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Copyrighted Material Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 577 INDEX A regular: Accrual barriers, 515 knock-in call options, 390, Accrual forwards, 395, 518–521 443–444 Accrual options, 395, 515–521 knock-out call options, 390, 439–443 accrual forwards, 518–521 577 range accrual, 516–518 pricing, 445 Adapted Greeks, 275–285 reverse: delta, 276–279 knock-in, 390, 445, 450 knock-out, 390, 445–450 gamma, 279–281 pricing, 450–452 risk management with, 282–285 selling, 468–471 vega, 221, 281–282 strike-out options, 454–460 Agreeing broker market data, 311–312 transatlantic, 392–394 American barrier options, 388–394, American digitals, 388 424, 439–460 American keep accrual discrete,COPYRIGHTED 394 MATERIALbarrier, 515 double knock-out and knock-in, American keep range accruals, 390, 391, 452–453 517–518 in-the-money, 392 American vanilla options, 394, knock-in/knock-out replication, 501–510 453–454 call and put, 14 knock-out–knock-in, 394 and Greeks, 506–509 Monte Carlo option pricer, pricing, 509 492–493 Arithmetic average, 534 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 578 Asian options, 396, 527–538 seasonality, 346 average rate options, 527–535 slope, 354–356 average strike options, 535–537 theta and roll down, 271, 272 double average rate options, weighted changes in, 154 537–538 ATM gamma, 272 Ask, see Offer(s) ATM position: ATM, see At-the-money defined, 138 ATM calendar spreads: trading, 152–155 price making, 132 ATM volatility and correlation trading exposures, 132 framework, 313–321 vanilla, 132 ATM volatility triangles, 313–319 ATM curve, 103–106 cross-currency positions construction of, 171–191 management, 321 adding weights, 199–204 dephased vega, 319–320 core ATM curve, 172–179 ATM volatility triangles, 313–319 events and holidays, 188–189 At-the-money (ATM). See also ATM in Excel, 193–204 curve and FX derivatives market forward implied volatility, 171–172 pricing, 182–184 implied volatilities of, 103–105 578 implied volatility patterns over a market conventions, 118–120 week, 182 vega exposures, 209–211 and volatility smile, 205 INDEX intraday variance patterns, 187 New York cut vs. Tokyo cut volatility spreads, 113–114 pricing, 185–187 zero-delta straddles, 122 overnight ATM on a Friday, Average rate options, 396, 527–535 184–185 Average strike options, 535–537 pricing same-day options, Axe, 468 190–191 for short-dates, 180–191 B using a model, 178–179, Bank trading desks, 39–40. See also 197–199 Interbank broker market using interpolation, 172–178, client types, 40–41 193–197 structure, 41–44 variance, 171–172 internal trading, 43–44 weekday variance patterns, sales desks, 42–43 189–190 support functions, 43 in market instrument analysis, Barrier delta gap (touch options), 344–346 429–430 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 579 Barrier options, 388–394 multi-asset options, 541 American, 389–394. See also one-touch options, 434 American barrier options self-quanto vanilla options, 514 continuous, 388, 424 vanilla, 113–116 discrete, 394, 482 Binary options, 388 European, 388–389. See also Black-Scholes delta, 276 European barrier options Black-Scholes formula, 18, 66–67 in-the-money, 392 Black-Scholes framework, 57–68 late-starting, 478 Black-Scholes formula, 66–67 shadow, 466–467 solving Black-Scholes SDE, 62–65 transatlantic, 392–394 stochastic differential equation, window, 395, 473–482 57–62 front-window, 395, 473–478 terminal spot distributions in generic, 481 calculating option values, 65–66 Monte Carlo option pricer, 493 Black-Scholes option pricer (Excel), rear-window, 395 91–101 risk management, 481–482 generate first-order Greeks, 98–100 Basis point, 120, 164 plot exposures, 100–101 Basket digitals, 543 set up simple option pricer, 91–96 Basket options, 396, 541–543 set up VBA pricing function, 96–98 579 Bending barriers, 466 Black-Scholes stochastic differential INDEX Best-of (BO) options, 396, 548–553 equation (SDE), 57–62 switching hedge, 553 drift in, 58–61 trading risks, 549–553 solving, 62–65 Bet spread, 410 uncertainty in, 61–62 Bid(s), 19–22 Bleed, delta, 266, 268–269 in choice markets, 21 BO options, see Best-of options defined, 19 Breakeven calculation, 323–325 in inverted market, 21 Broker fly, 127, 225 language of, 23 Broker market, see Interbank broker leaving orders, 22 market midmarket, 117–118 Broker market data, agreeing, Bid–offer spread, 22–23 311–312 European barrier options, 418 Bucketed vega exposures, 154 European digital options, 405 Butterfly (fly), 126–128, 225–230 exotic FX derivatives, 462–463 25d vs. 10d, 229–230 front-window barrier options, drivers of, 228 476–478 price making, 128 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 580 Butterfly (fly), (Continued) Continuous compounded interest trading, 228–229 rate, 160 trading exposures, 128 Conventions: vega exposures, 213–215 market, 306 and volatility smile, 106, 205 quoting delta, 264 Buying: Copula approach, 224 in faster markets, 21 Core ATM curve construction, methods of, 20 172–179 Buying interest, 50 using a model, 178–179 using interpolation, 172–178 C Corporate clients, 40–41 Call, 14 Correlation, 313. See also ATM Call/put spreads: volatility and correlation price making, 134 framework vanilla, 132–134 realized spot vs. interest rate, Carry trades, 352–354 336–339 Cash balance theta, 272 trading implied correlation, Cash-or-nothing options, 388 341–342 Cash price, in Excel Black-Scholes Correlation swaps, 342, 397 580 option pricer, 94 Cross-currency pairs, 7 Cash settlement: ATM volatility triangles, 313–319 INDEX of European digital options, 399 dephased vega, 319–320 of vanilla FX derivatives, 18 managing exposures in, 321 CCY, see Currencies Cross risk reversal, 224–225 Choice (in spread), 304 Currencies (CCY), 3 Choice markets, 21 delta and CCY1 vs. CCY2 premium, Choice price (risk reversals), 265–267 129, 130 European digital option replication: Client types (derivatives market), CCY1, 402–403 40–41 CCY2, 402 Cliquets, 568 G10, 4 Closed-form approach, 98 one-touch options variations CCY1 Closing out risk, 24 vs. CCY2 payout, 434–435 Collar, see Risk reversal (RR) relative strength of, 219 Compound options, 396, 570–572 self-quanto: Confidence intervals, 248 CCY1 call options, 510 Confidence interval spreading, 541 CCY1 put options, 510–513 Continuous barriers, 388, 424 Currency blocks, 42 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 581 Currency pairs, 3, 8 Delta exchange, 463 ATM volatility triangles, 313–319 Delta gap: cross, 7. See also Cross-currency American barriers, 469 pairs touch options, 429–430 in describing vanilla FX options, 14 Delta hedging, 118, 144–145 G10, 8, 9 Delta neutral, 83 major, 7 Delta risk: market conventions, 118–120 best-of and worst-of multiple, payoff in, see Multi-asset options, 550 options target redemption options, 524 names of, 8–9 Dephased vega, 319–320 pegged, 306–307 Deposits (depos), 160 quoting, 8 principal protected, 466 Cut(s): structured, 465–466 in describing vanilla FX options, 15 Depth (market), 20 New York vs. Tokyo, 185–187 Derivatives, 11. See also foreign exchange (FX) derivatives D Digital bets, 388 Daily variance, 173, 175 Digital options: DCDs (dual currency deposits), 41 American, 388 581 Decay, 143 basket, 543 INDEX Delivery dates, 17, 162–163 dual, 397, 543–548 Delta: trading risks, 545–546 adapted, 276–279 vega risk, 546–548 bleed, 266, 268–269 European, 388, 399–411 CCY1 vs. CCY2 premium, 265–267 bid–offer spread, 405 in Excel Black-Scholes option pricer, European digital range, 401–411 98–101 Greeks, 405–409 forward delta vs., 263–264 pricing, 403–405 low delta vanilla options, 310–311 replication, 400–403 quoting conventions, 264 European digital range, 401–411 sticky, 276 European digital spread, 410 touch options, 424–425, 429–430 Direct market, 39 vanilla FX derivatives, 83–87 Discrete barrier options, 394, 482 vanilla price making, 118 DNT (double-no-touch) vanilla trading low delta options, options, 388 310–311 Double average rate options, Delta bleed, 266, 268–269 537–538 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M. Page 582 Double knock-out and knock-in Greeks, 405–409 options: gamma and pin risk, 408–409 American, 390, 391 vega risk, 406–408 American barrier, 452–453 pricing, 403–405 Double-no-touch (DNT) options, 388 replication, 400–403 Drift (SDE), 58–61 CCY1, 402–403 Dual currency deposits (DCDs), 41 CCY2, 402 Dual digital options, 397, 543–548 European digital range, 401–411 trading risks, 545–546 European digital spread, 410 vega risk, 546–548 European knock-in (EKI), 389, 413, 418–420 E European knock-out (EKO), 389, 413, Early ending barriers, 473 416–417 Economic time, 200 European range accruals, 516–517 EKI, see European knock-in European vanilla options: EKO, see European knock-out call and put, 14 Emerging market (EM) countries: variations for changing trading risks currency flows mechanisms, 8 on, 497–514 currency pair names, 9 American exercise, 501–510 582 European accrual barrier, 515 late-delivery, 497–503 European barrier options, 388–389, self-quanto payoff, 509–514 INDEX 413–422 Events: bid–offer spread, 418 and ATM curve construction, Greeks, 419–422 188–189 gamma and pin risk, 422 defined, 188 vega risk, 420–422 EWMA (Exponentially Weighted intrinsic value, 417–418 Moving Average) volatility, knock-in, 413, 418–420 331–333 knock-out, 413, 416–417 Excel: Monte Carlo option pricer, 492 Black-Scholes option pricer, 91–101 pricing, 422 generate first-order Greeks, replication: 98–100 European knock-in, 418–420 plot exposures, 100–101 European knock-out, 416–417 set up simple option pricer, European digital options, 388, 91–96 399–411 set up VBA pricing function, bid–offer spread, 405 96–98 European digital range, 401–411 constructing ATM curve, 193–204 Jewitt bindex.tex V1 - 05/19/2015 1:43 P.M.
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