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FX Derivatives Trader School

Book Description

An essential guide to real-world derivatives trading

FX Derivatives Trader School is the definitive guide to the technical and practical knowledge required for successful foreign exchange derivatives trading. Accessible in style and comprehensive in coverage, the book guides the reader through both basic and advanced derivative pricing and risk management topics.

The basics of financial markets and trading are covered, plus practical derivatives mathematics is introduced with reference to real-world trading and risk management. Derivative contracts are covered in detail from a trader's perspective using risk profiles and pricing under different derivative models. Analysis is approached generically to enable new products to be understood by breaking the risk into fundamental building blocks. To assist with learning, the book also contains Excel practicals which will deepen understanding and help build useful skills.

The book covers of a wide variety of topics, including:

  • Derivative exposures within risk management

  • Volatility surface construction

  • Implied volatility and correlation risk

  • Practical tips for students on trading internships and junior traders

  • Market analysis techniques

  • FX derivatives trading requires mathematical aptitude, risk management skill, and the ability to work quickly and accurately under pressure. There is a tremendous gap between option pricing formulas and the knowledge required to be a successful derivatives trader. FX Derivatives Trader School is unique in bridging that gap.

    Table of Contents

    1. Title Page
    2. Copyright
    3. Dedication
    4. Preface
    5. Acknowledgments
    6. Part I: The Basics
      1. Chapter 1: Introduction to Foreign Exchange
        1. Practical Aspects of the FX Market
        2. What Do FX Traders Call Different Currency Pairs?
      2. Chapter 2: Introduction to FX Derivatives
        1. Vanilla Call and Put Options
        2. Practical Aspects of the FX Derivatives Market
      3. Chapter 3: Introduction to Trading
        1. Bids and Offers
        2. Market Making
        3. Price Making and Risk Management Overview
      4. Practical A: Building a Trading Simulator in Excel
        1. Task A: Set Up a Ticking Market Price
        2. Task B: Set Up a Two-Way Price and Price-Taking Functionality
        3. Task C: Introduce Price-Making Functionality
        4. Extensions
      5. Chapter 4: FX Derivatives Market Structure
        1. Client Types
        2. Bank FX Derivatives Trading Desk Structure
        3. Tips for a Trading Internship
        4. Tips for a Junior Trader
        5. FX Derivatives Interbank Direct Market
        6. FX Derivatives Interbank Broker Market
      6. Chapter 5: The Black-Scholes Framework
        1. Black-Scholes Stochastic Differential Equation (SDE)
        2. Solving the Black-Scholes SDE
        3. Calculating Option Values Using Terminal Spot Distributions
        4. The Black-Scholes Formula
      7. Practical B: Building a Numerical Integration Option Pricer in Excel
        1. Task A: Set Up the Terminal Spot Distribution
        2. Task B: Set Up the Option Payoff and Calculate the Option Price
        3. Testing
      8. Chapter 6: Vanilla FX Derivatives Greeks
        1. Option Value
        2. Delta
        3. Gamma
        4. Vega
        5. Summary
      9. Practical C: Building a Black-Scholes Option Pricer in Excel
        1. Task A: Set Up a Simple Black-Scholes Options Pricer
        2. Task B: Set Up a VBA Pricing Function
        3. Task C: Generate First-Order Greeks
        4. Task D: Plot Exposures
      10. Chapter 7: Vanilla FX Derivatives Pricing
        1. Maintaining Volatility Surfaces
        2. Vanilla Price Making
      11. Chapter 8: Vanilla FX Derivatives Structures
        1. Straddle
        2. Strangle
        3. Butterfly (Fly)
        4. Risk Reversal (RR)
        5. Leveraged Forward
        6. ATM Calendar Spread
        7. Call/Put Spreads
        8. Seagull
      12. Chapter 9: Vanilla FX Derivatives Risk Management
        1. Trading Gamma
        2. Trading the Short-Date Position
        3. Trading the ATM Position
        4. FX Derivatives Trading P&L
        5. FX Derivatives Market Language
      13. Chapter 10: Vanilla FX Derivatives Miscellaneous Topics
        1. Present Valuing and Future Valuing
        2. Market Tenor Calculations
        3. Option Premium Conversions
      14. Practical D: Generating Tenor Dates in Excel
    7. Part II: The Volatility Surface
      1. Chapter 11: ATM Curve Construction
        1. Variance
        2. Core ATM Curve Construction
        3. ATM Curve Construction: Short-Dates
      2. Practical E: Constructing an ATM Curve in Excel
        1. Task A: Constructing an ATM Curve Using Interpolation
        2. Task B: Constructing an ATM Curve Using a Model
        3. Task C: Adding Weights to an ATM Curve
      3. Chapter 12: Volatility Smile Market Instruments and Exposures
        1. Market Instrument Vega Exposures
        2. Risk Reversal Contract
        3. Butterfly Contract
        4. Volatility Smile Risk Management
        5. Volatility Smile Construction Methods
      4. Practical F: Constructing a Volatility Smile in Excel
        1. Task A: Set Up the Malz Smile Model
        2. Task B: Plot Implied Volatility versus Delta and Investigate Parameters
        3. Task C: Use Black-Scholes to Get Strike from Delta
        4. Task D: Switch to VBA Functions and Plot Implied Volatility versus Strike
        5. Task E: Investigate Volatility Smile Strike Placement
      5. Chapter 13: Probability Density Functions
        1. Fat-Tailed Distributions
        2. Confidence Intervals
        3. Limitations of Volatility Smile Parameterization
      6. Practical G: Generating a Probability Density Function from Option Prices in Excel
    8. Part III: Vanilla FX Derivatives Trading
      1. Chapter 14: Vanilla FX Derivatives Trading Exposures
        1. Delta
        2. Gamma and Theta
        3. Vega and Weighted Vega
        4. Adapted Greeks
        5. Zeta
        6. Interest Rate Risk (Rho)
      2. Chapter 15: Vanilla FX Derivatives Trading Topics
        1. Understanding the FX Derivatives Market
        2. Trading the Overnight
        3. Gartman's Rules of Trading
        4. Vega Positioning
        5. Short-Date Trading: Long ATM versus Short Wings
        6. Client Option Orders
        7. Quoting Vanilla Spreads
        8. Trading Long-Dated FX Derivatives
        9. Trading Pegged Currency Pairs
        10. Positive Vanilla Spreads
        11. Writing-Off Vanilla Risk
        12. Vanilla Pin Risk
        13. Low Delta Vanilla Options
        14. Agreeing Broker Market Data
      3. Chapter 16: ATM Volatility and Correlation
        1. ATM Volatility Triangles
        2. Dephased Vega
        3. Managing Cross-Currency Positions
      4. Chapter 17: FX Derivatives Market Analysis
        1. Calculating Breakevens
        2. Implied versus Realized Analysis
        3. Market Instrument Analysis
        4. Carry Trades
    9. Part IV: Exotic FX Derivatives
      1. Chapter 18: Exotic FX Derivatives Pricing
        1. Exotic Pricing Example
        2. Pricing the Volatility Smile
        3. VVV Pricing Example: Part 1
        4. Stopping Time
        5. VVV Pricing Example: Part 2
        6. Path Dependence
      2. Chapter 19: FX Derivatives Pricing Models
        1. Stochastic Volatility Models
        2. Local Volatility Models
        3. Mixed Volatility Models
        4. Jump Diffusion Models
        5. Stochastic Interest Rate Models
      3. Chapter 20: Exotic FX Derivatives Product Classification
        1. First-Generation Exotics
        2. Second-Generation Exotics
        3. Third-Generation Exotics
      4. Chapter 21: European Digital Options
        1. European Digital Replication
        2. European Digital Pricing
        3. European Digital Bid–Offer Spread
        4. European Digital Greeks
        5. European Digital Range
      5. Chapter 22: European Barrier Options
        1. European Knock-out Replication
        2. Intrinsic Value
        3. European Knock-in Replication
        4. European Barrier Greeks
        5. European Barrier Pricing
        6. European Barrier Bid–Offer Spread
      6. Chapter 23: Touch Options
        1. Delta Risk
        2. Vega Risk
        3. Gamma and Pin Risk
        4. Touch Barrier Delta Gap
        5. One-Touch Pricing
        6. One-Touch Variations
        7. No-Touch Options
      7. Chapter 24: American Barrier Options
        1. Regular American Barrier Options
        2. Reverse American Barrier Options
        3. Double American Barrier Options
        4. Knock-in/Knock-out Option Replication
        5. Strike-out Options
      8. Chapter 25: Exotic FX Derivatives Trading Topics
        1. Exotic Risk Management Overview
        2. Exotic Bid–Offer Spreading
        3. Exotic Interbank Broker Market
        4. Structured FX Hedging Strategies
        5. FX Derivatives Investment Products
        6. Shadow Barriers
        7. Recycling Exotic Risk
        8. Why Market Participants Prefer to Sell American Barriers
      9. Chapter 26: Window Barrier and Discrete Barrier Options
        1. Front-Window Barrier Options
        2. Rear-Window Barrier Options
        3. Generic Window Barrier Options
        4. Window Barrier Risk Management
        5. Discrete Barrier Options
      10. Practical H: Building a Monte Carlo Option Pricer in Excel
        1. Task A: Set Up the Simulation
        2. Task B: Set Up a Vanilla Option Payoff and the Monte Carlo Loop
        3. Task C: Set Up Multiple Payoffs
        4. Task D: Pricing Barrier Options
        5. Task E: Multi-Asset Simulation
        6. Extensions
      11. Chapter 27: Vanilla Variations
        1. Late-Delivery Vanilla Options
        2. American Vanilla Options
        3. Self-Quanto Vanilla Options
      12. Chapter 28: Accrual and Target Redemption Options
        1. Accrual Options
        2. Target Redemption Options
      13. Chapter 29: Asian Options
        1. Average Rate Options
        2. Average Strike Options
        3. Double Average Rate Options
      14. Chapter 30: Multi-Asset Options
        1. Multi-Asset Trading Risks
        2. Multi Asset Bid–Offer Spreading
        3. Basket Options
        4. Dual Digital Options
        5. Best-of and Worst-of Options
        6. Quanto Options
      15. Chapter 31: Miscellaneous Options
        1. Volatility and Variance Swaps
        2. Forward Volatility Agreements
        3. Forward Start Options
        4. Compound Options
    10. Further Reading
    11. About the Companion Website
      1. Index
    12. End User License Agreement