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Options - Basket Options - Evaluation & Evolution

There has been enormous growth in the use of various forms of basket options since their initial introduction. This course examines some of the key variants and shows how these have become attractive to investors, particularly in the retail equity area. Although the products are often easy to understand in terms of payoffs, they raise particular issues around structuring, pricing, and hedging, especially as regards the role of correlation. This course outlines the issues and the key responses to the challenges.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe some of the many variants of basket options, and identify their attractiveness in different situations

    Explain how complex options have been embedded in structured notes

    Identify the key pricing challenges faced by structurers and traders of multi-asset options, and in particular explain the role of correlation

    Outline the differing and evolving algorithmic and analytic pricing approaches that are used to price basket options

  • COURSE OUTLINE

    Topic 1: Diversity of Instruments

    Buying the Market?

    o Asian Options

    o Ratchet (Cliquet) Options

    o Hindsight / Lookback Options

    Buying or Selling Volatility?

    Buying or Selling Correlation?

    Some Variations of Basket Options

    Topic 2: Creating Structured Notes

    Creating a Structured Note

    Option plus Zero- Coupon Structure

    Constant Proportion Portfolio Insurance (CPPI)

    A Growing Market

    Topic 3: Pricing Approaches

    Dealing with Correlation

    Hedging Issues

    Pricing Procedures

    o Lattice Methods

    o Monte Carlo Simulation

    Which Procedure to use?

    Topic 4: Pricing Considerations

    Multi- Dimensionality

    Correlation Problems

    Alternatives to Correlation?

    Multi-Asset Distributions

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    90 Minutes

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