Book description
The FX options market represents one of the most liquid and strongly competitive markets in the world, and features many technical subtleties that can seriously harm the uninformed and unaware trader.
This book is a unique guide to running an FX options book from the market maker perspective. Striking a balance between mathematical rigour and market practice and written by experienced practitioner Antonio Castagna, the book shows readers how to correctly build an entire volatility surface from the market prices of the main structures.
Starting with the basic conventions related to the main FX deals and the basic traded structures of FX options, the book gradually introduces the main tools to cope with the FX volatility risk. It then goes on to review the main concepts of option pricing theory and their application within a Black-Scholes economy and a stochastic volatility environment. The book also introduces models that can be implemented to price and manage FX options before examining the effects of volatility on the profits and losses arising from the hedging activity.
Coverage includes:
how the Black-Scholes model is used in professional trading activity
the most suitable stochastic volatility models
sources of profit and loss from the Delta and volatility hedging activity
fundamental concepts of smile hedging
major market approaches and variations of the Vanna-Volga method
volatility-related Greeks in the Black-Scholes model
pricing of plain vanilla options, digital options, barrier options and the less well known exotic options
tools for monitoring the main risks of an FX options' book
The book is accompanied by a CD Rom featuring models in VBA, demonstrating many of the approaches described in the book.
Note: The ebook version does not provide access to the companion files.
Table of contents
- Title Page
- Copyright Page
- Dedication
- Preface
- Notation and Acronyms
- Chapter 1 - The FX Market
- Chapter 2 - Pricing Models for FX Options
-
Chapter 3 - Dynamic Hedging and Volatility Trading
- 3.1 PRELIMINARY CONSIDERATIONS
- 3.2 A GENERAL FRAMEWORK
- 3.3 HEDGING WITH A CONSTANT IMPLIED VOLATILITY
- 3.4 HEDGING WITH AN UPDATING IMPLIED VOLATILITY
- 3.5 HEDGING VEGA
- 3.6 HEDGING DELTA, VEGA, VANNA AND VOLGA
- 3.7 THE VOLATILITY SMILE AND ITS PHENOMENOLOGY
- 3.8 LOCAL EXPOSURES TO THE VOLATILITY SMILE
- 3.9 SCENARIO HEDGING AND ITS RELATIONSHIP WITH VANNA-VOLGA HEDGING
-
Chapter 4 - The Volatility Surface
- 4.1 GENERAL DEFINITIONS
- 4.2 CRITERIA FOR AN EFFICIENT AND CONVENIENT REPRESENTATION OF THE VOLATILITY SURFACE
- 4.3 COMMONLY ADOPTED APPROACHES TO BUILDING A VOLATILITY SURFACE
- 4.4 SMILE INTERPOLATION AMONG STRIKES: THE VANNA-VOLGA APPROACH
- 4.5 SOME FEATURES OF THE VANNA-VOLGA APPROACH
- 4.6 AN ALTERNATIVE CHARACTERIZATION OF THE VANNA-VOLGA APPROACH
- 4.7 SMILE INTERPOLATION AMONG EXPIRIES: IMPLIED VOLATILITY TERM STRUCTURE
- 4.8 ADMISSIBLE VOLATILITY SURFACES
- 4.9 TAKING INTO ACCOUNT THE MARKET BUTTERFLY
- 4.10 BUILDING THE VOLATILITY MATRIX IN PRACTICE
- Chapter 5 - Plain Vanilla Options
-
Chapter 6 - Barrier Options
- 6.1 A TAXONOMY OF BARRIER OPTIONS
- 6.2 SOME RELATIONSHIPS OF BARRIER OPTION PRICES
- 6.3 PRICING FOR BARRIER OPTIONS IN A BS ECONOMY
- 6.4 PRICING FORMULAE FOR BARRIER OPTIONS
- 6.5 ONE-TOUCH (REBATE) AND NO-TOUCH OPTIONS
- 6.6 DOUBLE-BARRIER OPTIONS
- 6.7 DOUBLE-NO-TOUCH AND DOUBLE-TOUCH OPTIONS
- 6.8 PROBABILITY OF HITTING A BARRIER
- 6.9 GREEK CALCULATION
- 6.10 PRICING BARRIER OPTIONS IN OTHER MODEL SETTINGS
- 6.11 PRICING BARRIERS WITH NON-STANDARD DELIVERY
- 6.12 MARKET APPROACH TO PRICING BARRIER OPTIONS
- 6.13 BID/ASK SPREADS
- 6.14 MONITORING FREQUENCY
- Chapter 7 - Other Exotic Options
- Chapter 8 - Risk Management Tools and Analysis
- Chapter 9 - Correlation and FX Options
- References
- Index
Product information
- Title: FX Options and Smile Risk
- Author(s):
- Release date: January 2010
- Publisher(s): Wiley
- ISBN: 9780470754191
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