The purpose of this seminar is to give you a thorough introduction to financial options and a good understanding of their mechanics, pricing and applications.
We start with general introduction to options and option markets. We present the basic options structures, we explain the basic option terminology, and we explain how options are traded and settled on options exchanges and in the OTC market.
We then explain the basic principles of option pricing. After a brief review of probability theory and an overview of fundamental statistical measures, we explain and demonstrate in more detail how options are priced. We first look at the pay-off profiles of different option types, and we explain the so-called put-call parity and other important relationships between options prices. Further, we describe the role of volatility in option pricing, we discuss what lies behind the term structure of volatility, and we explain techniques for volatility forecasting.
A number of important valuation models will then be presented and demonstrated, including the Black-Scholes, Black, Garman-Kohlhagen, Cox-Ross-Rubinstein and Black-Derman-Toy (BDT) models. We illustrate the use of these models with many practical examples.
Further, we explain how the important risk measures such as delta, gamma, vega, rho, theta etc. are derived from option pricing models and how these key ratios should be properly interpreted. We will make sure that you fully appreciate the importance of these sensitivities in trading and hedging. We present and discuss a number of trading strategies with options. Such strategies include “open position” strategies, “spread” strategies, “bull” and “bear” strategies, and different volatility strategies with options. The strategies will be illustrated in depth using real-life data and computer simulations.
We then explain how options can be effectively used to hedge interest rate, FX, equity, commodity and energy risk. We give examples of simple 1:1 hedges, but also more complex portfolio hedging and ratio hedging strategies will be examined in full detail. Finally, we explain delta-hedging and risk transferring through structured products.