OTC Option Valuation & Administration

OTC Option Valuation & Administration



OTC Option Valuation & Administration

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Programme Overview


Derivatives now play a significant role in the investment portfolio; whether they are used as a key risk management tool or to provide efficient liquid alternatives to position a portfolio for the direction of markets. Market volatility has served to underline the importance of considering using derivative products. But managing the exposures can be a worry for those without experience, which can lead to losses or unnecessary costs if not managed well.


Understanding how derivatives work, what markets they are relevant to, the pricing conventions and the product specific mechanics is of fundamental importance. This two-session programme will provide an overview of OTC derivatives valuation, pricing considerations and the practicalities of managing such products.


Each session sets out to provide participants with a comprehensive understanding of how the products work, exploring the different types of products together with a look at how they relate to the underlying physical marketplace. In addition to understanding how derivatives are priced and executed, it is equally important to appreciate the risks that come with using derivatives such as market, operational and counterparty risk and how they are managed.

OTC Option Valuation & Administration

Learning Objectives


Session 1: Equity and FX OTC Options:


  • Provide a short refresher of the terminology used in the marketplace and distinguish OTC derivatives trading from Exchange traded products
  • Become familiar with Equity and FX options, their definitions, and characteristics
  • Gain understanding of both the cash flows and the practical details
  • Understand the drivers behind option valuation and exposure calculations
  • Identify the different types of risk exposure within each product group


Session 2: Interest Rate Swaps and Credit Default Swap Indices


  • Gain familiarity with the cash flows and mechanics of both Interest Rate Swaps and Credit Default Swap Indices
  • Understand the mark-to-market exposures and calculations of swap and index products
  • Identify and understand the primary risks and sensitivities of interest rate and credit default products
  • How to terminate swaps contracts prior to maturity
  • Discuss the documentation and collateral, netting arrangements


Session 1: Equity and FX OTC Options


Equity and FX OTC Options Fundamentals

  • Review of the properties of vanilla options – terminology ‘buster’ and market conventions
    • Calls vs puts – review of the payoff profiles
    • Premium conventions – upfront vs. forward payments
    • Settlement conventions – cash vs. physical for equities
    • How FX options are quoted and the currency conventions for notionals, premiums and payouts
    • Understanding intrinsic value, option moneyness and time value
    • Options as ‘wasting assets’ and the effects of time on valuation


Intuitive Option Valuation and Volatility Products

  • Overview of the fundamental principles of option valuation
    • How option valuation differs from conventional delta one (linear) products
    • Intuitive explanation of the premium value and mark-to-market
    • The factors driving the option value
    • What are the most important exposure factors – the concepts of delta and vega
  • The Volatility Index and VIX options
    • How do VIX options work and differ from conventional equity options


Session 2: Interest Rate Swaps and Credit Default Swap Indices


Interest Rate Swaps (IRS)

  • IRS terminology, cash flow mechanics and market conventions explained
  • How IRS are used for directional views on interest rates
  • Quoting swaps – absolute rates or swap spreads
  • Intuitive IRS pricing and mark-to-market valuations using PV01 – the sensitivity exposure of swaps
  • Dealing with swap terminations – unwinds, closeouts and novations (assignments)
  • Understanding the counterparty risk exposure – who’s exposed to whom


Credit Default Swap Indices

  • Overview of the US credit index environment
  • Contract review and trading conventions – premium cash flows and credit event compensations and what constitutes a credit event
  • How are mark-to market valuations calculated


Documentation, Netting and Collateral Arrangements

  • Understanding the ISDA master agreement
  • Managing counterparty risk exposures using netting agreements
  • Overview of the collateral management process
  • Pricing for non-collateralised counterparties and Credit Valuation Adjustments (CVA)


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