Course Outline

The program aims to provide a sound understanding of the up-to-date practical realities of trading and risk managing correlation, especially equity and equity/forex.

The course will draw heavily from recent markets case studies, and the real practices used at large financial companies, highlighting the weaknesses and pitfalls where needed.

During the Excel based workshops students will have access to proprietary state-of-the-art professional software for exotic and multi-underlying pricing, thus gaining an understanding of multifactor pricing models and higher order exotic effects on risk exposures.

Who The Course is For

• Senior managers that need to understand risk
• Junior exotic traders
• Risk managers
• Auditors and product controllers
• Flow and proprietary traders that consider expanding their trading universe
• Regulators, quant analysts, structurers, sales

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Prior Knowledge

• Working knowledge of financial markets including vanilla derivatives.
• Calculus and statistics to at least first year university.

This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.

Day One

Refresh Foundations

• From single underlying to multi underlying
• Non normality: "good" and "bad"
• Jumps and Feedback loops
• From market prices to probability distributions
• Joint and marginal distribution concepts

Correlation vs. covariance, implied vs. realized

• Unstable statistics
• Non normal behaviour and Feedback loops
• Other dispersion statistics
• Examples and case studies

Workshop 1: calculating and analyzing historical statistics

Key products: Baskets and OBBOs

• Crossgammas and thetas
• Single Factor Modelling
• Multi Factor Modelling
• Implied Correlation

Workshop 2: single factor pricing approximation vs. multi factor Montecarlo

The crossgamma conundrum

• The equations
• Common misconceptions and their reasons
• Typical portfolio position

Workshop 3: short theta, short crossgamma?

Workshop 4: OBBOs in depth

Multi factor pricing with local volatilities and Gaussian copulas

Workshop 5: build a Gaussian copula, compare to local vol multi factor pricing

Day Two

Dispersion trading

• Correlation skew
• Types of dispersion strategies
• Dynamics of convex risks
• Approximate formulas and their shortcomings
• Current markets
• Dispersion as a hedge

Workshop 6: vega dynamics of dispersion strategies, a simple correlation skew model

Key products: WO, BO and outperformance options

• Cross gammas and corr vegas
• Skew exposures
• Risk dynamics and convexities
• Multi Factor Modelling
• Approximations

Workshop 7: risk dynamics and skew exposures of WO, BO, and spread options

Key products: Realized correlation swaps

• Analysis
• Current markets and positions

Challenges in marking correlation and measuring its risk

• Different measures and their shortcomings
• Using lambda
• Marking and reserving issues
• Stress scenarios

Workshop 8: impact of marking policies on greeks

Correlation markets

• History and current situation
• Retail structured flows
• Example and discussions of highly exotic payoffs
• Institutional and Hedge Fund flows
• IDB Broker OTC markets
• Structural positions: typical exposures, impact on other markets
• Term structure and skew pressures

Running correlation risks

• Crossgamma and correlation vegas behaviour of portfolios
• Dynamic hedging: issues, thetas, non-normality, correlation skew
• Convexities, higher order and path dependence
• Proxy hedging, hidden correlation risk
• Pitfalls and horror stories

Correlation skew modelling

• A survey of existing approaches

The quantos and others: equity/forex correlation

• Simple yet not so simple
• Market impact and examples
• A few words on fixed income and hybrids