Equity Derivatives

Equity indices, dividends, forwards, swaps and options are an essential part of the financial marketplace. This programme will equip you to use, price and manage risk across the wide variety of different equity derivative products. 

The programme starts with the building blocks of equity market indices, dividends, futures and forwards. From there, it progresses to equity and dividend swaps. It covers issues in swap valuation including collateral and credit risk as well as the practical applications of swaps in corporate finance, M&A activity and investment management.

Day two focuses on advanced issues in trading equity swaps and options. This includes the definition, types and uses of different equity options. It then progresses to teach practical applications and strategies across risk management, trading, corporate treasury and investment management. 

Day three covers the essentials of option pricing, including the Black-Scholes model, hedging and option sensitivities (the “Greeks”). It then teaches various strategies to trade views on volatility using equity options.

The approach is hands-on and learning is enhanced through many practical exercises covering hedging, valuation and risk management. The exercises use Excel spreadsheets which participants can take away for immediate implementation.

• Equity and Derivative sales, traders, structurers, quants and relevant IT personnel
• Asset allocation managers
• Equity portfolio managers
• Company finance executives, corporate treasurers and investment bankers
• Risk managers, finance and IPV professional
• Auditors and accountants

• Gain familiarity with corporate structure, types of equity, indices, dividends, repos / stock lending, futures and forwards – and how to use them
• Learn about equity and dividend swap products, their uses in trading, M&A and portfolio management –  and how to price them and manage the various risks
• Become familiar with equity options, their definitions and characteristics – learn how to price them and manage their risk, and how to use them for taking equity risk, yield enhancement and portfolio protection
• Understand strategies designed to trade / hedge volatility using options

Basic knowledge of Microsoft Excel and a general understanding of equity markets.

Equity Markets: Indices, Dividends, Forwards, Repo and Stock Loan

• Corporate structure and types of equity
• Equity indices: price and capitalisation weightings
• Lifecycle and type of dividend payment
• Dividends and tax
• Mechanics of stock lending
• Uses of stock loan – fee income and arbitrage strategies
• Equity Repos
• Introduction to an equity forward
• Non-arbitrage pricing of an equity forward
• Discounting and choosing a yield curve – Eonia or Euribor
• Differences between futures and forwards and the impact of uncertain rates
• Forecasting dividends – fixed amount or proportional dividends
• Using futures to short the market
• Futures and tactical asset allocation

Exercise: Building a forward curve, studying the impact of corporate actions on index dividends

Equity and Dividend Swaps

• Timing of resets and cashflows for an equity swap
• Valuing an equity swap using discounting
• Exotic swap types – variable notional, quanto, index vs. index
• Motivations and players in the market
• Using equity swaps for dividend taxation arbitrage
• Trading the equity repo
• Using an equity swap in mergers and acquisitions
• Diversifying cross holdings
• Overlay strategies for asset managers

Exercise: Corporate use of an equity swap

Advanced Issues in Equity Swaps

• Collateral and credit risk
• Central clearing and trading with a CSA
• Role of CVA in swap pricing
• Introduction to the dividend swap contract
• Comparing dividend swaps and dividend futures
• Trading dividends as an asset class
• Impact of the structured product market on dividend swaps
• Hedge fund strategies with dividend swaps

Exercise: Trading opportunities with a dividend swap

Equity Options

• Option definitions
• European and American options
• Trading on an exchange versus OTC
• Put / call parity for European options
• Index and basket options
• When to exercise American style options
• Portfolio protection – put, put spread, collar
• Directional views – call, call spread
• Buying the underlying vs. buying a call option
• Range bound strategies – straddles and strangles
• Yield enhancement – call overwriting
• Corporate Treasury – structured acquisition and disposal using options

Exercise: Protecting a portfolio against downside risk with options

Essentials of Option Pricing

• Pricing options by replication
• Black-Scholes assumptions on asset price movements
• Geometric Brownian motion and standard option valuation
• Hedging and risk neutrality
• Including dividends in price dynamics
• Sensitivities and the greeks
• Impact of dividend choices on risk measures (fixed cash, proportional and hybrid dividend assumptions)
• Hedging costs vs. time decay (the relationship between theta and gamma)
• Using trees to price American options
• Problems of combining dividends into American option pricing
• Causes and impact of volatility smiles

Exercise: Investigation of risk sensitivities for American and European options

Trading Volatility with Options

• Implied vs. historic volatility
• Options on illiquid assets or large size
• Extreme event risk, volatility skew and smile
• Pricing the chance of a payoff
• “Zero cost” and “Pay later” strategies
• Simple volatility trades
• Taking positions and skew and smile
• Introduction to a variance swap contract
• Trading with volatility indices

Exercise: Trading and hedging volatility