ACF Academy
Markets Training Training
 Markets Training
Targeted Audience:
 Anyone familiar with vanilla FX options working in FX risk manage-ment, currency sales and trading, companies with multi-currency operations, or those advising clients on managing their FX risk.
 A good working knowledge of vanilla FX options
CPE Credits:
 14 hours
Course Level:

This is an intensive and practical seminar aimed at those who are familiar with vanilla FX options but want to master the more advanced features like vanna / volga pricing and exotics.

The principal objectives of this two-day masterclass are to:
  Demonstrate the principles used in the active hedging of FX options and portfolios, and the practical problems faced by traders in managing a book of FX options.
  Examine FX options in greater depth, especially how the volatility smile and skew influences FX option prices.
  Explain second-order Greeks like vanna and volga, and their impact on FX option premiums.
  Explore the practical use of exotic, non-standard, and second generation options.
  Study barrier and digital options in greater depth, including their practical use by clients, and the peculiarities of their Greeks.
  Show how exotic FX options can enrich the range of possibilities for hedging or for exploiting specific views.
  Consolidate delegates’ understanding by providing first-hand practical experience with computer based strategy evaluation, graphics, analytics, option pricing, and simulation.

Hot Topic Using exotic FX options to exploit a volatile environment.

After attending the program, delegates will have mastered the complexities of vanilla and exotic FX options, and will return able to use these products confidently to manage FX risk or to exploit sophisticated directional, positional, and volatility views.

Course Outline
 Delta Hedging – Theory and Practice
Exactly how delta-hedging works
Why be delta-neutral?
Buying high and selling low to achieve delta-neutrality
The link between delta and gamma
The cost of being negative gamma
The benefit of being positive theta
The link between gamma and theta
The trade-off between implied volatility and experienced volatility
“Easy” and “difficult” options to hedge
Gamma hedging
Transactions costs
Market gapping problems
P&L risks while running an options book
The cost of hedging and running an options book – implications for clients
Delta-hedging simulation
 FX Options – A Deeper Insight
The delta-symmetric strike price
Calculating strike prices from deltas
Sticky delta vs. sticky strike
Risk reversals, butterflies, and the volatility smile/skew
Calculating the smile from flies and risk reversals
Trading flies to position for smile
Trading risk reversals to position for skew
Implications of smile and skew for FX option buyers
Spot delta vs. forward delta
Dual delta and dual gamma
Vanna – dVega/dSpot and dDelta/dVol
Volga – dVega/dVol
Implications of vanna and volga on hedging costs, and on FX option premiums
Vanna-volga pricing
 Overview of Exotic FX Options
Introduction to exotic options
A taxonomy of exotics
Path-dependent options
Options with step-like (singular) payouts
Everyday exotics: barriers and digitals
Correlation options: baskets, rainbows, outperformance, quantos, and others
Other exotics: compound, average rate(Asian), contingent, forward-start
Volatility and variance FX swaps
 Barrier Options
Up, down, knock-in, and knock-out – variations on a theme
Barriers with rebates
Normal and partial barriers
Single, double, and multiple barriers
Outside barriers (dual factor)
Curvilinear barriers
Practical issues in monitoring the barrier
Barrier running
Practical applications for barrier options in hedging FX risk
 Barrier Options (continued)
Barrier Option Pricing Workshop
Using FX barrier options
 Greeks for Barrier Options
Nature of delta for KO options
Nature of delta for KI options – why they hedge backwards
Nature of gamma and vega for KO and KI options
Delta changing at the barrier
Gamma at the barrier
Delta-hedging near the barrier
Delta-hedging at the barrier
Nature of delta, gamma, and vega for RKO and RKI options, or...
Why does my call option have a delta of minus 23?
Risks of RKO and RKI options
Risk characteristics of barrier options
Implications for clients buying FX barrier options
 Digital Options and the “Digital Cookbook”
One-touch, all-or-nothing – variations on a theme
Cash-or-nothing and asset-or-nothing
Digital options as a basic building block
Creating a pay-later option
Creating a reverse contingent option
Creating a “money back” option
Creating a stepped-premium option
Creating enhanced-rate synthetic forwards
Digital Options Pricing Exercises
Using Pay Later Options
 Greeks for Digital Options
Nature of delta for digital options
Nature of delta for NT, DNT, and DOT options – why they sometimes hedge backwards
Nature of gamma and vega for NT and DNT options
Delta changing at the trigger(s)
Gamma at the trigger(s)
Delta-hedging near the trigger(s)
Delta-hedging at the trigger(s)
Risks of writing digital options
Digitals near the trigger(s) near maturity, or...
Why does my pricing system tell me I need to sell $3 billion to re-hedge this option?
Risk characteristics of digitals
Adjusting FX option prices for vanna/volga
 Putting it All Together
Review of structures, barriers, and digitals
Combining exotics with vanilla options
Embedding options within a package
Designing innovative solutions
Reducing the cost of hedges by precisely tailoring the hedge to match the need
Exotic options client structuring exercise


NB All practical sessions are highlighted like this:
means a Workshop or Simulation
means a Case study


"The material was not delivered in a vacuum. The instructor always had an example / actual article to illustrate his point, so the class turned out to be a lot more interesting about real-life markets."

– Heajun H.