FX Options and Structured Products

Advanced Guidance to Excelling in the FX Market

Once you have a textbook understanding of money market and foreign exchange products, turn to FX Options and Structured Products, Second Edition, for the beyond-vanilla options strategies and traded deals proven superior in today's post-credit crisis trading environment. With the thoroughness and balance of theory and practice only Uwe Wystup can deliver, this fully revised edition offers authoritative solutions for the real world in an easy-to-access format. See how specific products actually work through detailed case studies featuring clear examples of FX options, common structures and custom solutions. This complete resource is both a wellspring of ideas and a hands-on guide to structuring and executing your own strategies. Distinguish yourself with a valued skillset by:

• Working through practical and thought-provoking challenges in more than six dozen exercises, all with complete solutions in a companion volume

• Gaining a working knowledge of the latest, most popular products, including accumulators, kikos, target forwards and more

• Getting close to the everyday realities of the FX derivatives market through new, illuminating case studies for corporates, municipalities and private banking

FX Options and Structured Products, Second Edition is your go-to road map to the exotic options in FX derivatives.

Auteur

UWE WYSTUP is the founder and managing director of Math-Finance AG, a consulting and software company specializing in quantitative finance, implementation of derivatives models, valuation and validation services. During his career, he worked as a financial engineer, structurer and consultant in FX options trading teams for such banks as Commerzbank, Deutsche Bank, Citibank, UBS and Sal. Oppenheim jr. & Cie. An internationally known FX options expert in academia and practice, he lectures on financial engineering as an honorary professor at Frankfurt School of Finance & Management and a professor of financial option price modeling and foreign exchange derivatives at Antwerp University, in addition to giving seminars all over the world. He coedited (with Jürgen Hakala) the industry standard, Foreign Exchange Risk.

Résumé
Advanced Guidance to Excelling in the FX Market

Once you have a textbook understanding of money market and foreign exchange products, turn to FX Options and Structured Products, Second Edition, for the beyond-vanilla options strategies and traded deals proven superior in today's post-credit crisis trading environment. With the thoroughness and balance of theory and practice only Uwe Wystup can deliver, this fully revised edition offers authoritative solutions for the real world in an easy-to-access format. See how specific products actually work through detailed case studies featuring clear examples of FX options, common structures and custom solutions. This complete resource is both a wellspring of ideas and a hands-on guide to structuring and executing your own strategies. Distinguish yourself with a valued skillset by:

• Working through practical and thought-provoking challenges in more than six dozen exercises, all with complete solutions in a companion volume
• Gaining a working knowledge of the latest, most popular products, including accumulators, kikos, target forwards and more
• Getting close to the everyday realities of the FX derivatives market through new, illuminating case studies for corporates, municipalities and private banking
  FX Options and Structured Products, Second Edition is your go-to road map to the exotic options in FX derivatives.

Contenu

List of Tables xiii

List of Figures xvii

Preface xxi

About the Author xxiii

Acknowledgments xxv

Chapter 1 Foreign Exchange Derivatives 1

1.1 Literature Review 1

1.2 A Journey through the History of Options 1

1.3 Currency Options 3

1.4 Technical Issues for Vanilla Options 4

1.4.1 Valuation in the Black-Scholes Model 6

1.4.2 A Note on the Forward 8

1.4.3 Vanilla Greeks in the Black-Scholes Model 8

1.4.4 Reoccurring Identities 11

1.4.5 Homogeneity based Relationships 13

1.4.6 Quotation Conventions 14

1.4.7 Strike in Terms of Delta 20

1.4.8 Volatility in Terms of Delta 21

1.4.9 Volatility and Delta for a Given Strike 21

1.4.10 Greeks in Terms of Deltas 22

1.4.11 Settlement 26

1.4.12 Exercises 30

1.5 Volatility 33

1.5.1 Historic Volatility 33

1.5.2 Historic Correlation 36

1.5.3 Volatility Smile 37

1.5.4 At-The-Money Volatility Interpolation 44

1.5.5 Volatility Smile Conventions 45

1.5.6 At-The-Money Definition 45

1.5.7 Interpolation of the Volatility on Fixed Maturity Pillars 45

1.5.8 Interpolation of the Volatility Spread between Maturity Pillars 48

1.5.9 Volatility Sources 49

1.5.10 Volatility Cones 52

1.5.11 Stochastic Volatility 52

1.5.12 Exercises 54

1.6 Basic Strategies Containing Vanilla Options 55

1.6.1 Call and Put Spread 56

1.6.2 Risk Reversal 61

1.6.3 Straddle 64

1.6.4 Strangle 65

1.6.5 Butterfly 67

1.6.6 Condor 70

1.6.7 Seagull 72

1.6.8 Calendar Spread 75

1.6.9 Exercises 75

1.7 First Generation Exotics 76

1.7.1 Classification 76

1.7.2 European Digitals and the Windmill Effect 77

1.7.3 Barrier Options 81

1.7.4 Touch Contracts 93

1.7.5 Compound and Installment 105

1.7.6 Asian Options 117

1.7.7 Lookback Options 126

1.7.8 Forward Start, Ratchet, and Cliquet Options 136

1.7.9 Power Options 138

1.7.10 Quanto Options 147

1.7.11 Exercises 152

1.8 Second Generation Exotics (Single Currency Pair) 156

1.8.1 Multiplicity Power Options 156

1.8.2 Corridors/Range Accruals 157

1.8.3 Faders 160

1.8.4 Exotic Barrier Options 162

1.8.5 Pay-Later Options 166

1.8.6 Step Up and Step Down Options 169

1.8.7 Options and Forwards on the Harmonic Average 169

1.8.8 Variance and Volatility Swaps 170

1.8.9 Forward Volatility Agreements (FVAs) 174

1.8.10 Exercises 176

1.9 Second Generation Exotics (Multiple Currency Pairs) 177

1.9.1 Spread and Exchange Options 177

1.9.2 Baskets 179

1.9.3 Outside Barrier Options 185

1.9.4 Best-of and Worst-of Options 188

1.9.5 Other Multi-Currency Options 191

1.9.6 Correlation Swap 192

1.9.7 Exercises 192

Chapter 2 Structured Products 197

2.1 Forward Transactions 197

2.1.1 Outright Forward 198

2.1.2 Participating Forward 200

2.1.3 Participating Collar 202

2.1.4 Fade-In Forward 203

2.1.5 Knock-Out Forward 205

2.1.6 Shark Forward 206

2.1.7 Fader Shark Forward 210

2.1.8 Butterfly Forward 212

2.1.9 Range Forward 214

2.1.10 Range Accrual Forward 215

2.1.11 Accumulative Forward 218

2.1.12 Boomerang Forward 224

2.1.13 Amortizing Forward 225

2.1.14 Auto-Renewal Forward 227

2.1.15 Double Shark Forward 228

2.1.16 Forward Start Chooser Forward 229

2.1.17 Free Style Forward 229

2.1.18 Boosted Spot/Forward 229

2.1.19 Flexi Forward/Time Option 231 2.1.20 St...