Equity Derivative Trading in Practice

Lecturer: Dr. Mika Kastenholz

Time: Wednesday 10.15 - 12.00

Place: ML F39 (exception: 28.09.2011 RZ F21)

TA: andreas

Links:

• Course Catalogue
• Lecturer's homepage  (Note: this page is password protected. You will get the login in the first lecture.)

Abstract
The aim of the lecture is to fill in the gaps between textbook quantitative finance and
industry practice. In particular, the emphasis will be on how theory and quantitative
models are used in derivatives trading every day. The course covers single and
multifactor vanilla and exotic options along with typical models and their limitations,
which are described in several case studies.
In order to relate the course content to the current market regime and make students
aware of current economic and political events, we will also discuss the week on week performance of several market indicators used by traders.

Lecturer
Dr. Mika Kastenholz is an equity exotics derivatives trader at Credit Suisse with over
five years experience both in London and Zurich. He is currently heading the single stock exotics and corporate derivatives desk at Credit Suisse in Zurich.

Detailed Course outline
The first nine lectures are split into blocks of three units to give a sound introduction
and understanding of derivatives trading including correlation products. The remaining five lectures cover additional topics important for trading.

1. Introduction to trading / Vanilla Option Trading I
2. Vanilla Option Trading II
3. Vanilla Option Trading III
The first three lectures on Vanilla option introduce briefly the theoretical framework
of risk neutral pricing and the Black-Scholes-Merton (BSM) model. Additional topics are: BSM first and second order Greeks, dividend modeling, simple and advanced vanilla trading strategies, corporate actions, organization of a trading desk, hedging out tail risk

4. Exotics Option Trading I
5. Exotic Option Trading II
6. Exotic Option Trading III
The next three lectures on Exotic options extend the previous vanilla framework to
these products. Additional topics are: volatility models beyond BS (in particular local and stochastic volatility), volatility model deficiencies and how to hedge against them, volatility surface dynamics (e.g. sticky strike, sticky delta skew dynamics), vega for exotics compared to vanillas

7. Correlation & correlation products I
8. Correlation & correlation products II
9. Correlation & correlation products III
The next three lectures extend the material to multifactor options, i.e. correlation and
correlation products. After a thorough introduction and definition of correlation/co-variance, students will learn how these derivatives are priced and traded.
Additional topics are: introduction to correlation (definition, historical / realized / implied correlation, cointegration, covariance, stationarity), from single factor to multi-factor derivatives, trading correlation instruments (CvC, correlation swap, covariance swap, variance dispersion), crossgamma (concept, equations, misunderstandings), dispersion trading, correlation sensitive products
(WoF, BoF, outperformance options) hidden risks, e.g. correlation skew modeling,
equity/FX & equity/IR correlation, Marking correlation (lambda approach), managing a correlation book, correlation term structure, Retail vs hedge fund flow, proxy hedging

10. Interest rates (IR): Yield curve construction, discounting for
collateralized/uncollateralized trades, FRA / IRS / OIS / Libor relationship, basis
swap, basis swap risk, hedging dv01 exposure

11. Credit derivatives
-CDS: history, application, mechanics, conventions
-CDS risk: CTD risk, event risk, liquidity risk, cp risk
-CDS vs Bond: basis
-CDS indices: application, roll mechanics, trading a CDS index
-CDO

12. VAR and scenario risk
-introduction to VAR
-managing positions with VAR and scenario risk

13. Structured Products
-Capital protected products
-Leveraged products
-Participation products
-Return enhancement products
-Listed exchange: SCOACH

14. Derivatives Accounting & Corporate Derivatives
-how are derivatives represented from an accounting point of view?
-topics: Funding penalties, Firm capital costs, Balance sheet usage, Collateral mgmt
(DVA / CVA), counterparty risk, BASEL III + Swiss finish
-Case study: The events of 2008/9 and 2011