FX options and smile risk

by Castagna, Antonio

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Title Statements

Full title :FX options and smile risk / Antonio Castagna.

Summary

The FX options market represents one of the most liquid and strongly competitive markets in the world, and features many technical subtleties that can seriously harm the uninformed and unaware trader. This book is a unique guide to running an FX options book from the market maker perspective. Striking a balance between mathematical rigour and market practice and written by experienced practitioner Antonio Castagna, the book shows readers how to correctly build an entire volatility surface from the market prices of the main structures. Starting with the basic conventions related to the main FX deals and the basic traded structures of FX options, the book gradually introduces the main tools to cope with the FX volatility risk. It then goes on to review the main concepts of option pricing theory and their application within a Black-Scholes economy and a stochastic volatility environment. The book also introduces models that can be implemented to price and manage FX options before examining the effects of volatility on the profits and losses arising from the hedging activity. Coverage includes:ul type="disc"lihow the Black-Scholes model is used in professional trading activitylithe most suitable stochastic volatility modelslisources of profit and loss from the Delta and volatility hedging activitylifundamental concepts of smile hedginglimajor market approaches and variations of the Vanna-Volga methodlivolatility-related Greeks in the Black-Scholes modellipricing of plain vanilla options, digital options, barrier options and the less well known exotic optionslitools for monitoring the main risks of an FX options' book/ul The book is accompanied by a CD Rom featuring models in VBA, demonstrating many of the approaches described in the book.

Edition Statements

Publication Date:2010.

Publication Statements

Publisher(s):J. Wiley & Sons
Place of Publication:Chichester, U.K
Language:eng
Publication Date:2010.

The Physical Object

Description:1 online resource (1 volume) : : illustrations

Edition Identifiers

ISBN:9781119207085, 1119207088, 9780470684931, 0470684933, 1282888870, 9781282888876, 9786612888878, 6612888873, 0470687185, 9780470687185
oclc:ocn852406591
LC Classification:HG3853
Dewey Decimal:332.45

Cover13; -- Contents -- Preface -- Notation and Acronyms -- 1 The FX Market -- 1.1 FX rates and spot contracts -- 1.2 Outright and FX swap contracts -- 1.3 FX option contracts -- 1.3.1 Exercise -- 1.3.2 Expiry date and settlement date -- 1.3.3 Premium -- 1.3.4 Market standard practices for quoting options -- 1.4 Main traded FX option structures -- 2 Pricing Models for FX Options -- 2.1 Principles of option pricing theory -- 2.1.1 The Black8211;Scholes economy -- 2.1.2 Stochastic volatility economy -- 2.1.3 Change of numeraire -- 2.2 The black-scholes model -- 2.2.1 The forward price to use in the formula -- 2.2.2 BS greeks -- 2.2.3 Retrieving implied volatility and strike -- 2.2.4 Some relationships of the BS formula -- 2.3 The Heston Model -- 2.3.1 Time-dependent parameters in the Heston model -- 2.4 The SABR model -- 2.5 The mixture approach -- 2.5.1 The LMLV model -- 2.5.2 The LMUV model -- 2.5.3 Features of the LMLV and LMUV models and a comparison between them -- 2.5.4 Extension of the LMUV model -- 2.6 Some considerations about the choice of model -- 3 Dynamic Hedging and Volatility Trading -- 3.1 Preliminary considerations -- 3.2 A general framework -- 3.3 Hedging with a co…