Equity Derivatives 2: Exotics and Structures

This programme on Exotic Options and Structured Products follows on naturally from the LFS Equity Derivatives course.

The first day of this programme looks at equity exotic options. It starts by considering barrier and binary options and the role they play in a variety of investment products. A detailed analysis is made of how best to price and manage the non-standard risks introduced by these products. The first day then moves on to consider correlation and basket options. It discusses how these features can be used to enhance an exotic product and how correlation products fit into an investment strategy.

The second day focuses on exotic underlyings and equity structured products. It starts by considering dynamic underlyings such as CPPI, risk controlled and risk budgeted indices and the role that these play in the current range of equity products. It then moves on to consider the variety of structured products seen in the equity markets today including capital protected notes, reverse convertibles, cliquets, and accumulators. Applications range from retail investment to equity capital markets and corporate finance. 

Finally, the course takes an in depth look at the autocallable market including structuring, valuation and risk management for this important market sector. The impact of regulation and the latest trends in autocallable features are considered in detail. 

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

• Equity and Derivative sales, traders, structurers, quants and relevant IT personnel
• Asset allocation managers
• Equity portfolio managers
• Insurance Company investment managers
• Company finance executives and investment bankers
• Risk managers, finance, IPV professionals, auditors and accountants

• Learn in detail about Exotic Options – Barriers, Binaries, Correlation and Baskets
• Become familiar with how to use them, price them and manage risk
• Understand the various exotic underlyings and structured products – risk controlled indices, reverse convertibles, capital protected notes and accumulators
• Gain a thorough understanding of the current state of the autocallable market
• Learn how to use exotic options and structured products in investment management and corporate M&A

Knowledge of Microsoft Excel and a good understanding of equity markets, indices, dividends, swaps and options.

Barriers and Binaries

• Types of barrier option – in/out, up/down, call/put
• Barrier monitoring
• Role of implied volatility in barrier option pricing
• Barrier/discontinuity risk
• Replicating European digitals with vanilla options
• American digitals – cash at hit and cash at maturity
• Models for pricing barriers and binaries
• Risk management for binary options
• Building a ladder option

Exercise: Investment opportunities with barrier options, building a ladder

Correlation and Baskets

• Introduction to basket options
• Correlation and basket option premium
• Best-of, worst-of and outperformance options
• Correlation and volatility exposures
• Dispersion trading
• Correlation smiles and impact on product risk management
• FX linkage - quanto and composition options
• Why quanto options have correlation exposure
• Ensuring arbitrage free quanto pricing

Exercise: Comparison of basket and quanto option in an investment strategy

Exotic Underlyings and Structured Products

• CPPI and the concept of a dynamic underlying
• Risk controlled indices and options
• Risk budget indices
• Accelerator options
• Forward starting options and cliquets
• PRIPs, regulation and the structured products market
• Capital protected notes
• Airbags and other participation enhancing structures
• Yield enhancing structures – reverse convertibles
• Knock-in reverse convertibles
• Enhancing yield with worst of structures

Exercise: Using a risk controlled index and looking for arbitrage in the structure products market

Autocallables and Accumulators

• Autocallable structures
• Using autocallable for enhanced participation
• Using autocallable for enhanced yield
• Common variants of autocallable
• Defensive autocallables
• Step-down autocallables
• Risk management of autocallable structures
• Role of autocallables in an investment portfolio
• Accumulators
• Corporate use of structured products
• Structured acquisitions and disposals

Exercise: Investigation of autocallable structure and the impact of defensive features