The purpose of this workshop is to give you a good understanding of and hands-on experience with advanced option valuation and risk assessment using financial modelling and simulation techniques in Excel™ and Visual Basic for Applications™.
We start with a review of the analytical and numerical models that are used for option pricing in practice. Models include the standard Black-Scholes model (stock options), the Garman-Kohlhagen model (currency options), the Black 76 model (interest rate options), the CRR model and various equilibrium and no-arbitrage term structure models for valuing interest rate option. The participants will implement selected models in Excel/VBA and use the models for practical option valuation and risk assessment.
Further, we explain and demonstrate how volatility including "volatility smiles" can be analyzed and modelled in Excel and how option "Greeks" and other analytics can be used in practical trading and hedging applications.
We also explain and demonstrate how to implement and use a Monte Carlo simulation toolkit. We explain how random numbers are generated and how stochastic differential equations for various processes can be simulated in Excel/VBA. We also explain and demonstrate how to sample from multivariate distributions using the "Cholesky decomposition", how return distributions of complex portfolios can be estimated and how risk measures such as "value-at-risk" and "extreme VaR" can be derived from these distributions.
Finally, we explain and demonstrate how "exotics" such as Asian, look-back, barrier, basket and rainbow option can be priced, and how "Greeks" such as delta, gamma, vega etc. Can be estimated using Monte Carlo simulation.