Latest Developments: Equity Derivatives / Stochastic Volatility / Option Variance & Equity Hybrids

Venue: Central London

Location: Central London, United Kingdom

Event Date/Time: Apr 05, 2006 End Date/Time: Apr 07, 2006
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Description

Day 1: Equity Derivatives: From Basic - Hybrids Workshop

Presenter: Oliver Brockhaus: Head of Equity Financial Engineering,
Commerzbank Corporates & Markets

Topics Covered:

• From market to model: Basics
• Complete smile models
• Stochastic volatility
• Monte Carlo
• Correlation
• Hybrids

Day 2: Latest Developments: Equity Derivatives Modelling Techniques

Presenters:

Frédéric Abergel: Head of Equity Derivatives Quant Analytics: Ixis-cib
Sebastien Bossu, VP, Global Equity Derivatives, Dresdner Kleinworth Wasserstein
Daniel Bloch: Manager, Barclays Capital
Nicolas Mougeot: Senior Derivatives Analyst, BNP Paribas

Topics Covered:

• Understanding option trading and variance swaps
• Options on quadratic payoffs within Affine and Quadratic models
• A proper dynamic for the variance swap within the class of Affine and Quadratic models
• 3rd generation volatility products: variance swaps and beyond
• The emergence of variance swaps and their valuation
• Comparison of calibration and hedge performances for various stochastic volatility models
• Requirements for a “good” stochastic volatility modelling
• LSV model: theoretical and practical issues

Day 3: Latest Developments: Equity Hybrid Products

Presenters:

Claudio Albanese: Chair of Mathematical Finance, Imperial College London
Damiano Brigo: Head of Credit Models: Banca IMI
Denis Cohen-Bengio: AXA-IM
Tariq Dennison: Vice President, Bear Sterns

Topics Covered:

• Equity Derivatives and Hybrids
• Almost stationary calibration and forward start skews
• Latest Developments CPPI
• Credit Default Swap Calibration and Equity Swap Valuation with a time varying Black-Cox type Structural Model
• Complete overview of Interest Rate / Equity Hybrids

Day 1: Equity Derivatives: From Basic - Hybrids Workshop

08:30 – 17:00: Oliver Brockhaus: Head of Equity Financial Engineering,
Commerzbank Corporates & Markets

I. From market to model: Basics
Forward:
Interest rate, repo rate, dividends, spot, forward
Vanilla:
Representation of implied volatility
Arbitrage considerations

II. Complete smile models
Local volatility
Implied distribution
Independent returns
Implementing Finite Difference
Path dependent features

III. Stochastic volatility
Hedging and incomplete models
Understanding forward skew and convexity
Analytic results: Heston, Hagan
Efficient calibration
Volatility products
Case study: Cliquets

IV. Monte Carlo
Random number generation
Large step simulation
Barriers
Sensitivites

V. Correlation
Baskets and implied correlation
Smile models and decorrelation
Correlation skew models
Case study: Rainbows

VI. Hybrids
Stochastic interest rates
Credit risk
Case study: Calibration to Equity and Credit

Day 2: Latest Developments: Equity Derivatives Modelling Techniques

08:30 – 10:30 Sebastien Bossu, Vice President, Global Equity Derivatives, Dresdner Kleinworth Wasserstein

2 Hours

Understanding option trading and variance swaps

• Introduction
• Key concepts behind Black-Scholes
• Black-Scholes in practice
• Managing an option book
• Trading volatility
• P&L path-dependency
• Variance swaps

10:30 – 10:45 Break

10:45 – 12:45 Nicolas Mougeot: Senior Derivatives Analyst, BNP Paribas

2 Hours

3rd generation volatility products: variance swaps and beyond

• Volatility investing: the traditional way
• The emergence of variance swaps and their valuation
• Why use variance swaps?
• 3rd generation volatility products: description and pricing
(gamma swaps, trading dispersion, corridor variance swaps...)

12:45 – 13:45 Lunch

13:45 - 15:45 Daniel Bloch: Manager, Barclays Capital

2 Hours

Options on quadratic payoffs within Affine and Quadratic models

• Variance swap, corridor on Gamma swaps, Signed variance swap etc…
• Modelling the variance swap as a bond
• A proper dynamic for the variance swap within the class of Affine and Quadratic models
• Options on Quadratic payoffs
• A proper dynamic for the VIX future
• Options on the VIX future

15:45 – 16:00 Break

16:00 – 18:00 Frédéric Abergel: Head of Equity Derivatives Quant Analytics: Ixis CIB

2 Hours

Comparison of calibration and hedge performances for various stochastic volatility models

• Requirements for a “good” stochastic volatility modelling
• Parameter estimations: historical and market-implied
• Affine models: pros and cons
• LSV model: theoretical and practical issues
• A class of Lévy processes with jumps

Cocktail Party 18:00 – 19:30

Day 3: Latest Developments: Equity Hybrids Products

08:30 – 11:00 Claudio Albanese: Imperial College London: 2 Hours 30 minutes

Equity Derivatives and Hybrids

• Regime switching for equity derivatives
• Functional lattices and spectral methods
• Economic cycle correlation and high dimensional lattices
• Almost stationary calibration and forward start skews
• Including stochastic dividends and stochastic rates
• Case study 1: Spectral methods for cliquets and path dependent options
• Case study 2: Equity linked swaptions

11:00 – 11:15 Break

11:15 – 13:15 Damiano Brigo: Banca IMI

2 Hours

Counterparty Risk Pricing in Equity Payoffs with CDS consistent structural
models

• A Black Cox type structural model with general time varying coefficients
• Exact Calibration to CDS data for different maturities
• Calibration case study for Parmalat CDS
• Tractable Extensions with scenario default barrier and volatility
• A Calibration exercise with the extended models
• Hybrid features induced by Counterparty Risk
• Possible use for Equity return swaps and hybrid equity/credit products
• Numerical Examples

13:15 – 14:15 Lunch

14:15 – 16:15 Tariq Dennison: Vice President, Bear Sterns

2 Hours

Complete overview of Interest Rate / Equity Hybrids

• Background: Familiar structures leading up to today's hybrids
Separable products: Converts, ELNs, especially when callable
Spread products: Quanto options
The American Put option
• Structured products on bond ETFs and IR sensitive single "stocks" and other underlyings
Total Return vs Price Return structures
Handling the correlation of payoff to discount factor for European options
Discount factor sensitivity in path-dependent options
Parity of long-term implied vol and skew with pure IR structured products
American put on a bond ETF
• Today's basket and hybrid products: why allocate when one product does it all
Modelling long-term equity-IR correlation
Tail Events in equity-IR behavior
Term structure of equity-IR covariance
"Rainbow" and non-decomposable basket payoffs
• Non-basket hybrids, for example, IR-contingent equity options
Likely future directions in equity-IR hybrid structuring

16:15 – 16:30 Break

16:00 – 17:30 Representative AXA-IM. CPPI:1 hour 30 minutes

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