The purpose of this advanced-level course is to give you a good understanding of the mechanics, pricing, risk characteristics and applications of exotic options.
We start with a general introduction to exotics options, explaining the differences between "vanilla" and "exotic" options and giving an overview of exotic options, their pay-off profiles, and their applications.
Further, we present a general framework for valuing exotic options. Models include analytical as well as numerical models and Monte Carlo simulation techniques.
We then take a closer look at the various types of exotic options: such as Asian, lookback, barrier, basket, compound, ladder, clique, chooser, contingent premium and rainbow options. We establish the pay-off profiles of these options and explain how they can be decomposed into more basic "building blocks" – such as vanilla options and digital options - for analysis and structuring purposes.
Further, we explain how the options are priced and hedged, and how the traditional "greeks" – delta, gamma, vega, theta and rho – as well as higher order sensitivities such as "speed", "color" and "charm" - are calculated and interpreted.
We also explain how the individual exotic options can be used for the hedging of commercial foreign exchange transactions, complex market risk exposures, and as building blocks in "exotic" structured products.
Finally, we present and discuss ways of effectively managing the risk of a portfolio of exotic options. We explain how to establish a "risk warehouse" and how this risk warehouse can be managed using standard derivatives, structured products and dynamic hedging techniques.