff: IT, middle office, audit, senior back office, internal controls
  • Financial engineers
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