Duration: 1 day
- Pricing Futures Using Cost-of-Carry
- Cheapest-to-Deliver (CTD) Analysis
- Black-Scholes Analysis
- Binomial Models
- Pricing American Options
- Monte Carlo Simulation
- Pricing "Path Dependent" Options
The objective of this workshop is to give the participants a thorough understanding of and
hands-on, practical experience with the valuation of futures and options. First, we explain how
futures are priced, using the "basic" Cost-of-Carry model as well as more advanced versions of this
model that take into account the role of the delivery option, margin payments and other special
features. We also demonstrate in detail how the "Cheapest-to-Deliver" (CTD) bond for delivery
against bond futures can be properly identified, and, using arbitrage arguments, we explain the
links between the delivery option, volatility and the "basis". We then look at a number of models
and techniques for pricing options. We start with the basic Black-Scholes model, but participants
will also work with derivations of this model, including the Black 76 model for options on
forwards, the Garman-Kohlhagen model for currency options, and the Margrabe model for exchange
options. In each case, we show how the fair option value, the "Greeks", and the implied volatility
are calculated. Further, we present, explain and demonstrate some numerical option pricing models,
including the Cox-Ross-Rubinstein model for valuing American options and the BDT model for valuing
interest rate options. Finally, we explain and demonstrate a Monte Carlo simulation approach to
valuing more complex options structures, including path-dependent structures such as Barrier, Asian
and Lookbacks.
Day One
09.00 - 09.15 Welcome and Introduction
09.15 - 10.15 Pricing Futures
- Brief Review of the Cost-of-Carry Model
- Cheapest-to-Deliver (CTD) Analysis
- Workshop: Identifying the CTD Bond
- Sensitivity Analysis
10.30 - 12.00 Analytical Option Pricing
- The Principle of Risk Neutral Valuation
- Derivation of the Black-Scholes Model
-
Other Analytical Models
- Black 76
- Garman-Kohlhagen
- Margrabe
- Option Sensitivities
- Workshop: Pricing and sensitivity analysis of selected stock, bond and currency
options
12.00 - 13.00 Lunch
13.00 - 16.00 Numerical Option Pricing
-
Binomial Models for Stock Options
- The Cox-Ross-Rubinstein Model
- Pricing American Stock Options
- Handling Dividend Payments
- Workshop: Setting up a CRR tree and valuing American Stock Options
-
Models for Interest Rate Options
- Equilibrium and No-arbitrage models
- Valuing selected interest rate options
- Workshop: Pricing bond options using the BDT model
-
Monte Carlo Simulation
- Random number generation
- Setting up and simulating stochastic differential equations
- Pricing "Path Dependent" Options
- Workshop: Using simplified MC approach to valuing path-dependent options
16.00 - 16.15 Evaluation and Termination of the Seminar