Derivatives09-7 - Asian options and Barrier options

Derivatives09-7 - Asian options and Barrier options - week...

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Unformatted text preview: week 7: Asian options and Barrier options Equity-linked notes (ELN) ELN is a combination of a short or medium note with an option position Yield enhancement Note/deposit + short option(s) Bull ELN, Bear ELN, Strangle ELN Bull ELN is the most popular type, over 90% ELN trades are Bull ELN ELN USD 10,000 Yield: 24% Time Deposit USD 10,000 Yield: 2% Short a asset Put option struck at strike price Premium received is packaged as extra yield = + ELN Investor can choose a stock he/she is willing to acquire at a price lower than current market level => Put Strike Price Usually set at 5 to 10% below current price Then the investor can choose a maturity Fair Yield of an ELN How can we know whether an ELN is giving a fair yield? Or the participation rate is fair for a capital guarantee note? The answer lies on the price of the option: Are we getting fair price for selling option(s) or paying fair price for buying option(s)? Whether an option is fairly priced or not can be judged from the implied volatility of the option? Example of ELN Issuer: ABC Investment Underlying Stock: HSBC Holdings plc <0005.HK> Underlying Price: HK$85 Put Strike Price: 90% of Spot, or $77.18 Trade Price: 99.05% Trade Date: 10-Oct-02 Settlement Date: 24-Oct-02 Valuation Date: 12-Nov-02 Maturity Date: 14-Nov-02 Denomination: HK$100,000 Shares per Note: 1296 ( subject to adjustment) ELN Calculator.xls ELN Calculator ELN Calculator How to Learn Exotic Options? Step 1: Understand the nature of one special exotic option. Why people need it and what are its special features (use diagram)? What related products on the market? Step 2: Understand its pricing model, but, do not force yourself to recite it Step 3: How different factors, such as, volatility, time, interest rate, etc., affect the price and risk in terms of greeks this is very important. Step 4: Use spreadsheet to try some cases. You can access such tools at: http://www.montegodata.co.uk/Consult/PriceModel.asp Or just use the spread sheets that attached at the end of each chapter of our Teaching Materials 1 Step 5: Find a product on the market and see if you could replicate it? Walk through its development process. Part 1: Asian Options - Outline Asian Options/Average Price Options/APOs What Are APOs? One important distinction Variations in contract terms/payoff Why Are They Traded? Why are they popular? What do they Hedge? How are they Hedged? How Are They Priced?...
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Derivatives09-7 - Asian options and Barrier options - week...

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