FX Derivatives Trader School

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.

GILES JEWITT is the Head of FXO Automated Trading and eRisk for HSBC in London. He has worked on trading desks in London and Hong Kong for over a decade, pricing and risk managing the full range of FX Derivatives products.

Preface xi

Acknowledgments xiii

PART I The Basics 1

CHAPTER 1 Introduction to Foreign Exchange 3

CHAPTER 2 Introduction to FX Derivatives 11

CHAPTER 3 Introduction to Trading 19

Practical A Building a Trading Simulator in Excel 27

CHAPTER 4 FX Derivatives Market Structure 39

CHAPTER 5 The Black-Scholes Framework 57

Practical B Building a Numerical Integration Option Pricer in Excel 69

CHAPTER 6 Vanilla FX Derivatives Greeks 77

Practical C Building a Black-Scholes Option Pricer in Excel 91

CHAPTER 7 Vanilla FX Derivatives Pricing 103

CHAPTER 8 Vanilla FX Derivatives Structures 121

CHAPTER 9 Vanilla FX Derivatives Risk Management 137

CHAPTER 10 Vanilla FX DerivativesMiscellaneous Topics 159

Practical D Generating Tenor Dates in Excel 165

PART II The Volatility Surface 169

CHAPTER 11 ATM Curve Construction 171

Practical E Constructing an ATM Curve in Excel 193

CHAPTER 12 Volatility Smile Market Instruments and Exposures 205

Practical F Constructing a Volatility Smile in Excel 233

CHAPTER 13 Probability Density Functions 241

Practical G Generating a Probability Density Function from Option Prices in Excel 253

PART III Vanilla FX Derivatives Trading 261

CHAPTER 14 Vanilla FX Derivatives Trading Exposures 263

CHAPTER 15 Vanilla FX Derivatives Trading Topics 293

CHAPTER 16 ATM Volatility and Correlation 313

CHAPTER 17 FX DerivativesMarket Analysis 323

PART IV Exotic FX Derivatives 355

CHAPTER 18 Exotic FX Derivatives Pricing 357

CHAPTER 19 FX Derivatives Pricing Models 375

CHAPTER 20 Exotic FX Derivatives Product Classification 387

CHAPTER 21 European Digital Options 399

CHAPTER 22 European Barrier Options 413

CHAPTER 23 Touch Options 423

CHAPTER 24 American Barrier Options 439

CHAPTER 25 Exotic FX Derivatives Trading Topics 461

CHAPTER 26 Window Barrier and Discrete Barrier Options 473

Practical H Building a Monte Carlo Option Pricer in Excel 485

CHAPTER 27 Vanilla Variations 497

CHAPTER 28 Accrual and Target Redemption Options 515

CHAPTER 29 Asian Options 527

CHAPTER 30 Multi-Asset Options 539

CHAPTER 31 Miscellaneous Options 555

Further Reading 573

About the CompanionWebsite 575

Index 577

The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.