John Wiley - FX Options and Structured Products

1. Chapter 1
2. Chapter 2
3. Chapter 3
4. Chapter 4

1. Chapter 1
2. Chapter 2
3. Chapter 3
4. Chapter 4

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com.

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding.

This edition first published 2006

2017 Uwe Wystup

Registered office

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

Library of Congress Cataloging-in-Publication Data

Names: Wystup, Uwe, author.

Title: FX options and structured products / Uwe Wystup.

Description: Second edition. | Chichester, West Sussex, United Kingdom : John Wiley & Sons, [2017] | Includes index. |

Identifiers: LCCN 2017015264 (print) | LCCN 2017023711 (ebook) | ISBN 9781118471111 (pdf) | ISBN 9781118471135 (epub) | ISBN 9781118471067 (cloth)

Subjects: LCSH: Foreign exchange options. | Structured notes (Securities) | Derivative securities.

Classification: LCC HG3853 (ebook) | LCC HG3853 .W88 2017 (print) | DDC 332.4/5dc23

LC record available at https://lccn.loc.gov/2017015264

Cover Design: Wiley

Cover Images: Pen image: archerix/iStockphoto;

Gears image: sbayram/iStockphoto

To Ansua

Treasury management of international corporates involves dealing with cash flows in different currencies. Therefore the natural service of an investment bank consists of a variety of money market and foreign exchange products. This book explains the most popular products and strategies with a focus on everything beyond vanilla options.

It explains all the FX derivatives including options, common structures and tailormade solutions in examples, with a special focus on the application including views from traders and sales as well as from a corporate treasurer's perspective.

It contains actually traded deals with corresponding motivations explaining why the structures were traded. This way the reader gets a feeling for how to build new structures to suit clients' needs. We will also cover some examples of bad deals, deals that traded and led to dramatic losses.

Several sections deal with some basic quantitative aspect of FX options, such as quanto adjustment, deferred delivery, vannavolga pricing, settlement issues.

One entire chapter is devoted to hedge accounting, where after the foundations a typical structured FX forward is examined in a case study.

The exercises are meant to practice the material. Several of them are actually difficult to solve and can serve as incentives to further research and testing. Solutions to the exercises are not part of this book; however they may eventually be published on the book's web page, fxoptions.mathfinance.com.

There are numerous books on quantitative finance, and I am myself originally a quant. However, very few of these illustrate why certain products trade. There are also many books on options or derivatives in general. However, most of the options books are written in an equity options context. In my opinion, the key to really understanding options is the foreign exchange market. No other asset class makes the symmetries so obvious, and no other asset class has underlyings as liquid as the major currency pairs. With this book I am taking the effort to go beyond common literature on options, and also pure textbook material on options. Anybody can write a book on options after spending a few days on an internet search engine. Any student can learn about options doing the same thing (and save a lot on tuition at business schools). This book on FX options enables experts in the field to become more credible. My motivation to write this book was to share what I have learned in the many decades of dealing with FX derivatives in my various roles as a quant coding pricing libraries and handling market data, a structurer dealing with products from the trading and sales perspective, a risk manager running an options position, a consultant dealing with special topics in FX markets, an expert resolving legal conflicts in the area of derivatives, an adviser to the public sector and politicians on how to deal with currency risk, and last but not least as a trainer, teaching FX options to a second generation, during which time I have received so much valuable feedback that many sections of the first edition need to be updated or extended. Since the first edition, new products have been trading and new standards have been set. So it is about time. I really couldn't leave the first edition as it is. Moreover, many have asked me over the years to make solutions to the exercises available. This book now contains about 75 exercises, which I believe are very good practice material and support further learning and reflection, and all of the exercises come with solutions in a separate book. It is now possible for trainers to use this book for teaching and exam preparation. Supplementary material will be published on the web page of the book, fxoptions.mathfinance.com.