Volatility and Correlation - Trading and Risk Management

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 General Introduction to Volatility and Correlation

• Why Volatility and Correlation Are Important in Trading and Risk Management?
• Important Volatility and Correlation Concepts
  • Realized Volatility, Implied Volatility, Stochastic Volatility etc.
  • Volatility and Correlation “Smiles”

Modelling and Forecasting Volatility

• Standard Approach to Estimating Volatility
• Moving Averages
  • Simple Moving Average and EWMA
• GARCH Modelling
  • Conditional and Unconditional Variance
  • GARCH (1,1) and Higher Order GARCH
• Implementing GARCH
  • Variance Targeting
  • Maximum Likelihood Methods
• Forecasting Future Volatility
• Volatility Term Structures and Volatility Skews
• Practical Implementation Issues and Pitfalls

12.00 - 13.00 Lunch

13.00 - 16.30 Trading and Hedging Volatility

• The Trading Process
  • Formulating a View on Volatility
  • Setting Trading Goals and Limits
  • Implementation and Follow-Up
• Using Volatility Cones to Determine Current Volatility Levels Relative to Historical Volatility
• Standard Long and Short Volatility Trade Using Options
• Volatility Trading Using Corporate Derivatives
• Setting future re-hedging points: The delta contour map
• Using CBOE VIX Futures and Options
• Using OTC Volatility Products
  • OTC Variance and Volatility Swaps
  • Gamma Swaps and Corridor Variance Swaps
  • Options on Realized Variance
• Trading Volatility without the Use of Options or Swaps
• Volatility Arbitrage
• Hedging Volatility Risk
  • Hedging the “Volatility Book” Using Volatility Swaps, Futures and Options on Volatility
  • Transferring Volatility Risk Using Structured Products
• Small Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Modelling Correlation

• Types of Correlation Coefficients
  • Pearson's Product-Moment Coefficient
  • Non-Parametric Correlation Coefficients
• Copulas and Correlation
• Estimating Correlation
  • The Need to Reduce Dimensionality in Estimating Correlation
  • The Stability Or Lack of Correlation Amongst Assets
  • Volatility Clustering and Correlations
• Modelling Default Correlation
  • Causes of Default Correlation
  • Market Variables and Data Sources
• Methods for Estimating Default Correlation
  • Moody’s Binomial Expansion Method
  • Asset-Based Approaches
  • Factor Models for Asset Dynamics
  • Modelling Default Correlations with Intensity Models
  • Modelling Dependence Using Copula Functions
  • Backing Out Implied Correlations from Market Data
• Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Trading and Hedging Correlation

• Overview of Ways of Buying and Selling Correlation
• Correlation Related Products
  • OTC covariance swaps
  • Nth-to-default Swaps
  • Single-Tranche Synthetic CDOs
  • CDO-Squared
  • Index Tranches
  • Leveraged Super-Senior Swaps
  • Constant Principal Protection Insurance
• Dispersion Trades
• Trading Correlation with CDO and Basket CDS Tranches
  • Case Study: CPPI Correlation Trade
• Strategies for Profiting from Correlation “Breakdowns”
• Hedging Correlation Risk
  • Using Currency Baskets to Hedge Currency Correlation Risk
  • Hedging the Correlation Risk in CDO Tranches
  • Delta-Hedging the “Correlation Book”
• Small Exercises

Summary, Evaluation and Termination of the Seminar