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Description of Pricing and Managing Exotic and Hybrid Options

Exotic and hybrid options provide, for many risk managers, the ideal risk-protection tool. Many of the rules and strategies are still being formulated, resulting in frequent and costly calculation errors and misunderstandings.

Pricing and Managing Exotic and Hybrid Options introduces methods for pricing, trading, and managing this new generation of derivative products. Risk managers and traders can turn to this practical, hand-on book for detailed mathematical analyses and in-depth coverage including:

• correlation - a complete description, and why it is the most important factor to quantify
  
  
• computer code - sophisticated techniques for building a customized pricing mechanism
  
  
• valuable appendices - tools and summaries to which practitioners can quickly refer when pricing, trading and managing their own portfolios
  
  Pricing and Managing Exotic and Hybrid Options communicates the fundamental dependence and consequences of correlation effects for the new generation of financial products. But, more than that, its uniquely perceptive and intuitive approach equips traders and risk managers with clear mechanisms for pricing exotic and hybrid options, establishes strategies for managing them, and carefully illustrates methods for integrating them into an overall risk-management portfolio.

Title Information

ISBN:

9780070066694

Pages:

364 pages

Format:

Hardback

Product Code:

9585

Publisher:

McGraw-Hill Professional

Published:

30/11/-0001

Edition:

1st Edition

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Contents of Pricing and Managing Exotic and Hybrid Options

1. Transactions

Equity Index-Linked Interest-Rate Options

Foreign-Exchange-Linked Caps

Multifactor Range Accrual Notes

Self-Adjusting Forwards

Yield Curve Basket Options

Outperformance Options

Portfolio Insurance

Convertible Issuance Hedges

'Diffs' and Cross-Currency Swaps

Intermarket Spread Option

Long-Dated Foreign Exchange Options

Multiasset Barrier Swaps

Multiasset American Puts

2. Markets and Products

Markets

Product Variations

3. Pricing Analytics

Zero-Correlation Pricing

The Multifactor Stochastic Process

Symmetries, Invariances, and Equivalences

Spread Options

Constructing the Explicit Dynamic Hedge

Long-Dated Forex Options

'Inside' and 'Outside' Barrier Options

'Rainbow' Options

Convertible Bonds with Stochastic Interest Rates

Baskets and the Edgeworth Expansion

Generalized Put-Call Conversions and Static Hedging

Which Discount Curve?

4. Correlation

Estimation

Correlation term Structure

Trading Correlation with Volatility

Vector Algebra for Correlation

deviations from Multinormality

5. Numerical Methods

Numerical Integration

Multivariable Monte-Carlo Simulation

Multivariate Trees and Lattices

Finite Difference Methods

Advanced Numerical Techniques

6. Strategic Risk Management

Trade Selection

Cross Risks

Hedging Costs

The Index Approach and Optimal Risk Aggregation

Market Price of Risk for Hybrids

Static Hedging

Implied Joint Probabilities

Trading Algorithms and Risk Measures

7. Epilogue

Utility (or futility) of Hedging with Customized Products

Deferred Profits

The Doctrine of Effective Dynamics

References

Appendix A: Techniques for Normal Integrals

Common Integrals

Cholesky Decomposition

Appendix B: Random Vectors in n Dimensions

ÊDensity and Distribution

Transformations

Independence

Mean and Covariance

Conditional Densities

Conditional Expected Values

Characteristic Functions and Normality

Order-Statistics

Appendix C: Review of Basic Black-Scholes Pricing

Appendix D: Monte-Carlo Engine in VBA

Appendix EL Max-Min Algebra

Appendix F: Volatility and Skews

Estimation

Hedge readjustment with Vol Skews

Appendix G: Multivariate Statistical Techniques

Overview of Multivariate Methods

Covariance Matrix Eigenstructure

Applied Principal Components Decomposition

Appendix H: Distributions

Properties of the Lognormal Distribution

Mixed Normal Distributions

Moment Generating Functions

Multivariate Distributions

Method of Moments

Useful Numerical Approximations

Appendix I: Stochastic Process

Useful Properties

Girsanov Theory and Change of Drift

Solution of Stochastic Differential Equations

Level-Crossing

First-Passage Time

Appendix J: PDE Methods

Classification

Numerical Solutions of the Diffusion Equation

Analytic Solutions of the Diffusion Equation

Fourier Transform Method

Laplace Transform Methods

Index