Volatility: Trading and Managing Risk

London Financial Studies
Training overview
Professional Course
Classroom
3 days
From 5,625 USD
Start dates
New York City
5,625 USD
Please contact LFS
London Financial Studies

Course description

Volatility: Trading and Managing Risk

This program gives you a deep understanding of the key differences between volatility models and their implications for trading and risk management.

The course starts by analyzing the role of volatility in current financial markets including the causes and impact of volatility smiles on a variety of financial products.  This leads into practical sessions covering techniques for trading volatility, and the application of a range of volatility derivatives such as volatility swaps, volatility futures and volatility options.

The final part of the program covers the treatment of volatility in the more popular stochastic volatility models used in the industry such as SABR and Heston and provides insights into the most relevant approaches to modeling volatility under current market conditions.

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Who should attend?

This Volatility: Trading and Managing Risk programme is designed for:

  • Derivative traders
  • Quants and research analysts
  • Fund managers, fund of funds
  • Structured product teams
  • Financial and valuation controllers
  • Private wealth managers
  • Risk managers and regulators
  • Finance directors
  • Bank and corporate treasury managers

Training content

Day One

Black-Scholes Revisited

  • A quick revision of Black-Scholes and Ito lemma
  • Black-Scholes Greeks
  • Black-Scholes implied volatility and implied risk neutral distributions
  • Examples of derivatives sensitive to the whole volatility surface
  • Motivation for alternatives to Black-Scholes and stochastic volatility  

Local Volatility

  • Is Local Volatility a stochastic volatility model?
  • Calculating a Local Volatility
  • Implementing Local Volatility models
  • Local Volatility as a conditional expectation of instantaneous volatility
  • Weaknesses of Local Volatility models

Workshop: Calibrating local volatility and pricing a Barrier option

Trading on Realised Volatility

  • Volatility Skew and Smile
  • The Greeks
  • Trading Skew and Kurtosis
  • Trading Implied Volatility
  • Variance Swaps and Volatility Swaps

Workshop: Fitting a volatility surface and pricing a variance swap

Day Two

Heston and the Volatility Surface

  • Looking at volatility dynamics in the real world
  • The Heston equation
  • The role of market price of volatility risk
  • Volatility surface sensitivities to Heston parameters
  • Linking Heston parameters to Black-Scholes implied volatilities
  • Implication of the Heston volatility surface dynamics
  • Simulating the Heston process

Workshop: Simulating the Heston dynamics and using it to price a Barrier option

SABR and the Volatility Surface

  • SABR: Stochastic Alpha, Beta and Rho
  • SABR calibration
  • SABR parameters and the volatility surface
  • Sticky strike versus sticky moneyness
  • SABR in interest rate modelling and LMM-SABR

Trading on Volatility Indices

  • Volatility indices – VIX and VSTOXX
  • Volatility as an Asset Class – VXX and VXZ
  • Incorporating Volatility into an Investment Portfolio
  • Futures and Options on Volatility Indices
  • The need for a stochastic volatility model
  • Hedging Volatility Indices

Workshop: Finding a risk neutral distribution of volatility

Day Three

Market Models of Volatility

  • Volatility surfaces revisited – extrapolation and interpolation
  • Combining risk neutral distributions with a copula
  • Using volatility smiles and copulae for pricing basket and spread options
  • Dispersion trading
  • Market models of volatility options
  • Arbitrage between volatility options and S&P options

Workshop: Relating VIX options and variance swaps

Hedging Volatility Exposure

  • Hedging volatility exposure of a book of exotic options
  • Static versus Dynamic Hedging
  • Impact of Model choice
  • Smile risk
  • Understanding greeks
  • Vega convexity

Workshop: Finding the best vega hedge

About London Financial Studies

London Financial Studies

Global markets move quickly, evolving continuously and deepening in complexity. Over the past decades London Financial Studies has provided specialist executive education programs and short courses focused exclusively on global capital markets. Preparing only the highest quality and most relevant...


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