Day Two - Key developments in pricing and hedging exotic derivativesFollowing from day one on volatility and correlation modelling techniques, the theme of stochastic volatility against implied volatility surfaces is extended to exotic derivatives. Toplevel researchers present new and varied techniques with vast experience in practically applying new methods. This practical focus will be maintained by Stephen Blyth fromMorgan Stanley Dean Witter.08.0008.3008.4009.4010.4011.0012.0013.0014.00Registration and breakfastChairman's opening remarksTRADING VOLATILITY PRODUCTS· Analysing the growing trend of correlation and volatility based products- greater historical volatility levels- correlation risk in quanto, index and basket options· Successfully hedging the portfolio with correlation and volatility based products· Answering key questions regarding volatility contracts- how to hedge volatility contracts- using volatility contracts rather than options· Creating covariance contracts from volatility contractsEXOTIC OPTIONS AND EXOTIC UNDERLYINGS· Credit, insurance, weather and electricity as option underlyings· Catastrophic call spreads and arbitrage pricing of insurance derivatives· Credit derivatives as an example of market incompleteness· The limits of the Merton jump-diffusion process to represent electricity price spikes and fat tails· Seasonality effects and mean reversion in commodities markets· Weather derivatives as Asian options in a non-Black-Scholes world· Hedging weather derivatives using insurance derivatives and exotic energy derivativesMorning breakLEVY PROCESSES IN OPTION PRICING, VG AND BEYOND· The Theoretical Case for Pure Jump Processes· The Empirical Case for such Processes· The VG model and its Properties· The Generalization to CGMY and learning how to change measure· Calibrating the surface parsimoniously using VG Markov and CGMYSA· Exotic Option Pricing using Vanilla calibrated StructuresA NEW METHODOLOGY FOR STATIC HEDGING OF BARRIER OPTIONS· Methodology that enables direct identification of statically replicating European optionportfolios for barrier options· Demonstrating that results are valid for barrier options with:- completely general knock-out/knock-in sets and- hold for both state-dependent volatility and jumps· Application of our technique to Bermudan options, lookback options, and fixed incomeproducts· Impact of stochastic volatilityLunchEXTENDING BLACK & SCHOLES TO COVER STOCHASTIC VOLATILITY MODELS· We take a closer look at equities markets specific features such as- skewness of the return distribution of stocks and indices- discrete dividend payments of stocks and indices- cross currency products (quanto and composite options)and their interplay.· The standard approaches to incorporate these in the Black and Scholes framework areextended to cover local and stochastic volatility models.Stephen Blyth, Morgan Stanley Dean WitterFrançois Mantion, Head of Research & Advanced Risk (<strong>London</strong>), Chase Manhattan BankFrançois Mantion is Head of Research and Advanced Risk in <strong>London</strong> for the FX Options/Commodities Groupof The Chase Manhattan Bank. He is responsible for the analysis of currency/metal/energy option markets, inparticular the pricing and hedging of new exotic products. Prior to joining Chase in 1996, he was with theCentre for Quantitative Finance at Imperial College. He is a graduate from the French Grande Ecole SUPELECand holds a PhD in Mathematical Finance.Hélyette Geman, Professor of Finance, Université de Paris Dauphine and ESSECHélyette Geman is Professor of Finance ant the University of Paris Dauphine and at ESSEC GraduateBusiness School. She is a graduate from Ecole Normale Superieure, holds a master's degree in theoreticalphysics and a Ph.D. in mathematics from the University of Paris Pierre et Marie Curie and a Ph.D. in Financefrom the University of Paris Pantheon Sorbonne. Previously a Director at Caisse des Depots in charge ofresearch and development, she is currently a Scientific Advisor for major financial institutions and industrialfirms. In 1993, Dr Geman received the first prize of the Merrill Lynch awards for her work on exotic options.She is also President of the Bachelier Finance Society and the author of the book "Insurance and WeatherDerivatives" published by Risk.Dilip Madan, Professor of Finance, University of MarylandDilip Madan joined the Robert H. Smith School of Business in 1988 where he now specializes in mathematicalfinance. His work is dedicated to improving the quality of financial valuation models, enhancing the performanceof investment strategies, and advancing the understanding and operation of efficient risk allocation in moderneconomies. Of particular note are contributions to the field of option pricing and the pricing of default risk. Heis a founding member and President Elect of the Bachelier Finance Society and Associate Editor forMathematical Finance. Recent contributions have appeared in European Finance Review, Finance andStochastics, Journal of Computational Finance, Journal of Financial Economics, Journal of Financial andQuantitative Analysis, Mathematical Finance and Review of Derivatives Research.Jesper Andreasen, Vice President, General Re Financial ProductsJesper Andreasen is a Vice President in the quantitative research department at General Re Financial Productsin <strong>London</strong>, where he since 1997 has worked on development and implementation of models for fixed income,foreign exchange, and equity derivatives. His research interests include: exotic options, volatility skews andsmiles, yield curve models and numerical methods. Jesper holds a Ph.D. in mathematical finance from AarhusUniversity.Oliver Brockhaus, Vice President (Equity Derivatives), The Chase Manhattan BankOliver Brockhaus recently joined Chase Manhattan, where he is responsible for Equity Derivatives QuantitativeResearch Europe and Asia. Before entering finance in 1996 as Quantitative Researcher for Deutsche Bank in<strong>London</strong> he was a consultant at Andersen Consulting. He was awarded a masters degree (DEA) in probabilitytheory at the University Pierre et Marie Curie in Paris in 1991 and holds a PhD in mathematics from theUniversity of Bonn.
15.0016.0016.3017.3017.40EXOTIC OPTIONS, VOLATILITY SMILES, LAPLACE TRANSFORMS, ANDEIGENFUNCTION EXPANSIONS· Pricing Options when the underlying follows a scalar diffusion process: general results- Exponentially-stopped options, static pricing ODE and its fundamental solutions- Pricing Exponentially Stopped Single- and Double-Barrier and Lookback Options- Inverting the Laplace transform numerically via Abate-Whitt algorithm and analytically viaeigenfunction expansions· The CEV Process- Volatility smiles generated by the CEV model- Pricing of barrier and lookback options under the CEV process via Laplace transforms- Inverting Laplace transforms analytically via eigenfunction expansions· Pricing and Hedging Exotic Options with Volatility Smiles: ExamplesAfternoon breakROBUST HEDGING OF BARRIER OPTIONS· Black-Scholes only works if the model is correct· Call prices contain information about price movements· Only some models are consistent with call prices· Vanilla calls as hedging instruments· Super-replicating strategies· A range of possible prices for exotic options· Arbitrage-free bounds· Barrier puts and calls, lookback options· Simple hedges can be "optimal" for hedgingChairman's closing remarksEnd of day twoVadim Linetsky, Northwestern UniversityVadim Linetsky is an Associate Professor in the Department of Industrial Engineering and ManagementSciences at Northwestern University in Evanston where he teaches courses in financial engineering andstochastic modeling. Previously he was an Assistant Professor at the University of Michigan in Ann Arbor. Hiscurrent research interests are in asset pricing, exotic options, term-structure models and credit risk. His paperson option pricing appeared in Mathematical Finance, Computational Economics and RISK. Previously, he was aresearcher in mathematical physics, specializing in quantum mechanics and quantum field theory. Dr. Linetskyhas a Ph.D. in Mathematical Physics from the Russian Academy of Sciences, as well as an MS in electricalengineering.David Hobson, Senior Lecturer, University of BathDr David Hobson is a Senior Lecturer in Statistics at the University of Bath. Prior to this, he worked on themodelling of financial markets at the Judge Institute of Management Studies, University of Cambridge. He isinterested in Brownian motion and the theory of diffusions as well as applications to finance. These applicationsinclude the study of stochastic volatility, passport options and robust hedging strategies for exotic options.D A Y T W O
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