This document discusses risk management concepts including options hedging, option structures, exchange-traded options vs over-the-counter options, and leverage. It also covers option valuation using the Black-Scholes model and interest rate caps. Key points include that options hedge the underlying asset's price risk, leverage allows outsized gains from a small initial investment in options, and the Black-Scholes model is commonly used to value options based on the underlying asset price, strike price, time to expiration, interest rates, and volatility.
Conference on Option Trading Techniques - Option Trading StrategiesQuantInsti
This presentation was delivered by QuantInsti founders Rajib Ranjan Borah & Nitesh Khandelwal at a conference on 'Options Trading Techniques' organized in Bangkok on 6-October-2014. This event was organized by 'Stock Exchange of Thailand', ' Thailand Futures Exchange', 'FlexTrade' and supported by 'QuantInsti'.
The presentation looks at various categories of strategies that could be traded using options - for e.g. usage of option derivatives as a methodology to express viewpoint on volatility, correlation between index components, etc, etc.
This presentation was a part of a series of presentations delivered by Rajib Ranjan Borah and Nitesh Khandelwal to a gathering of around 150 Thai traders. The rest of the presentations in the conference included the following topics:
i) Option Derivative Fundamentals
ii) Option Trading Strategies
iii) Managing Option Portfolios - lower and higher order derivatives
iv) Global Option Trading Landscapes
Risk management is amongst the most overlooked yet very critical aspects of systematic trading. In this webinar, you’ll get to learn risk management techniques to overcome the most common challenges. This session will explain you the concepts of optimal leverage, hedging and risk indicators.
- Risk Management and the real challenge
- Optimal leverage: Kelly formula, Maximum drawdown
- Market risk: Stop Losses, volatility targeting, value-at-risk
- Hedging techniques
- Risk indicators
Learn more about our EPAT™ course here: https://www.quantinsti.com/epat/
Most Useful links:
Visit us at: https://www.quantinsti.com/
Like us on Facebook: https://www.facebook.com/quantinsti/
Follow us on LinkedIn: https://www.linkedin.com/company/quantinsti
Follow us on Twitter: https://twitter.com/QuantInsti
The presentation I gave in my investment class about paris trading. I implemented a experiment using R language to identify good pairs from S&P 100 universe. The algorithm is to perform ADF test on the spread of two random stocks and find out the pairs with stationary spread (co-integrated pairs). Pairs identification period is from 2010/11 to 2012/10, test period is from 2012/11 to 2013/12. Finally I got 33 pairs out of 4950 candidates, and I conduct a summary on the experiment result.
A pair trade is the taking of a long position in one security together with an equal short position in another that is strongly correlated with it. It is sometimes used to refer to multiple long and short positions that are similarly matched.
Conference on Option Trading Techniques - Option Trading StrategiesQuantInsti
This presentation was delivered by QuantInsti founders Rajib Ranjan Borah & Nitesh Khandelwal at a conference on 'Options Trading Techniques' organized in Bangkok on 6-October-2014. This event was organized by 'Stock Exchange of Thailand', ' Thailand Futures Exchange', 'FlexTrade' and supported by 'QuantInsti'.
The presentation looks at various categories of strategies that could be traded using options - for e.g. usage of option derivatives as a methodology to express viewpoint on volatility, correlation between index components, etc, etc.
This presentation was a part of a series of presentations delivered by Rajib Ranjan Borah and Nitesh Khandelwal to a gathering of around 150 Thai traders. The rest of the presentations in the conference included the following topics:
i) Option Derivative Fundamentals
ii) Option Trading Strategies
iii) Managing Option Portfolios - lower and higher order derivatives
iv) Global Option Trading Landscapes
Risk management is amongst the most overlooked yet very critical aspects of systematic trading. In this webinar, you’ll get to learn risk management techniques to overcome the most common challenges. This session will explain you the concepts of optimal leverage, hedging and risk indicators.
- Risk Management and the real challenge
- Optimal leverage: Kelly formula, Maximum drawdown
- Market risk: Stop Losses, volatility targeting, value-at-risk
- Hedging techniques
- Risk indicators
Learn more about our EPAT™ course here: https://www.quantinsti.com/epat/
Most Useful links:
Visit us at: https://www.quantinsti.com/
Like us on Facebook: https://www.facebook.com/quantinsti/
Follow us on LinkedIn: https://www.linkedin.com/company/quantinsti
Follow us on Twitter: https://twitter.com/QuantInsti
The presentation I gave in my investment class about paris trading. I implemented a experiment using R language to identify good pairs from S&P 100 universe. The algorithm is to perform ADF test on the spread of two random stocks and find out the pairs with stationary spread (co-integrated pairs). Pairs identification period is from 2010/11 to 2012/10, test period is from 2012/11 to 2013/12. Finally I got 33 pairs out of 4950 candidates, and I conduct a summary on the experiment result.
A pair trade is the taking of a long position in one security together with an equal short position in another that is strongly correlated with it. It is sometimes used to refer to multiple long and short positions that are similarly matched.
We cannot reduce market risks or systematic risks but we can have a measure of these risks with the help of beta.
With the help of beta we can approximately tell how much a particular stock will move if we know how much the whole stock market is going to move.
This presentation demonstrates that how economic concepts and/or econometric techniques can be useful in financial decision making (i.e. trading) and that how EViews can effectively handle the whole process.
Exchanges are centralized places where certain securities, commodities, derivatives, and other financial instruments are traded. In order to facilitate trading among buyers and sellers of these products, exchanges take the central position of being the counterparty to both buyers and the sellers of the product. This is done to remove the possibility of disputes that may arise from the non-performance of the counterparty. The exchange guarantees trades will be honored. This creates credit risk for the exchange attributable to the buyers and the sellers of its products. To address the potential loss due to the credit risk undertaken by exchanges from these buyers and sellers of the exchange traded products, exchanges demand certain margin requirements from their counterparties.
This presentation addresses in detail the issues that are considered for calculation of margin requirements and maintenance.
Prepared by Students of University of Rajshahi
Shahin Islam
Aslam Hossain
Shahidul Islam
Amy Khatun
Sohanuzzaman Sohan
MD. Rehan
Bikash Kumar
Rahid Hasan
Ali Haider
Uttam Kumar
MD. Abdullah AL Mamun
Mamunur Rahman
presented by Mango squad
For downloading this contact- bikashkumar.bk100@gmail.com
Why do Active Funds that Trade Infrequently Make a Market more Efficient? --...Takanobu Mizuta
Why do Active Funds that Trade Infrequently Make a Market more Efficient? -- Investigation using Agent-Based Model Takanobu Mizuta SPARX Asset Management Co., Ltd.
A tutorial to basics of stock markets, basically for newbie's. Explains what is stocks, how trading happens, kinds of trading and some basic terminologies.
The beta coefficient is a form of measurement for volatile movement in an individual stock, as well as systematic risk in comparison to comparable stocks or the wider market.
Beta is a representation of the trajectory output of the slop calculated through regression analysis of a particular stock vs sector vs wider market. http://blugm.com
Case study of a comprehensive risk analysis for an asset managerGateway Partners
The following case study is an excerpt of a comprehensive risk analysis prepared for an asset manager client of Gateway Partners. This client is a medium-sized asset manager with offices in both the U.S. and abroad who needed assistance in both quantifying and fully understanding the risk profile of their multi-billion dollar portfolio. Additional risk concerns of this client include “worst case” risk scenario analysis and the use of derivative instruments to assist in the hedging of their portfolio. While this case study has been used with the permission of our client, specific securities and the amounts they represent in the client portfolio have been changed and reduced to protect the identity of the client. Gateway Partners is proud to present this case study as an example of the risk management services we provide to our clients.
The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
We cannot reduce market risks or systematic risks but we can have a measure of these risks with the help of beta.
With the help of beta we can approximately tell how much a particular stock will move if we know how much the whole stock market is going to move.
This presentation demonstrates that how economic concepts and/or econometric techniques can be useful in financial decision making (i.e. trading) and that how EViews can effectively handle the whole process.
Exchanges are centralized places where certain securities, commodities, derivatives, and other financial instruments are traded. In order to facilitate trading among buyers and sellers of these products, exchanges take the central position of being the counterparty to both buyers and the sellers of the product. This is done to remove the possibility of disputes that may arise from the non-performance of the counterparty. The exchange guarantees trades will be honored. This creates credit risk for the exchange attributable to the buyers and the sellers of its products. To address the potential loss due to the credit risk undertaken by exchanges from these buyers and sellers of the exchange traded products, exchanges demand certain margin requirements from their counterparties.
This presentation addresses in detail the issues that are considered for calculation of margin requirements and maintenance.
Prepared by Students of University of Rajshahi
Shahin Islam
Aslam Hossain
Shahidul Islam
Amy Khatun
Sohanuzzaman Sohan
MD. Rehan
Bikash Kumar
Rahid Hasan
Ali Haider
Uttam Kumar
MD. Abdullah AL Mamun
Mamunur Rahman
presented by Mango squad
For downloading this contact- bikashkumar.bk100@gmail.com
Why do Active Funds that Trade Infrequently Make a Market more Efficient? --...Takanobu Mizuta
Why do Active Funds that Trade Infrequently Make a Market more Efficient? -- Investigation using Agent-Based Model Takanobu Mizuta SPARX Asset Management Co., Ltd.
A tutorial to basics of stock markets, basically for newbie's. Explains what is stocks, how trading happens, kinds of trading and some basic terminologies.
The beta coefficient is a form of measurement for volatile movement in an individual stock, as well as systematic risk in comparison to comparable stocks or the wider market.
Beta is a representation of the trajectory output of the slop calculated through regression analysis of a particular stock vs sector vs wider market. http://blugm.com
Case study of a comprehensive risk analysis for an asset managerGateway Partners
The following case study is an excerpt of a comprehensive risk analysis prepared for an asset manager client of Gateway Partners. This client is a medium-sized asset manager with offices in both the U.S. and abroad who needed assistance in both quantifying and fully understanding the risk profile of their multi-billion dollar portfolio. Additional risk concerns of this client include “worst case” risk scenario analysis and the use of derivative instruments to assist in the hedging of their portfolio. While this case study has been used with the permission of our client, specific securities and the amounts they represent in the client portfolio have been changed and reduced to protect the identity of the client. Gateway Partners is proud to present this case study as an example of the risk management services we provide to our clients.
The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
Giaohangtietkiem.vn - Giải pháp giao hàng TMĐT (eCom Services JSC)Quan Ph
Tốc độ giao hàng tác động rất lớn đến khách hàng trong bán lẻ trực tuyến. GHTK nỗ lực mỗi ngày để cung cấp dịch vụ giao hàng trong ngày và thu tiền hộ (same-day delivery và cash on delivery) uy tín và đáng tin cậy. Chúng tôi tin rằng dịch vụ này hữu ích cho xã hội nói chung. Người bán hàng bán được nhiều hơn, khách hàng mua sắm thoải mái hơn, và người giao hàng có thêm nhiều công việc và thu nhập xứng đáng.
Dịch vụ của chúng tôi đã có mặt tại Hà Nội và Tp.Hồ Chí Minh.
explain about techniques for hedging transaction exposure, how to used hedge future, option, money market for payable and receivable, comparing techniques for hedging vs not-hedging
Presented 25-Sep-2013 for Borsa İstanbul's Vadeli İşlem ve Opsiyon Piyasası (VİOP)
Borsa İstanbul : Vadeli İşlem ve Opsiyon Piyasası (VİOP)
- popular strategies' concentrate strikes & cause some skew
- review implied probabilities and conditional payoff are model-free
- gamma trading shows dynamic hedge issues
- volatility is not a normal "asset class"
- market maker's priorities for hedging jumps
- key hidden assumptions causing model risk
- important portfolio mismatch risks
- spotting real options & non-economic options
http://borsaistanbul.com/en/news/2013/09/26/borsa-istanbul-organizes-the-first-of-futures-and-options-market-seminar-series
To become a good Options investor, understanding the basic fundamentals and its pricing is key. In this session, we will discuss fundamentals of Options. This is an opportunity for beginners to ask the most basic questions on the working of CALL/PUT options and we will also put on trades (on a demo account).
We will discuss risks of buying and writing Options.
We can then talk about basic strategies involving single CALL/PUT contracts. We will see why writing PUTS can be so rewarding; so much so that Warren Buffet prefers selling PUT options.
Objectives
• Know that standard NPV analysis does not account for real options
• Basic understanding of option pricing
– Black-Scholes formula
– Binomial model
• Know different types of real options and their implications
– Option to Expand
– Option to Wait
• Improve your ability to recognize valuable real options to make good business decisions
Korea Stock Exchange, Australian Stock Exchange, New York Stock Exchange, NAS...Tai Tran
This presentation consists of 2 sections
1. An overview of Korea Stock Exchange and Australian Stock Exchange, accompanied by a comparison of the two exchanges
2. A discussion of Bennett & Li "Market Structure, Fragmentation, and Market Quality" article which looks into market fragmentation on New York Stock Exchange and NASDAQ
This was done as part of a project for University of New South Wales
St.George's Acquisition by Westpac AnalysisTai Tran
HotK team's Analysis on the St.George Acquisition by Westpac. The time in the presentation was set at April 2008. The information is our view and does not necessarily reflect what would have happened after April 2008.
3. Structure
Buyer Seller
Buy/Sell
Underlying asset
Agreed price
Agreed future time
Right Obligation
Option Premium
4. From Financial Markets
• Call
• Put
• Exercise (Strike) price
• Expiration date
• American Option
• European Option
• Option Premium
5. ETO vs. OTC
Exchange-Traded Options Over The Counter
Margin • Apply to seller, managed by Clearing • No
House
Standard- • Standardised • Customised
isation • Majority of options in FX and Money
Markets
Pricing • Displayed on screen • An agreement between buyer and seller
• Controlled by standardised pricing • Calculated according to the pricing
mechanisms conventions of both parties
Liquidity • Options with strike prices near the • Very illiquid for OTC's where there is an
current market are very liquid active ETO market
• To way prices for deep out of the
money options are difficult to value
Cost • A function of strike price and market • A function of the agreement between the
price buyer and the seller
• The volume of options required does • Price may be affected by the volume
not affect the price required
Credit risk • Exposure is to the exchange on which • Exposure is with the counterparty to the
the option is traded option
6. Leverage
Give me a lever long enough and a fulcrum on
which to place it, and I shall move the world.
Archimedes
7. Leverage
1. One Option allows the holder to buy/sell 100
shares
2. Price of an option vs. price of one share
8. Google Finance, accessed 7 November 2012,
<http://www.google.com/finance/option_chai
n?q=NYSE%3AWMT&ei=GzOaUMiuPMO3kgW
CxwE>
9. Leverage
Shares only (market price $73.76) Shares and Options
Buy 100 shares at $7376 Buy 1 Call with Strike Price $75 at
$2.20
When price goes up to $80, sell When price goes up to $80,
100 shares exercise call and end up with 100
shares
Profit = 100(80-73.76) = $624 Profit = 100(80-75) = $500
Profit/initial investment = Profit/initial investment = 500/2.2
624/7376 = 8.5% = 227.27 times
12. Option Value
Mone- Call Put Intrinsic
ness value
In The S > X S < X |S-X|
Money Intrinsic
(ITM) Value
At The S = X S = X 0
Money Option
(ATM)
Out of S < X X > S 0 Value
The
Time
Money Value
(OTM)
Why?
13. Black Scholes Model
C=Call premium
P=Put premium
S = Spot Price
X = Exercise Price
r = Risk Free rate
t=time to maturity
N() = Cumulative
Normal
Distribution
= volatility
14. Exercise
• Market price of Apple Inc. (AAPL) is $582.85
• Strike price = 500 + the last two digits of your student ID
• Time to maturity is 5 months
• Interest rate is 1%
• Volatility is 20%
• Calculate Call price and Put price
• Tip: take 4 digits
22. Black Scholes Assumptions
• Returns on Underlying asset are lognormally distributed
– Trading is continuous
– Share Price follows a random walk in continuous time
• Short-term rate is known and constant through life of
option
• Volatility is constant through life of option
• European Option
– The share pays no dividends or other distributions
• Value at expiry is intrinsic value only
• Value of option cannot be negative
24. Interest Rate Caps
• Definition:
– Caps are ceiling rate agreements that specify that if rates
go above a certain level (the ceiling) the financial
institution providing the agreement will compensate the
buyer for the difference between the actual rate and the
ceiling rate.
Topic 6 24
25. Cap Characteristics
• Series of European Options (“caplets”):
– Put Options on the underlying instrument
(the right to sell the underlying discount security at at
the price determined by the strike yield), or Call Options
on The “Interest rate” (both views can be correct)
• Contract for Differences
• Typically a borrower will be the buyer of a cap.
Topic 6 25
26. Example: Floating Rate Cap
• A borrower has a $1mio, one year variable rate loan with quarterly
rollovers. The current market rate (BBSW) for one year is 8%.
• Cap Details:
– Borrower buys a one year interest rate cap, striking at 9.00%.
– Standard cap arrangement is that premium is paid up front and
the exchange of interest differences is made in arrears.
– The cap is for $1 million notional principal (no principal is
exchanged between the counterparties).
Topic 6 26
27. Cap Cash Flows
D a te R a te C a sh F lo w
Day 1 8 .0 0 % P re m iu m p a id b u y
b o rro w e r to se lle r
Day 90 B B S W 8 .5 0 % N o P a ym e n t.
st
(1 ra te re se t) (ca p le t la p se d )
Day 180 B B S W 9 .8 0 % S e lle r to p a y $ 1 m io x
nd
(2 ra te re se t) C a p le t e xe rcise d 0 .8 % x 9 0 /3 6 5 =
rd
$ 1 ,9 7 2 .6 0 a t 3 re se t
Day 270 B B S W 1 0 .0 % S e lle r P a ys $ 1 ,9 7 2 .6 0 ,
rd
(3 ra te re se t) C a p le t E xe rcise d S e lle r to p a y$ 1 m io x
1 .0 % x 9 0 /3 6 5 =
th
$ 2 ,4 6 5 .7 5 a t 4 re se t
Day 360 B B S W 8 .9 % S e lle r p a ys $ 2 ,4 6 5 .7 5
th
(4 re se t, C a p e xp iry) C a p le t la p se d
Topic 6 27
28. Floors & Collars
• Floor products protect against prices falling below a certain
agreed level.
– One entity will “guarantee” prices will not go below a certain level
(the floor). If prices fall below the level, the seller compensates
the buyer.
• A combination of cap and floor where the range of highest
and lowest asset prices are set. Premium earned on a sold
floor offsets the premium paid for a bought call (and vice
versa).
Topic 6 28
29. Borrower’s Collar
• A borrower buys a cap from its bank and sells a floor to the
same bank.
– As rates rise, upper level is ensured via the cap and the borrower
receives compensation from the bank if interest rates rise above
this level.
– If rates fall below the level if the floor, the borrower pays the bank
the difference between the floor level and the current market
Topic 6 29
31. Collars
• Zero-Cost Collar:
– “Zero cost” collars can be constructed so as the strike
prices will generate a premium paid equal to the
premium earned.
• Pricing Collars:
– The price of a collar is the difference between the
premiums for the cap and the floor.
Topic 6 31
32. Pricing Collars
•PCollar= PCap - PFloor
•PCap = sum of prices of the embedded options.
•PFloor = sum of prices of the embedded options.
Topic 6 32
33. Interest Rate Options & Intrinsic Value
Consider the following series of options on 10 yr bond futures
when the market is at 94.00.
S trik e P ric e P u t P re m iu m C a ll P re m iu m
9 3 .5 0 0 .6 0 0 .6 5
9 3 .7 5 0 .3 0 0 .2 8
9 4 .0 0 0 .0 5 0 .0 3
9 4 .2 5 0 .3 0 0 .3 5
Which options:
Have intrinsic value
Have time value
Are At the Money
Are In the Money
Are Out of the Money
Topic 6 33
34. Interest Rate Options & Intrinsic Value
Consider the following series of options on the 7.50% Sept 2009
Govt bond. Current market yield is 5.70%
S trik e P ric e P u t P re m iu m C a ll P re m iu m
5 .8 0 0 .1 2 0 .2 5
5 .7 5 0 .0 6 0 .0 8
5 .7 0 0 .0 2 0 .0 3
5 .6 5 0 .1 0 0 .1 0
Which options:
Have intrinsic value
Have time value
Are At the Money
Are In the Money
Are Out of the Money 6
Topic 34
35. Currency Options
• Currency Option
“gives the right
but not the obligation to buy or sell one currency
against another currency at a specified price during
a specified period”
Topic 6 35
36. Currency Options
• Lack of flexibility in FX futures, and the possibility of
margin calls lead many FX hedgers to options
• Puts
• Calls
• Premium
– in USD per unit of Commodity CCY
• OTC & ETO markets
Topic 6 36
37. Currency Options
• OTC
– usually sold by banks, tailored to requirements
– illiquid secondary market
• ETO
– Standardised like futures
– liquid, competitively priced
– Cash CCY options & Options on CCY futures
Topic 6 37
38. Currency Options
• Every foreign exchange transaction involves the
purchase of one currency and sale of another
• Every currency option is both a call and put.
• An option to buy Australian dollars against US
dollars is both an Australian dollar CALL and a US
dollar PUT
Topic 6 38
39. Cash Currency Options
• Call Options (at exercise):
– Buyer receives Comm CCY, Pays USD
– Seller delivers Comm CCY, receives USD
• Put Options (at exercise):
– Buyer delivers Comm CCY, receives USD
– Seller delivers USD, receives Comm CCY
Topic 6 39
40. Options on CCY Futures
• Call Option on Futures (at exercise):
– Buyer takes long position in nearest futures
contract on Commodity CCY
– Seller takes short position in nearest futures
contract on Commodity CCY
• Put Option on Futures (at exercise):
– Buyer takes short position in nearest futures
contract on Commodity CCY
– Seller Takes long position in nearest futures
contract on Commodity CCY
Topic 6 40
42. Currency Options - Moneyness
Relationship Call Option Put Options
Strike < Current In the money Out of the
Exchange Rate money
Strike = Current At the money At the money
Exchange Rate
Strike > Current Out of the In the money
Exchange Rate money
Topic 6 42
43. Valuing Cash Currency Options
• A foreign currency is an asset that
provides a continuous yield equal to rf
• We can use the formula for an option on
a stock paying a continuous dividend
yield :
Set S = current spot exchange rate
Topic 6 43
44. The Foreign Interest Rate in CCY
Option Valuation
• We denote the foreign interest rate by rf
• When a U.S. company buys one unit of the
foreign currency it has an investment of S0
dollars
• The return from investing at the foreign
rate is rf S0 dollars
Topic 6 44