FX Options and Structured Products E-Book

Uwe Wystup

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch

Seitenzahl: 824

Veröffentlichungsjahr: 2017

Beschreibung

Advanced Guidance to Excelling in the FX Market

Once you have a textbook understanding of money market and foreign exchange products, turn to FX Options and Structured Products, Second Edition, for the beyond-vanilla options strategies and traded deals proven superior in today’s post-credit crisis trading environment. With the thoroughness and balance of theory and practice only Uwe Wystup can deliver, this fully revised edition offers authoritative solutions for the real world in an easy-to-access format. See how specific products actually work through detailed case studies featuring clear examples of FX options, common structures and custom solutions. This complete resource is both a wellspring of ideas and a hands-on guide to structuring and executing your own strategies. Distinguish yourself with a valued skillset by:

• Working through practical and thought-provoking challenges in more than six dozen exercises, all with complete solutions in a companion volume
• Gaining a working knowledge of the latest, most popular products, including accumulators, kikos, target forwards and more
• Getting close to the everyday realities of the FX derivatives market through new, illuminating case studies for corporates, municipalities and private banking

FX Options and Structured Products, Second Edition is your go-to road map to the exotic options in FX derivatives.

Leseprobe

Table of Contents

Cover

Title Page

List of Tables

List of Figures

Preface

SCOPE OF THIS BOOK

THE READERSHIP

About the Author

Acknowledgments

CHAPTER 1: Foreign Exchange Derivatives

1.1 LITERATURE REVIEW

1.2 A JOURNEY THROUGH THE HISTORY OF OPTIONS

1.3 CURRENCY OPTIONS

1.4 TECHNICAL ISSUES FOR VANILLA OPTIONS

1.5 VOLATILITY

1.6 BASIC STRATEGIES CONTAINING VANILLA OPTIONS

1.7 FIRST GENERATION EXOTICS

1.8 SECOND GENERATION EXOTICS (SINGLE CURRENCY PAIR)

1.9 SECOND GENERATION EXOTICS (MULTIPLE CURRENCY PAIRS)

CHAPTER 2: Structured Products

2.1 FORWARD TRANSACTIONS

2.2 TARGET FORWARDS

2.3 SERIES OF STRATEGIES

2.4 DEPOSITS, LOANS, BONDS, AND CERTIFICATES

2.5 INTEREST RATE AND CROSS CURRENCY SWAPS

2.6 PARTICIPATION NOTES

2.7 HYBRID FX PRODUCTS

2.8 TREASURY CASE STUDIES

CHAPTER 3: Hedge Accounting

3.1 HEDGE ACCOUNTING UNDER IAS 39

3.2 HEDGE ACCOUNTING UNDER IFRS 9

CHAPTER 4: Foreign Exchange Markets

4.1 VANNA‐VOLGA PRICING

4.2 BID‐ASK SPREADS

4.3 SYSTEMS AND SOFTWARE

4.4 TRADING AND SALES

4.5 CURRENCY PAIRS

4.6 THINGS TO REMEMBER

4.7 GLOSSARY

Bibliography

Index

End User License Agreement

List of Tables

Chapter 1

TABLE 1.1 Standard market quotation of major currency pairs with sample spot prices

TABLE 1.2 Standard market quotation types for option values. In the example we take FOR = EUR, DOM = USD,

,

,

,

,

,

year,

(call), notional

EUR

USD. For the pips, the quotation 291.48 USD pips per EUR is also sometimes stated as 2.9148% USD per 1 EUR. Similarly, the 194.32 EUR pips per USD can also be quoted as 1.9432% EUR per 1 USD

TABLE 1.3 Default premium currency for a small selection of currency pairs. LHS currency pairs assume premium paid in USD (domestic currency), RHS assume premium paid in foreign currency

TABLE 1.4 1y EUR call USD put strike

for a EUR‐based bank. Market data: spot

, volatility

, EUR rate

, USD rate

. The raw delta is

EUR and the value is

EUR

TABLE 1.5 1y EUR call USD put strike

for a EUR‐based bank. Market data: spot

, volatility

, EUR rate

, USD rate

. The raw delta is

EUR and the value is

EUR

TABLE 1.6 Vega in terms of delta for the standard maturity labels and various deltas. It shows that one can vega hedge a long 9M 35 delta call with 4 short 1M 20 delta puts

TABLE 1.7 EUR/GBP implied volatilities in % for at‐the‐money vanilla options.

TABLE 1.8 EUR/GBP 25 delta risk reversal in %.

TABLE 1.9 EUR/GBP 25 delta butterfly in %.

TABLE 1.10 EUR/GBP implied volatilities in % of 4 April 2005.

TABLE 1.11 Sample data of a volatility cone in USD‐JPY for a 6‐month time horizon from 6 September 2003 to 24 February 2005

TABLE 1.12 Example of a call spread

TABLE 1.13 Example of a Risk Reversal

TABLE 1.14 Example of a Risk Reversal flip

TABLE 1.15 Example of a Straddle, valued at a volatility of about 7.8%

TABLE 1.16 Example of a Strangle, valued at a volatility of about 8%

TABLE 1.17 Example of a short butterfly

TABLE 1.18 Example of a short condor

TABLE 1.19 Example of a seagull call

TABLE 1.20 Windmill‐adjustment for a digital call paying one unit of domestic currency. Contract data: Time to maturity

, strike

, market data spot

,

,

, volatilities

,

,

,

TABLE 1.21 Example of an up‐and‐out call

TABLE 1.22 Example of a compound call option

TABLE 1.23 Example of an installment call

TABLE 1.24 Types of Asian options for

, where

denotes the time interval over which the average is taken,

denotes the strike,

the spot price at expiration time and

the average

TABLE 1.25 Values of average options. Input parameters are

,

,

,

,

,

days

years, 90 observations (implying a time step of 0.002739726 years), 10,000 price paths in the Monte Carlo simulation. The arithmetic average options are average price options. All values are in domestic pips

TABLE 1.26 Types of lookback options. The contract parameters

and

are the time to maturity and the strike price respectively, and

denotes the spot price at expiration time. Fixed strike lookback options are also called hindsight options

TABLE 1.27 Sample valuation results for lookback options. For the input data we used spot

,

,

,

,

, running min

, running max

,

. We find the analytic results in the continuous case in agreement with the ones published in Haug [71]. We can also reproduce the numerical results for the discretely sampled floating strike lookback put contained in Nahum [98]

TABLE 1.28 Value and Greeks of a forward start vanilla in USD on EUR/USD – spot of 0.9000,

,

,

,

, maturity

days, strike set at

days

TABLE 1.29 Static replication for the asymmetric power call, using

,

. For the symmetric power call the

standard calls need to be removed

TABLE 1.30 Asymmetric power call replication versus formula value, using

(at‐the‐money),

,

,

,

,

days

TABLE 1.31 Example of a quanto digital put. The buyer receives 100,000 EUR if at maturity the ECB fixing for USD‐JPY (computed via EUR‐JPY and EUR‐USD) is below 108.65. Terms were created on January 12 2004 with the following market data: USD‐JPY spot ref 106.60, USD‐JPY ATM vol 8.55%, EUR‐JPY ATM vol 6.69%, EUR‐USD ATM vol 10.99% (corresponding to a correlation of

% for USD‐JPY against JPY‐EUR), USD rate 2.5%, JPY rate 0.1%, EUR rate 4%

TABLE 1.32 Example of a quanto plain vanilla

TABLE 1.33 Example of a European corridor. To compare, the premium for the same corridor in American style would be 100,000 EUR

TABLE 1.34 Example of a fade‐in put. In comparison the corresponding vanilla put costs 50,000.00 EUR

TABLE 1.35 Example of a fade‐in forward

TABLE 1.36 Example of a variance swap in EUR‐USD. The quantity

is called the log‐return from fixing day

to day

and the average log‐return is denoted by

. The notation

means a multiplication with 0.0001. It is also sometimes denoted as

TABLE 1.37 Example of two variance scenarios in EUR‐USD. The left column shows a possible fixing set with a lower realized variance, the right column a scenario with a higher variance

TABLE 1.38 Example of a traded forward volatility agreement in EUR/GBP

TABLE 1.39 Example of a spread option

TABLE 1.40 Sample contact data of a EUR call basket put. The value of the basket is noticeably less than the value of three vanilla EUR calls

TABLE 1.41 Sample market data of 21 October 2003 of four currencies: EUR, GBP, USD, and JPY. The correlation coefficients are implied from the volatilities based on Equation (428) for the triangles and Equation (429) for the tetrahedra

TABLE 1.42 Example of a triple strike best‐of call (American style) with 100 M USD notional and one year maturity. Compared with buying vanilla options one saves 800,000 USD or 20%. All premiums are in USD

TABLE 1.43 Sample market ATM volatilities of four currencies: EUR, GBP, USD, and CHF

TABLE 1.44 Relating the notation of Heynen and Kat to the one by Shreve

TABLE 1.45 Sample short time series of two spots

Chapter 2

TABLE 2.1 Example of a participating forward

TABLE 2.2 Example of a participating collar with zero premium

TABLE 2.3 Terms and conditions of a fade‐in forward traded on 27 May 2004

TABLE 2.4 Example of a knock‐out forward with zero premium

TABLE 2.5 Example of a fader forward plus

TABLE 2.6 Example of a fader forward extra

TABLE 2.7 Pricing details of a fader forward extra

TABLE 2.8 Example of a butterfly forward for a EUR buyer/USD seller

TABLE 2.9 Example of a range or bonus forward

TABLE 2.10 Example of a range accrual forward

TABLE 2.11 Overhedge of an accumulator using RKO EUR calls and KO EUR puts as an approximation

TABLE 2.12 Terms and conditions of an accumulated forward in GBP‐EUR.

TABLE 2.13 Example of an amortizing forward

TABLE 2.14 Possible amortization schedule

TABLE 2.15 Example of a double shark forward (plus)

TABLE 2.16 Example of a boosted spot. And yes: the client sells both USD and a USD call

TABLE 2.17 Example transaction of a strike leverage forward traded in June 2007

TABLE 2.18 Indicative terms and conditions of an escalator ratio forward

TABLE 2.19 Sample scenario of an escalator ratio forward, designed for an exporter in the Euro zone in December 2008

TABLE 2.20 Indicative terms and conditions of an intrinsic value ratio knock‐out forward

TABLE 2.21 Sample scenario of an intrinsic value ratio knock‐out forward, designed for corporate treasury hedging in September 2008

TABLE 2.22 Example of a tender‐linked forward contract

TABLE 2.23 Terms and conditions of a

contingent rebate

structure

TABLE 2.24 Terms and conditions of a structured forward. The final amount of EUR applies only in the case that the reference spot at maturity is above 1.2060 EUR‐USD and the trigger 1.2300 has not been touched or crossed during the lifetime of the structure

TABLE 2.25 Terms and conditions of a flip forward

TABLE 2.26 Terms and conditions of a structured forward with

doubling option

: the bank has the right to double the notional at maturity

TABLE 2.27 Indicative terms and conditions of a forward with knock‐out chance

TABLE 2.28 Indicative terms and conditions of a power reset forward

TABLE 2.29 Scenario illustration of a target redemption forward. In the non‐capped type the last week's profit will be 4.85 big figures. In the capped type the accumulated profit is capped at 0.30, so the client accumulates only the last 3.75 big figures and the trade terminates. In traders' jargon it “knocks out,” although there is no knock‐out barrier or barrier event. Each forward will be settled physically every week until trade terminates (if target is reached). Note that a loss in one of the weeks does

not

lead to a reduction of the accumulated profit

TABLE 2.30 Fixing table of a monthly target redemption forward, M denoting the month.

TABLE 2.31 Pricing results of a monthly target redemption forward. For the digital risk we assume a digital risk range of 0.025. For the pin risk we assume a pin risk range of 0.005. Spot reference is EUR/USD 1.2964

TABLE 2.32 Market data used for pricing a monthly target redemption forward: discount factors (DF), deposit rates, and swap points for EUR/USD. Spot reference is EUR/USD 1.2964

TABLE 2.33 Volatility matrix and bucketed risk of a monthly target redemption forward: Aega, Rega, and Sega are in USD. Spot reference is EUR/USD 1.2964

TABLE 2.34 Bucketed interest rate risk of a monthly target redemption forward: both rhos are in USD. Spot reference is EUR/USD 1.2964

TABLE 2.35 Term sheet of a pivot target forward in USD‐CAD.

TABLE 2.36 Semi‐static replication portfolio of common versions (V) of seller tarfs. Version 2 generalizes the standard version 1 to a term‐structure of strikes; version 4 uses a knock‐in ratio forward

TABLE 2.37 EUR/USD outright forward rates as of May 3 2004 for spot reference 1.1900

TABLE 2.38 Example term sheet of a collar extra series

TABLE 2.39 Example of a performance‐linked deposit, where the investor is paid a minimum coupon below market plus 30% of the EUR‐GBP return

TABLE 2.40 Example of a tunnel deposit. The minimum rate is paid if EUR‐USD leaves the range, the maximum rate is paid if EUR‐USD stays inside the range

TABLE 2.41 Example of a corridor deposit. The minimum rate is paid in any case. The coupon paid at maturity in GBP is

, where

is the number of fixings inside the range

TABLE 2.42 Example of a turbo deposit

TABLE 2.43 Example of tower deposit. The minimum rate is paid if EUR‐USD leaves the widest range, the rates for the ranges are paid if EUR‐USD stays inside the respective range

TABLE 2.44 Example of a tower note. Ranges are American style

TABLE 2.45 Two‐way express certificate: terms and conditions. Early termination occurs if the fixing is outside the barriers, otherwise extended to next fixing date; coupons in case of early termination are 8.75 EUR, 12.25 EUR, 15.75 EUR, 19.25 EUR, 22.75 EUR; at maturity: if all fixings are between the barriers including the last one, then 90 EUR are returned

TABLE 2.46 Example of a cross currency swap in EUR‐JPY.

TABLE 2.47 The arbitrage argument for classic interest rate parity

TABLE 2.48 The arbitrage argument for interest rate parity with cross currency basis swap

TABLE 2.49 Example of a Hanseatic cross currency swap in EUR‐CHF. Both levels are of American style, i.e. observed continuously over time

TABLE 2.50 Example of a turbo cross currency swap in EUR‐CHF.

TABLE 2.51 Example of a flip swap in EUR‐CHF.

TABLE 2.52 Example of a corridor cross currency swap in EUR‐CHF.

TABLE 2.53 Example of a currency related swap in EUR‐CHF. This example traded between a family office and a leisure‐oriented bank on 5 Sept 2008, starting on 9 Sept 2008, maturing on 31 Dec 2018. Maturity days were 31 Dec and 30 June, starting on 31 Dec 2008. Spot reference is unknown, Bloomberg shows 1.5960 for end of day; 10Y‐EUR‐CHF forward is about 18 big figures down; EUR‐CHF ATM volatilities between 5% and 7%

TABLE 2.54 Terms of the quanto currency related swap 4175 in EUR‐CHF; traded 12 February 2007, starting on 14 February 2007, maturing on 15 April 2017. Maturity days were 15 April and 15 October, starting on 15 April 2007. Spot reference is unknown, probably near 1.6238; 10Y‐EUR‐CHF forward 1.3991; EUR‐CHF ATM volatilities average around 3%

TABLE 2.55 Example of a EUR‐CHF 9‐month double‐no‐touch linked 2‐year swap in EUR.

TABLE 2.56 Indicative terms and conditions as of 11 August 2004 or a EUR‐USD range reset swap. Ranges are American style. The best case is paid for each period in which EUR/USD stays inside the pre‐defined range between the fixing date and the expiry date

TABLE 2.57 Sample indicative terms and conditions of a gold performance note as of 21 February 2003. Note that OPTREF no longer exists; one would have to take a different fixing source now

TABLE 2.58 Currency pairs, normalizers, weights, sample spots, and values of a basket of four used to structure a basket‐linked performance note. The summands are computed as

, the index value

being the sum of these four summands, the basket payoff following Equation (410)

TABLE 2.59 Example of a dual asset range accrual note. The number of fixing days, where both EUR‐CHF and 12‐month EURIBOR are fixed inside the corridor, is denoted by

TABLE 2.60 USD‐BRL market on 28 March 2014.

Chapter 3

TABLE 3.1 List of abbreviations for hedge accounting relevant material

TABLE 3.2 Subsequent measurement of financial assets

TABLE 3.3 Specifications for the case study of the forward plus

TABLE 3.4 Example of shark forward plus as a basis for IFRS 9 hedge accounting

Chapter 4

TABLE 4.1 Common abbreviations for FX derivatives and structured products

TABLE 4.2 Spreads for one‐touch contracs

TABLE 4.3 Spreads for first generation exotics

TABLE 4.4 Currency codes, part one, sorted by the three‐letter code

TABLE 4.5 Currency codes, part two, sorted by the three‐letter code

TABLE 4.6 Chinese yuan currency symbols, (*) only by legal entities resident in China

TABLE 4.7 Common replication strategies and structures

TABLE 4.8 Common approximating rules of thumb

List of Illustrations

Chapter 1

FIGURE 1.1 Simulated paths of a geometric Brownian motion. The distribution of the spot

at time

is log‐normal. The light gray line reflects the average spot movement.

FIGURE 1.2 The Cable at Porthcurno, in the telegraphic museum and on the beach near the cable house.

FIGURE 1.3 Relevant dates for trading options. The spot dates are usually two business days (2bd) after the horizon, fixing or expiry date.

FIGURE 1.4 Dependence of the value of a vanilla call and a reverse knock‐out call on volatility. The vanilla value is monotone in the volatility, whereas the barrier value is not. The reason is that as the spot gets closer to the upper knock‐out barrier, an increasing volatility would increase the chance of knock‐out and hence decrease the value.

FIGURE 1.5 ECB fixings of EUR‐USD from 4 March 2003 to 3 March 2004 and the line of average growth.

FIGURE 1.6 Value of a European call in terms of volatility with parameters

,

,

,

,

. The saddle point is at

. The value starts at the value of the forward contract 0.5981 USD per EUR and converges to 1.0000 EUR, which is the (foreign discounted) value of the call currency amount expressed in USD.

FIGURE 1.7 The risk reversal (upper payoff) is a skew‐symmetric product, the butterfly (lower payoff) is a symmetric product.

FIGURE 1.8 Risk reversal and butterfly in terms of volatility for a given FX vanilla option smile.

FIGURE 1.9 Implied volatilities for EUR‐GBP vanilla options as of 4 April 2005.

FIGURE 1.10 Relationship of risk reversal, butterfly, and market strangle volatility (the 1‐vol strangle).

FIGURE 1.11 Kernel interpolation to generate an FX volatility smile.

FIGURE 1.12 USD/JPY volatility surface on the delta space up to one‐year tenor and historic ATM volatilities.

FIGURE 1.13 Bloomberg page OVDV quoting currency option volatilities.

FIGURE 1.14 SuperDerivatives displaying EUR/INR option volatilities. The figures in boxes are meant to be read as market input; all other figures are calculated by SuperDerivatives' proprietary interpolation and extrapolation methods.

FIGURE 1.15 Reuters displaying EUR/USD option volatilities. It is not obvious to me (but hopefully to Reuters and its subscribers) which figures are used as market input and how the rest of the figures are interpolated or extrapolated.

FIGURE 1.16 Tullett Prebon quoting USD‐JPY volatilities of 14 April 2014 in terms of at‐the‐money, risk reversals and butterflies.

FIGURE 1.17 Volmaster single leg pricing screen with market input data on the right. “Fly” and “Rev” represent butterfly and risk reversal respectively.

FIGURE 1.18 Example of a volatility cone in USD‐JPY for a 6‐month time horizon from 6 September 2003 to 24 February 2005.

FIGURE 1.19 Historic implied volatilities for USD‐JPY 1‐month vanilla at‐the‐money options for the period 1994–2000.

FIGURE 1.20 Profit & loss and final exchange rate of a call spread.

FIGURE 1.21 Position of a Ratio Call Spread reflecting the view of a rise and sharp landing of USD‐TRY at about 1.6000 in 2008.

FIGURE 1.22 Smile effect in a ratio call spread in USD‐TRY.

FIGURE 1.23 Payoff and final exchange rate of a risk reversal.

FIGURE 1.24 Profit and loss of a long Straddle.

FIGURE 1.25 Profit and loss of a Strangle.

FIGURE 1.26 Profit and loss of a long and short butterfly.

FIGURE 1.27 Profit and loss of a long and short condor, valued at a volatility of about 10%.

FIGURE 1.28 Profit (equivalent to the payoff for a zero-value structure) and final exchange rate of a seagull call.

FIGURE 1.29 Replicating a digital call with a vanilla call spread.

FIGURE 1.30 Windmill effect. The shaded gray areas show the mis‐pricing. Working with a flat volatility is not sufficient. A first order approximation is attained using the windmill adjustment and will be considerably better. Working on the smile curve exactly is achieved by the call spread replication.

FIGURE 1.31

Down‐and‐out

American barrier: if the exchange rate is never at or below

between the trade date and maturity, the option can be exercised.

Up‐and‐out

American barrier: if the exchange rate is never at or above

between the trade date and maturity, the option can be exercised.

FIGURE 1.32

Up‐and‐out

American barrier option payoff (above) and final exchange rate (below).

FIGURE 1.33 Barrier option terminology: regular barriers are out‐of‐the‐money, reverse barriers are in‐the‐money.

FIGURE 1.34 Comparison of a discretely and a continuously monitored knock‐out barrier option.

FIGURE 1.35 Comparison of a vanilla put and a down‐and‐out put. As the barrier moves far away from the current spot, the barrier option behaves like a vanilla option. As the barrier moves close to the current spot, the barrier option becomes worthless.

FIGURE 1.36 Barrier had lost popularity in 1994–1996 when USD‐DEM had dropped below its historic low.

FIGURE 1.37 Vega depending on spot of an up‐and‐out put and a vega hedge consisting of two vanilla options.

FIGURE 1.38 Semi‐static replication of the regular knock‐out with a risk reversal. A short down‐and‐out call is hedged by a long call with the same strike and a short put with a strike chosen in such a way that the value of the call and put portfolio is zero if the spot is at the barrier.

FIGURE 1.39 Delta of a reverse knock‐out call in EUR‐USD with strike 1.2000, barrier 1.3000.

FIGURE 1.40 Delta hedging a short reverse knock‐out call. The

‐axis shows the USD value per EUR notional. Recall that the slope of the value function of a long contract represents the delta hedge to employ.

FIGURE 1.41 Comparison of two scenarios of an installment option. The top graph shows a continuation of all installment payments until expiration. The graph below shows a scenario where the installment option is terminated after the first decision date.

FIGURE 1.42 Lifetime structure of the options with value

for the i‐th Option.

FIGURE 1.43 The holding value shortly before

for an installment option with 4 rates is shown by the solid line. The positive slope of this function is less than 1 and the function is continuous and convex. The net holding value of an installment call option

for

and a decision time

is presented by the dashed line. This curve intersects the

‐axis in the point, where it divides the stopping region and the holding region. The value function is zero in the stopping region

and equal to the net holding value in the holding region

, where

is a threshold for every time

, which depends on the parameters of the installment option.

FIGURE 1.44 Above: comparing the value of average price options with vanillas, we see that average price options are cheaper. The reason is that averages are less volatile and hence less risky. Below: ingredients for average options: a price path, 90‐days rolling price average (here: geometric), and an averaging period for an option with 90‐days maturity.

FIGURE 1.45 Above: option values and delta depending on the underlying price; Asian value is lower than vanilla value, Asian delta is smoother than vanilla delta; below: option values and gamma depending on the underlying price; Asian value is lower than vanilla value, Asian gamma is lower than vanilla gamma.

FIGURE 1.46 Option values and vega depending on volatility for at‐the‐money options.

FIGURE 1.47 Graph above: dynamic hedging: performance of option position and hedge portfolio; graph below: static hedging: comparison of hedged and unhedged “Greek” exposure. For both, sample prices were generated randomly.

FIGURE 1.48 Payoff profile of lookback calls (sample underlying price path, 20 trading days).

FIGURE 1.49 Vanilla and lookback call (left‐hand scale) with deltas (right‐hand scale) using

. The lookback delta equals the sum of the delta of a vanilla option plus the delta of a strike bonus option.

FIGURE 1.50 Value (left‐hand scale) and gamma (right‐hand scale) of an at‐the‐money floating strike lookback and a vanilla call.

FIGURE 1.51 Comparison of the payoffs of a floating strike lookback option and a vanilla straddle (graph above) and the values of the positions (graph below) for a random time path (exchange rate and straddle strike on the rhs scale).

FIGURE 1.52 Payoff of asymmetric power options vs. vanilla options, using

,

.

FIGURE 1.53 Payoff of symmetric power options vs. vanilla options, using

,

.

FIGURE 1.54 Symmetric power call replicated with asymmetric power and vanilla calls, using

,

.

FIGURE 1.55 Asymmetric power call and vanilla call value, delta (lhs) and gamma (rhs) on the spot space, using

,

,

,

,

,

days.

FIGURE 1.56 Gamma exposure of a symmetric power versus vanilla straddle, using

(at‐the‐money),

,

,

,

,

days.

FIGURE 1.57 Vega exposure of a symmetric power versus vanilla straddle, using

(at‐the‐money),

,

,

,

,

days.

FIGURE 1.58 Static replication performance of an asymmetric power call, using

,

,

,

,

,

days.

FIGURE 1.59 XAU‐USD‐EUR FX quanto triangle. The arrows point in the direction of the respective base currencies. The length of the edges represents the volatility. The cosine of the angles

represents the correlation of the currency pairs

and

,

if

both

and

have the same base currency (DOM). If the base currency (DOM) of

is the underlying currency (FOR) of

, then the correlation is denoted by

.

FIGURE 1.60 Payoff of a multiplicity power put compared with a vanilla put with strike

and cap of 600. USD‐JPY final spot on the

‐axis.

FIGURE 1.61 Example of a corridor or range accrual with spot 1.2500, domestic interest rate 3.00%, foreign interest rate 2.75%, volatility 10%, for a maturity of 1 year with 12 monthly fixings indicated by the dots. The range is 1.2000–1.3000. In a resurrecting corridor, the investor would accumulate 10 out of 12 fixings. In a non‐resurrecting corridor, the investor would accumulate 4 out of 12 fixings as the fifth is outside the range.

FIGURE 1.62 Notional of a fade‐in put. At

, the holder would be entitled to sell

1 M EUR, where 5 is the number of fixings between the lower and the upper level

and

on a resurrecting basis (here

because at

the spot fixing is below the lower level). The total number of fixings inside the range will be known only at

. Hence, the notional of the put will be known only at

.

FIGURE 1.63 Value function

of an up‐and‐out call option with window barrier active only for the second month, with strike

, knock‐out barrier

, and maturity 3 months. We used the interest rates

,

, volatility

, and

.

FIGURE 1.64 Comparison of Parisian and Parasian barrier option values.

FIGURE 1.65 Payoff of a pay‐later EUR call USD put. We use the market input spot

, volatility

, EUR rate

, USD rate

, strike

, time to maturity

years. The vanilla value is 0.0158 USD, the digital value is 0.2781 USD, the resulting pay‐later price is 0.0569 USD, which is substantially higher than the plain vanilla value. Consequently the break‐even point is at 1.3075, which is quite far off. For this reason pay‐later type structures do not trade very often.

FIGURE 1.66 Comparison of scenarios for a low variance (graph above) and a higher variance (graph below).

FIGURE 1.67 Nested double‐no‐touch ranges.

FIGURE 1.68 Protection with a basket option in two currencies. The ellipsoids connect the points that are reached with the same probability assuming that the forward prices are at the center.

FIGURE 1.69 Relationship between volatilities

(edges) and correlations

(cosines of angles) in a tetrahedron with four currencies and six currency pairs. The arrows mark the market standard quotation direction, i.e. in EUR‐USD the base currency is USD and the arrow points to USD.

FIGURE 1.70 Amount of premium saved in a basket of two currencies compared with two single vanillas as a function of correlation: the smaller the correlation, the higher the premium savings effect.

Chapter 2

FIGURE 2.1 A carry trade is done if a market participant has a different expectation of the futures spot (shown by the constant straight line) from the risk‐neutral outright forward rate (shown by the dotted curve following Equation (3), which could be EUR‐CHF or AUD‐JPY).

FIGURE 2.2 Payoff of a participating forward.

FIGURE 2.3 Payoff of a participating collar.

FIGURE 2.4 Final exchange rate of a knock‐out forward for a EUR buyer.

FIGURE 2.5 Comparison of final exchange rates for a shark forward plus: outright forward versus forward plus rate.

FIGURE 2.6 Comparison of final exchange rates for a shark forward plus: the forward plus worst case is the lowest. Using an extra strike or participation, one can increase either the knock‐out barrier or – as shown here – move the worst case closer to the outright forward at the same price and allow less participation on the upside.

FIGURE 2.7 Final exchange rate of a butterfly forward for a EUR buyer.

FIGURE 2.8 Final exchange rate of a range forward for a EUR buyer.

FIGURE 2.9 Final exchange rate of a range accrual forward for a EUR buyer/USD seller.

FIGURE 2.10 Ranges for an accumulative forward in EUR/GBP in GBP‐EUR quotation.

FIGURE 2.11 Amortization schedule of an amortizing forward contract for a EUR buyer/USD seller.

FIGURE 2.12 P&L scenarios pivot target forward.

FIGURE 2.13 Pivot target forward payoff and psychology.

FIGURE 2.14 Illustration of profits and losses in a long kiko TARN (target redemption range accrual note). A range of possible AUD‐JPY fixings is plotted on the

‐axis. The

‐axis denotes the profit and loss per fixing in million of JPY.

FIGURE 2.15 Illustration of profits and losses in a long kiko TARN (target redemption range accrual note). A range of possible AUD‐JPY fixings is plotted on the

‐axis. The

‐axis denotes the profit and loss in AUD summed over all 26 fixings.

FIGURE 2.16 Bloomberg screen shot tarf explanation.

FIGURE 2.17 Bloomberg screen shot: OVML pivot target forward.

FIGURE 2.18 EUR/USD target forward sample term sheet.

FIGURE 2.19 Comparing the market interest rate (dotted line) with the enhanced interest rate of a dual currency deposit.

FIGURE 2.20 Best case and worst case interest rate of a tunnel deposit compared with the market interest rate (dotted line).

FIGURE 2.21 EUR‐CHF spot during the first three quarters of 2003.

FIGURE 2.22 Design of a tower deposit with three ranges.

FIGURE 2.23 Two‐way express certificate: five possible scenarios.

FIGURE 2.24 A cross currency swap as a dual currency trade, e.g. USD and JPY. Two parties exchange cash flows in different currencies.

FIGURE 2.25 Basis swaps and basis spread margin concept. The margin

is constant over all interest rate pay dates.

refers to LIBOR.

FIGURE 2.26 Basis swaps and spreads of November 9, 2009.

FIGURE 2.27 Basis spread history in EUR‐USD.

FIGURE 2.28 Basis spread history in USD‐JPY.

FIGURE 2.29 Cash flows and currency risk protection for a Hanseatic cross currency swap.

FIGURE 2.30 Three ranges for a turbo cross currency swap in EUR‐CHF. In this sample path the structure works out well for the client as all the future spot fixings are in the upper range, thus he would pay the best case interest rate of only 0.50% in all of the eight periods.

FIGURE 2.31 Two ranges for a flip swap in EUR‐CHF. In this sample path the structure works out well for the client as all the future spot fixings are in the upper range, so he would pay the best case interest rate of only 3.95% in all periods.

FIGURE 2.32 Corridor ranges for a corridor cross currency swap in EUR‐CHF. In this sample path the structure works out well for the client for three future spot fixings where she would pay the best case and not so well for the other three spot fixings where she would pay the worst case.

FIGURE 2.33 Currency related swap in EUR‐CHF. We show the payoff (in EUR) of each of the 21 embedded EUR put CHF call options. Note that the benefit of saving EUR 25,250 if spot is above the strike is achieved by taking an unlimited risk if spot goes lower. Measured in EUR, the loss is a non‐linear function of spot and the maximum potential loss is unbounded. Even for a spot of 1.1000 the interest rate amount the investor needs to pay to the bank is EUR 709,114, which is almost 30 times higher than the maximum possible profit.

FIGURE 2.34 History of the ask price of gold in USD from 1987 to 2002.

FIGURE 2.35 PRDC power coupon via USD‐JPY call spread.

FIGURE 2.36 PRDC power coupon via USD‐JPY call spread.

FIGURE 2.37 Sell‐side vega of a PRDC power coupon via a 10‐year USD‐JPY call spread.

FIGURE 2.38 Concept of a floan: ignoring interest payments on the way, the treasurer borrows CHF at time

, converts into EUR at EUR‐CHF spot

. At maturity

he needs to buy back CHF at the prevailing spot

. The interest rate he saves is in theory identical to the higher EUR cash required if the prevailing spot is equal to the forward

. The treasurer enters the floan because he expects

when he takes the decision at

. His risk is that

, and the losses arising from this risk are potentially unlimited.

FIGURE 2.39 EUR‐CHF drop and recovery in 2015.

FIGURE 2.40 Comparison of exit strategies of a sick floan in EUR‐CHF. The treasurer needs to buy CHF 20 M for EUR in six months to pay back his floan. His goal is to minimize the EUR amount required to buy CHF. Initial spot 1.0400 and terminal spot 1.0900 shown in vertical lines.

FIGURE 2.41 USD notional returned for a DCD. In the standard case the investor sells a USD call EUR put. In the inverse case selling USD put EUR call would potentially lead to a negative value. One way to correct this would be the self‐quanto USD put EUR call.

Chapter 3

FIGURE 3.1 Typical derivative contracts, see e.g. [4], p. 137.

FIGURE 3.2 Dollar‐offset and solution for small numbers. From top to bottom: (a) perfect hedge, (b) hedge effectiveness area, (c) Hailer/Rump tolerance bounds, (d) combination of (b) and (c).

FIGURE 3.3 Screenshot of a Monte Carlo simulation. The variables on which the simulation is based are shown in the shaded area in the upper left corner. The bold numbers can be varied. Generally, for a prospective test for effectiveness, all simulated exchange rate paths are used, except the path with the title “Average.”

FIGURE 3.4 150 simulated paths of the exchange rate.

FIGURE 3.5 Screenshot: calculation of Shark Forward Plus values. Inside the box, the knock‐out barrier for the given specification can be calculated so that the initial value is near zero without calculating all paths and time steps.

FIGURE 3.6 150 simulated paths of the exchange rate including strike and barrier of Forward Plus.

FIGURE 3.7 Screenshot: calculation of Shark Forward Plus values at maturity. Red (light gray in black‐white mode) numbers indicate that the barrier was hit along the path.

FIGURE 3.8 Screenshot: calculation of forward rates.

FIGURE 3.9 Screenshot: calculation of the forecast transaction's value.

FIGURE 3.10 Screenshot: prospective Dollar‐Offset Ratio.

FIGURE 3.11 Screenshot: prospective variance reduction measure.

FIGURE 3.12 Screenshot: prospective Regression Analysis.

FIGURE 3.13 Selected paths for the retrospective test for effectiveness.

FIGURE 3.14 Screenshot: cumulative Dollar‐Offset Ratio path 1.

FIGURE 3.15 Screenshot: variance reduction measure path 1.

FIGURE 3.16 Screenshot: regression analysis path 1.

FIGURE 3.17 Screenshot: dollar‐offset ratio path 5.

FIGURE 3.18 Screenshot: cumulative dollar‐offset ratio path 5.

FIGURE 3.19 Screenshot: Variance reduction measure path 5.

FIGURE 3.20 Screenshot: regression analysis path 5.

FIGURE 3.21 Screenshot: cumulative dollar‐offset ratio path 12.

FIGURE 3.22 Screenshot: variance reduction measure path 12.

FIGURE 3.23 Screenshot: regression analysis path 12.

FIGURE 3.24 Screenshot: cumulative dollar‐offset ratio path 2.

FIGURE 3.25 Screenshot: variance reduction measure path 2.

FIGURE 3.26 Screenshot: regression analysis path 2.

Chapter 4

FIGURE 4.1 Vanna of a vanilla option as a function of spot and time to expiration, showing the skew symmetry about the at‐the‐money line.

FIGURE 4.2 Volga of a vanilla option as a function of spot and time to expiration, showing the symmetry about the at‐the‐money line.

FIGURE 4.3 Consistency check of vanna‐volga‐pricing. Vanilla option smile for a one month maturity EUR/USD call, spot

,

,

,

,

,

.

FIGURE 4.4 Consistency check of vanna‐volga‐pricing. Vanilla option smile for a one‐year maturity EUR/USD call, spot

,

,

,

,

,

.

FIGURE 4.5 Consistency check of vanna‐volga‐pricing. Vanilla option smile for a one‐year maturity EUR/USD call, spot

,

,

,

,

,

.

FIGURE 4.6 Overhedge of a one‐touch in EUR‐USD for both an upper touch level (graph above) and a lower touch level (graph below), based on vanna‐volga pricing.

FIGURE 4.7 Comparison of interest rate and volatility risk for a vanilla option. The volatility risk behaves like a square root function (see Equation (24)), whereas the interest rate risk is close to linear (see Equation (29)). Therefore, short‐dated FX options have higher volatility risk than interest rate risk.

FIGURE 4.8 Vanilla bid‐ask spreads on log‐moneyness space in implied volatilities.

FIGURE 4.9 BFIX TWAP weights assigned to the 306 snapshots.

FIGURE 4.10 Pedigree of FX options, exotics and structured products. Dotted lines resemble approximate replications, full lines resemble static replication. Key building blocks are vanillas and the one-touch.

Guide

Cover

TABLE of Contents

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E1

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FX Options and Structured Products

Second Edition

UWE WYSTUP

This edition first published 2006

© 2017 Uwe Wystup

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

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Library of Congress Cataloging-in-Publication Data

Names: Wystup, Uwe, author.

Title: FX options and structured products / Uwe Wystup.

Description: Second edition. | Chichester, West Sussex, United Kingdom : John Wiley & Sons, [2017] | Includes index. |

Identifiers: LCCN 2017015264 (print) | LCCN 2017023711 (ebook) | ISBN 9781118471111 (pdf) | ISBN 9781118471135 (epub) | ISBN 9781118471067 (cloth)

Subjects: LCSH: Foreign exchange options. | Structured notes (Securities) | Derivative securities.

Classification: LCC HG3853 (ebook) | LCC HG3853 .W88 2017 (print) | DDC 332.4/5—dc23

LC record available at https://lccn.loc.gov/2017015264

Cover Design: Wiley

Cover Images: Pen image: © archerix/iStockphoto;

Gears image: © sbayram/iStockphoto

To Ansua

List of Tables

1.1 Standard Market Quotation of Major Currency Pairs

1.2 Standard Market Quotation Types for Option Values

1.3 Default Premium Currency

1.4 Premium and Delta Currency Example 1

1.5 Premium and Delta Currency Example 2

1.6 Vega in Terms of Delta

1.7 EUR/GBP ATM Implied Volatilities

1.8 EUR/GBP 25-delta Risk Reversal

1.9 EUR/GBP 25-delta Butterfly

1.10 EUR/GBP Implied Volatilities

1.11 Volatility Cone

1.12 Call Spread Example

1.13 Risk Reversal Example

1.14 Risk Reversal Flip Example

1.15 Straddle Example

1.16 Strangle Example

1.17 Butterfly Example

1.18 Condor Example

1.19 Seagull Example

1.20 Windmill-Adjustment for Digital Options

1.21 Up-and-out Call Example

1.22 Compound Option Example

1.23 Installment Call Example

1.24 Types of Asian Options

1.25 Values of Average Options

1.26 Types of Lookback Options

1.27 Lookback Options: Sample Valuation Results

1.28 Forward Start Option Value and Greeks

1.29 Static Replication for the Asymmetric Power Call

1.30 Asymmetric Power Call Replication Versus Formula Value

1.31 Quanto Digital Put Example

1.32 Quanto Plain Vanilla Vega Hedging

1.33 European Corridor Example Terms

1.34 Fade-In Put Example Terms

1.35 Fade-in Forward Example Terms

1.36 Variance Swap Example Term Sheet

1.37 Two Variance Scenarios in EUR-USD

1.38 Forward Volatility Agreement: Traded

1.39 Spread Option

1.40 Basket Option Sample Terms

1.41 Basket Option Sample Market Data

1.42 Best-of Call Valuation Example

1.43 Sample Market ATM Volatilities of four Currencies EUR, GBP, USD, and CHF

1.44 Notation Mapping of Heynen and Kat vs. Shreve

1.45 Sample Short Time Series of two Spots

2.1 Participating Forward Term Sheet

2.2 Participating Collar Term Sheet

2.3 Fade-In Forward Term Sheet

2.4 Knock-Out Forward Term Sheet

2.5 Fader Forward Plus Example

2.6 Fader Forward Extra Example

2.7 Fader Forward Extra Pricing Details

2.8 Butterfly Forward Term Sheet

2.9 Range Forward Term Sheet

2.10 Range Accrual Forward Example

2.11 Overhedge of an Accumulator

2.12 Accumulator Term Sheet

2.13 Amortizing Forward Example

2.14 Amortizing Forward: Amortization Scenario

2.15 Double Shark Forward Example

2.16 Boosted Spot Term Sheet

2.17 Strike Leverage Forward Transaction

2.18 Escalator Ratio Forward Term Sheet

2.19 Escalator Ratio Forward Sample Scenario

2.20 Intrinsic Value Ratio Knock-Out Forward Term Sheet

2.21 Intrinsic Value Ratio Knock-Out Forward Sample Scenario

2.22 Tender-Linked Forward Term Sheet

2.23 Contingent Rebate Structure

2.24 Structured Forward with Improved Exchange Rate

2.25 Flip Forward Term Sheet

2.26 Structured Forward with Doubling Option

2.27 Forward with Knock-Out Chance Term Sheet

2.28 Power Reset Forward Term Sheet

2.29 Target Redemption Forward Term Sheet

2.30 EUR/USD Target Redemption Forward: Fixing Table

2.31 EUR/USD Target Redemption Forward: Pricing Results

2.32 EUR/USD Target Redemption Forward: Market Data

2.33 EUR/USD Target Redemption Forward: Volatility Matrix and Bucketed Risk

2.34 EUR/USD Target Redemption Forward: Bucketed Interest Rate Risk

2.35 Pivot Target Forward in USD-CAD

2.36 TARF Semi-Static Replication

2.37 EUR/USD Outright Forward Rates

2.38 Collar Extra Strip Term Sheet

2.39 Performance-Linked Deposit Term Sheet

2.40 Tunnel Deposit

2.41 Corridor Deposit

2.42 Turbo Deposit

2.43 Tower Deposit

2.44 Tower Note

2.45 Two-Way Express Certificate Term Sheet

2.46 Cross Currency Swap in EUR-JPY

2.47 Classic Interest Rate Parity

2.48 Interest Rate Parity with Cross Currency Basis Swap

2.49 Hanseatic Cross Currency Swap Term Sheet

2.50 Turbo Cross Currency Swap Term Sheet

2.51 Flip Swap

2.52 Corridor Cross Currency Swap

2.53 Currency Related Swap in EUR-CHF

2.54 Quanto Currency Related Swap 4175 in EUR-CHF

2.55 Double-No-Touch Linked Swap

2.56 Range Reset Swap

2.57 Gold Performance Note

2.58 FX Basket-Linked Performance Note

2.59 Dual Asset Range Accrual Note

2.60 USD-BRL Market on 28 March 2014

3.1 Hedge Accounting Abbreviations

3.2 Subsequent Measurement of Financial Assets

3.3 Effectiveness of Forward Plus: Data

3.4 Shark Forward Plus Scenario for IFRS 9 Hedge Accounting

4.1 Abbreviations for FX Derivatives

4.2 One-Touch Spreads

4.3 Spreads for First Generation Exotics

4.4 Currency Codes Part 1

4.5 Currency Codes Part 2

4.6 Chinese Yuan Currency Symbols

4.7 Common Replication Strategies and Structures

4.8 Common Approximating Rules of Thumb

List of Figures

1.1 Simulated Paths of a Geometric Brownian Motion

1.2 The Cable at Porthcurno

1.3 Dates Relevant for Option Trading

1.4 Dependence of Option Value on Volatility

1.5 ECB Fixings EUR-USD and Average Growth

1.6 Value of a European Call on the Volatility Space

1.7 Risk Reversal and Butterfly

1.8 Risk Reversal and Butterfly on the Volatility Smile

1.9 Implied volatilities for EUR-GBP

1.10 Risk Reversal, Butterfly, and Strangle

1.11 Kernel Interpolation of the FX Volatility Smile

1.12 USD/JPY Volatility Surface and Historic ATM Volatilities

1.13 Bloomberg page OVDV

1.14 SuperDerivatives FX Volatility Surface

1.15 Reuters EUR/USD Volatility Surface

1.16 Tullett Prebon USD-JPY volatilities

1.17 Volmaster Single Leg Pricing Screen

1.18 Volatility Cone

1.19 Historic USD-JPY ATM Implied Volatilities

1.20 Call Spread P&L and Final Exchange Rate

1.21 Ratio Call Spread in USD-TRY

1.22 Ratio Call Spread with Smile Effect

1.23 Risk Reversal Payoff and Final Exchange Rate

1.24 Straddle Profit and Loss

1.25 Strangle Profit and Loss

1.26 Butterfly Profit and Loss

1.27 Condor Profit and Loss

1.28 Seagull Payoff and Final Exchange Rate

1.29 Replicating a Digital Call with a Vanilla Call Spread

1.30 Windmill Effect

1.31 Knock-Out Barrier Option (American Barrier)

1.32 Up-and-out Call Payoff and Final Exchange Rate

1.33 Barrier Option Terminology

1.34 Discrete vs. Continuous Barrier Monitoring

1.35 Vanilla vs. Down-and-Out Put Value

1.36 Barrier Options Less Popular in 1994–1996

1.37 Best Vega Hedge of a Barrier Option

1.38 Semi-Static Replication of the Regular Knock-Out with a Risk Reversal

1.39 Delta of a Reverse Knock-Out Call

1.40 Delta Hedging a Short Reverse Knock-Out Call

1.41 Installment Options: Buy-and-Hold vs Early Termination

1.42 Installment Schedule

1.43 Installment Options: Hold vs. Exercise

1.44 Asian Options vs. Vanilla Options

1.45 Asian vs. Vanilla Delta and Gamma

1.46 Option Values and Vega Depending on Volatility for ATM Options

1.47 Asian Option: Hedging Performance

1.48 Payoff Profile of Lookback Calls

1.49 Vanilla and Lookback Option Value and Delta

1.50 Vanilla and Lookback Value and Gamma

1.51 Floating Strike Lookback vs. Vanilla Straddle

1.52 Asymmetric Power Option Payoff

1.53 Symmetric Power Option Payoff

1.54 Replication of a Symmetric Power Call

1.55 Asymmetric Power Call and Vanilla Call Value, Delta, and Gamma

1.56 Symmetric Power Versus Vanilla Straddle Gamma

1.57 Symmetric Power Versus Vanilla Straddle Vega

1.58 Static Replication Performance of an Asymmetric Power Call

1.59 XAU-USD-EUR FX Quanto Triangle

1.60 Payoff of a Multiplicity Power Put

1.61 Range Accrual

1.62 Notional of a Fader

1.63 Window Barrier Option

1.64 Parisian and Parasian Barrier Option

1.65 Pay-Later Option: Payoff

1.66 Two Variance Scenarios in EUR-USD

1.67 Nested Ranges

1.68 Basket Option vs. Vanilla Option Portfolio

1.69 Currency Tetrahedron

1.70 Basket Value in Terms of Correlation

2.1 Carry Trade

2.2 Participating Forward Payoff

2.3 Participating Collar Payoff

2.4 Knock-Out Forward Final Exchange Rate

2.5 Shark Forward Plus Final Exchange Rate

2.6 Shark Forward Plus with Extra Strike

2.7 Butterfly Forward Final Exchange Rate

2.8 Range Forward Final Exchange Rate

2.9 Range Accrual Forward Final Exchange Rate

2.10 Accumulative Forward Ranges

2.11 Amortizing Forward – Amortization Schedule

2.12 P&L Scenarios Pivot Target Forward

2.13 Pivot Target Forward Payoff and Psychology

2.14 KOKO TARN Payoff per Fortnight

2.15 KIKO TARN Payoff in Total

2.16 Bloomberg Screen Shot: TARF Explanation

2.17 Bloomberg Screen Shot: OVML Pivot Target Forward

2.18 EUR/USD Target Forward Sample Term Sheet

2.19 Dual Currency Deposit

2.20 Tunnel Deposit

2.21 Historic EUR-CHF Spot Rates in 2003

2.22 Tower Deposit

2.23 Two-Way Express Certificate Scenarios

2.24 Cross Currency Swap Cash Flows

2.25 Basis Spread Margin Concept

2.26 Basis Spread Quotes on Reuters

2.27 Basis Spread History in EUR-USD

2.28 Basis Spread History in USD-JPY

2.29 Hanseatic Cross Currency Swap

2.30 Turbo Cross Currency Swap Ranges

2.31 Flip Swap Ranges

2.32 Corridor Cross Currency Swap Ranges

2.33 Currency Related Swap in EUR-CHF

2.34 Historic Gold Price from 1987 to 2002

2.35 PRDC Power Coupon

2.36 PRDC Power Coupon

2.37 PRDC Power Coupon Vega

2.38 Floan Concept

2.39 EUR-CHF Drop and Recovery in 2015

2.40 Exit Strategies of a Sick Floan

2.41 Inverse Dual Currency Deposit

3.1 Typical Derivative Contracts

3.2 Dollar-Offset and Solution for Small Numbers

3.3 Screenshot Monte Carlo Simulation

3.4 Exchange Rate Monte Carlo Simulation

3.5 Screenshot: Calculation of Shark Forward Plus Values

3.6 Exchange Rate Monte Carlo Simulation with Strike and Barrier

3.7 Screenshot: Calculation of Shark Forward Plus Values at Maturity

3.8 Screenshot: Calculation of Forward Rates

3.9 Screenshot: Calculation of the Forecast Transaction’s Value

3.10 Screenshot: Prospective Dollar-Offset Ratio

3.11 Screenshot: Prospective Variance Reduction Measure

3.12 Screenshot: Prospective Regression Analysis

3.13 Selected Paths for the Retrospective Test for Effectiveness

3.14 Screenshot: Cumulative Dollar-Offset Ratio Path 1

3.15 Screenshot: Variance Reduction Measure Path 1

3.16 Screenshot: Regression Analysis Path 1

3.17 Screenshot: Dollar-Offset Ratio Path 5

3.18 Screenshot: Cumulative Dollar-Offset Ratio Path 5

3.19 Screenshot: Variance Reduction Measure Path 5

3.20 Screenshot: Regression Analysis Path 5

3.21 Screenshot: Cumulative Dollar-Offset Ratio Path 12

3.22 Screenshot: Variance Reduction Measure Path 12

3.23 Screenshot: Regression Analysis Path 12

3.24 Screenshot: Cumulative Dollar-Offset Ratio Path 2

3.25 Screenshot: Variance Reduction Measure Path 2

3.26 Screenshot: Regression Analysis Path 2

4.1 Vanilla Vanna

4.2 Vanilla Volga

4.3 Vanna-Volga Consistency Check for Medium Skew

4.4 Vanna-Volga Consistency Check for Small Skew

4.5 Vanna-Volga Consistency Check for Dominating Skew

4.6 One-Touch Overhedge Using Vanna-Volga

4.7 Interest Rate and Volatility Risk Compared

4.8 Vanilla Bid-Ask Spreads

4.9 Bloomberg Weighting Scheme for Currency Fixings

4.10 Pedigree of Exotics and Structured Products

Preface

SCOPE OF THIS BOOK

Treasury management of international corporates involves dealing with cash flows in different currencies. Therefore the natural service of an investment bank consists of a variety of money market and foreign exchange products. This book explains the most popular products and strategies with a focus on everything beyond vanilla options.

It explains all the FX derivatives including options, common structures and tailor‐made solutions in examples, with a special focus on the application including views from traders and sales as well as from a corporate treasurer's perspective.

It contains actually traded deals with corresponding motivations explaining why the structures were traded. This way the reader gets a feeling for how to build new structures to suit clients' needs. We will also cover some examples of “bad deals,” deals that traded and led to dramatic losses.

Several sections deal with some basic quantitative aspect of FX options, such as quanto adjustment, deferred delivery, vanna‐volga pricing, settlement issues.