Course description
Equity indices, swaps, and options are an essential part of the financial marketplace. This program will equip you to use, price, and manage the risk of equity index products, equity and dividend swaps, options, exotic options, and structured products.
The program starts with the building blocks of equity market indices, dividends, futures, and forwards. From there, it progresses to equity and dividend swaps. It covers issues in swap valuation including collateral and credit risk as well as the practical applications of swaps in corporate finance, M&A activity, and investment management. Day two examines equity options with a focus on practical applications and strategies across risk management, trading, corporate treasury, and investment management. Advanced issues of valuation and hedging – including best ways to model dividends and the impact of the volatility smile – are also tackled. The last day of the program covers exotic options and structured products with a practical guide to modeling and hedging these products.
The approach is hands-on and learning is enhanced through many practical exercises covering hedging, valuation, and risk management. The exercises use Excel spreadsheets which participants can take away for immediate implementation.
Learning Objectives:
- Gain familiarity with corporate structure, types of equity, indices, dividends, repos / stock lending, futures, and forwards – and how to use them
- Learn about equity and dividend swap products, their uses in trading, M&A and portfolio management, and how to price them and manage the various risks
- Gain an understanding of equity options, their definitions, and characteristics – and learn how to price them and manage their risk, and how to use them for taking equity risk, yield enhancement, and portfolio protection
- Learn how to use and structure exotic options and other structured products
Upcoming start dates
Who should attend?
Who The Course is For:
- Equity and Derivative sales, traders, structurers, quants, and relevant IT personnel
- Asset allocation managers
- Equity portfolio managers
- Insurance Company investment managers
- Company finance executives and investment bankers
- Risk managers, finance, IPV professionals, auditors, and accountants
Prior Knowledge
Basic knowledge of Microsoft Excel and a general understanding of equity markets are assumed.
Training content
Day One
Equity Markets: Indices, Dividends, Forwards, Repo, and Stock Loan
- Corporate structure and types of equity
- Equity indices – price and capitalization weightings
- Lifecycle and type of dividend payment
- Dividends and tax
- Mechanics of stock lending
- Uses of stock loan – fee income and arbitrage strategies
- Equity Repos
- Introduction to an equity forward
- Non-arbitrage pricing of an equity forward
- Discounting and choosing a yield curve – Eonia or Euribor
- Differences between futures and forwards and the impact of uncertain rates
- Forecasting dividends – fixed amount or proportional dividends
- Using futures to short the market
- Futures and tactical asset allocation
Exercise: Building a forward curve, studying the impact of corporate actions on index dividends
Equity and Dividend Swaps
- Timing of resets and cashflows for an equity swap
- Valuing an equity swap using discounting
- Exotic swap types – variable notional, quanto, index vs. index
- Motivations and players in the market
- Collateral and credit risk
- Role of CVA in swap pricing
- Using equity swaps for dividend taxation arbitrage
- Trading the equity repo
- Using an equity swap in mergers and acquisitions
- Diversifying cross holdings
- Overlay strategies for asset managers
- Introduction to the dividend swap contract
- Comparing dividend swaps and dividend futures
- Trading dividends as an asset class
- Impact of the structured product market on dividend swaps
- Hedge fund strategies with dividend swaps
Exercise: Corporate use of an equity swap
Day Two
Equity Options
- Option definitions
- European and American options
- Trading on an exchange vs. OTC
- Put / call parity for European options
- Index and basket options
- When to exercise American style options
- Portfolio protection – put, put spread, collar
- Directional views – call, call spread
- Buying the underlying vs. buying a call option
- Range bound strategies – straddles and strangles
- Yield enhancement – call overwriting
- Corporate Treasury – structured acquisition and disposal using options
Exercise: Protecting a portfolio against downside risk with options
Essentials of Option Pricing
- Pricing options by replication
- Black-Scholes assumptions on asset price movements
- Geometric Brownian motion and standard option valuation
- Hedging and risk neutrality
- Including dividends in price dynamics
- Sensitivities and the Greeks
- Impact of dividend choices on risk measures – fixed cash, proportional, and hybrid dividend assumptions
- Hedging costs vs. time decay – the relationship between theta and gamma
- Using trees to price American options
- Problems of combining dividends into American option pricing
- Causes and impact of volatility smiles
- Volatility dynamics – sticky smile and sticky moneyness
Exercise: Investigation of risk sensitivities for American and European options
Day Three
Barriers, Binaries, and Baskets
- Types of barrier option – in / out, up / down, call / put
- Barrier monitoring
- Role of implied volatility in barrier option pricing
- Barrier / discontinuity risk
- Replicating European digitals with vanilla options
- American digitals – cash at hit and cash at maturity
- Risk management for binary options
- Using barrier options to produce a ladder structure
- Introduction to basket options
- Correlation and basket option premium
- Best-of, worst-of, and outperformance options
- Correlation and volatility exposures
- Correlation smiles and the impact on basket options
- Common alternatives models for pricing options
- How to choose between local volatility and stochastic volatility models
- Why model choice matters
Exercise: Investment opportunities with barrier options, building a ladder
Equity Structured Products
- Capital protected notes
- Yield enhancing structures – reverse convertibles
- Autocallable structures
- Using autocallable for enhanced participation
- Using autocallable for enhanced yield
- Knock-in reverse convertibles
- Structures using worst-of options
- Risk management of autocallable structures
- Accumulators
- Corporate use of structured products
- Structured acquisitions and disposals
Exercise: Designing a structured product to satisfy an investment requirement
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London Financial Studies - Capital Markets Executive Education in the USA
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...