Mastering Volatility Asia 2012
Novotel Singapore Clarke Quay,
27 February - 1 March 2012
Led by world-class practitioner and academic expert on volatility, Dr Robert G.Tompkins,who has published the primary referenced work on the empirical facets of volatility analysis.
His work has been referenced in Hull’s book and ties together implied and actual volatilities and provides traders with a tool kit to analyze and trade options and underlying markets. His work also covers more asset classes and markets than has been considered previously.
1 OPTIONS, FUTURES AND OTHER DERIVATIVES BY JOHN C. HULL. HIS WORK IS REFERENCED IN THE CHAPTER ON VOLATILITY SMILES.
Why Master Volatility
Volatility is the most crucial input into the pricing and hedging of derivative products and currently the most important factor in the markets.
It is a measure of market sentiments, indicates the health of a market, determines the appropriate investment portfolio and determines the appropriate amount of capital that must be maintained for a financial institution to remain solvent.
The importance of managing volatility has been discussed extensively by both practitioners and academics. The major areas that volatility impacts includes:
- Assessing Investment Risks
- Pricing/Hedging of Derivative Securities
- Financial Risk Management
- Measure of Economic Health and Market Sentiments
- As a “Fear Index”
- Liquidity Concerns and Capital Requirements
- Market Growth Potential
There will be no loss of the depth of volatility analysis by broadening the asset classes examined.
It will be shown that the characteristics of volatility are remarkably similar across all asset classes. Differences will be discussed when appropriate,however the knowledge gained will apply equally well across all financial assets.
Bring Your Laptop Along!
Practical and Extensive Computer work will be done on Excel spreadsheets. Data from the Asian markets will be considered and created for precise analysis. These will include historical and implied volatility analysis and methods to forecast volatility. Asian Markets examples will be created and sent to attendees prior to start of the course.
Participants will return to work with new tools to implement their new-found skills.
UNDERSTANDING THE VOLATILITY PROCESS: REVIEW OF STOCHASTIC PROCESSES
In this section, we will cover the ground work for the remainder of the course. The first principle is: what is volatility from a statistical standpoint? We will go through practical examples of how to determine the statistical properties of financial markets. For this course, we will consider Asian markets and will examine, stock indices, foreign exchange rates, interest rates and swap rates. There will be extensive interactive computer workshops.
We will also discuss how volatility is the crucial input into popular financial models like Black & Scholes (1973) for the pricing of options, Value at Risk (VaR) and the determination of optimal portfolio allocation (Markowitz). Of particular emphasis is the assumed process that market returns are supposed to assume. We will review the assumptions of normality of returns and compare these with what we actually observe for real markets.
- Discrete Distributions
- Continuous Distributions
- Volatility as the Standard Deviation
- Modelling the Higher Moments
- Skewness
- Kurtosis
VOLATILITY ESTIMATION TECHNIQUES – WITH HISTORICAL DATA
This section will consider what data to use to estimate Historical volatility. We will consider different frequencies and time horizons and compare results. This will rely on hands on computer workshops.
There will be an extensive discussion of Volatility Cones, of which much of the fundamental work was completed by Hodges and Tompkins (2001). We will provide computer programmes to analysis the volatility cones of Asian financial markets. This will be a combination of workshop and practical work sessions.
- Data Frequency for Estimation
- Use of Monthly, Weekly and Daily Closing Prices
- Use of Higher Frequency Data
- Closing Prices versus High/Low Data
- Sample Period of Estimation
- Volatility Cone Approach (Burghardt & Lane 1992)
- Problems with Overlapping and Non-Overlapping Data
- Solutions to the Biases of Overlapping Data
WHAT HISTORICAL VOLATILITY IS TELLING US
Once we have modelled the Historical volatility for financial assets, we will consider what models could explain what we observe in actual financial markets. The first step is to determine appropriate empirical features that cause financial markets to deviate from what is expected in the usual approaches to modelling financial market risks. Once we have these key features identified, we will examine alternative models to explain actual market behaviours.
This will include introducing the possible models that have been proposed to explain why actual market return dynamics differ from the assumption of normality, specifically, we will consider:
- Models where the market price can jump
- Models when volatility is not constant but itself varies (stochastic)
- Models which combine both Jumps and Stochastic Volatility
Once the models have been proposed, we will use an econometric approach to fitting these models known as Simulated Method of Moments. We will find the best alternative models which explain actual market dynamics. This will be important to the delegates as this will provide a means to better model future risks. This can be used as an input into risk management or portfolio optimisation. In addition, it will tell us how important the dynamics of the financial markets are to the pricing of derivatives on these same markets.
- Estimation of Daily Historical Volatility Series for Bonds, Stock Indices, Currencies and Forward Interest Rates
- Tests for Autocorrelations in Data Series
- Examination of Actual Dispersion Processes for Volatilities
- Determination of Volatility Cones
- Estimation of Leverage Effects for Stock Markets
- Calibration of Stochastic Volatility Model from Empirical Results
VOLATILITY ESTIMATION TECHNIQUES – IMPLIED VOLATILITIES
This session considers an alternative metric of volatility: the volatility implicit in the prices of options on financial markets. Crucial to this section is a complete understanding of how the implied volatility is determined from the option pricing formulae and the assumptions made. There are alternative techniques for obtaining this result and delegates will learn the most appropriate method for the market considered.
The major emphasis of this section is to compare the implied volatility estimates for the same underlying market with different striking prices and terms to maturity. First, we will consider how to determine the volatility smile/skew/smirk and the relative shapes across different asset classes. This will be review of empirical patterns over multiple decades. Secondly, we will consider implied volatility term structure patterns. With these two elements completed, we will show attendees how to construct a “Volatility Matrix”, which allows them to modify Black Scholes prices to conform to market prices. We will consider how stable these relationships are and provide evidence that the relative shape of volatility surfaces remains stable over time. This is based on two papers by Tompkins, which will be provided to the attendees prior to the course for review.
- Implied Volatility
- Assumptions of the Options Pricing Theory
- Techniques for Determination
- Weighting Techniques across Strike Prices
WHAT IMPLIED VOLATILITY IS TELLING US
- Estimation of the Volatility Matrix
- Volatility ‘Smiles’
- Term Structure of Volatility
VOLATILITY FORECASTING MODELS
This section will consider approaches to forecast future levels of volatility. We will consider moving average methods, as those proposed by RISKMETRICS for VaR calculation and will introduce GARCH models. This will entail extensive computer workshops where attendees will be shown how to gather data and implement both moving average and GARCH models with Excel spreadsheets.
We will also consider how effective the volatility forecasts are over longer time periods.
- Moving Average Methods
- Stochastic Volatility Models
- The ARCH/GARCH family of models
- Diffusion Models with Mean Reversion Assumptions
CONSERVATION OF VOLATILITY FORECASTING MODEL
This section will consider some work done by Tompkins (1998) on a simplistic volatility forecasting model based on a mean reverting assumption. This suggests that volatility will have an overall constant level and high/low patterns of actual market volatility will average to the long term level. This will help explain the patterns observed for Volatility Cones.
- Volatility Forecasting as a Simple Sampling Problem
- The existence of Economic and Normal Volatility Days
- Estimation of Future Volatility from Simple Probability Theory
- Empirical Tests explaining Smile Structures and Volatility Cones
THE USE OF VOLATILITY FORECASTING MODELS
This section will consider the “Implied Densities from Implied Volatilities” proposed by Dupire (1992) and Derman & Kani (1992). Regulators (Bank of England) have used implied distributions to assess market consensus of future possible levels. We will show attendees how to determine such implied densities and discuss how well they predict future events. This will not work well and for those attendees that rely on systems with such implied densities, this will provide extremely useful to avoid possible losses when relying on such systems.
- Fitting Observed Volatility to the Pricing of Contingent Claims
- Pricing Approaches to Incorporate Observed Volatilities
- How Well do the Models work in Practice
THE RELATIONSHIP OF VOLATILITIES BETWEEN MARKETS
This section examines the correlation/covariance between markets. This will examine the statistical properties that link volatilities and correlations and discuss specific applications in the currency markets, where volatility trading can hedge correlation risks. In the equity markets, we will consider the relationships between the volatilities on individual stocks and stock indices. This was first pointed out in Tompkins (1994) and has been implemented by a number of Hedge funds.
- Relationship of Volatilities and Correlations
- Multi-Factor Stochastic Volatility Models
- Currency Market Applications
- Interest Rate Applications
- Equity Market Applications
IMPACTS OF VOLATILITY ON DERIVATIVE SECURITIES
IMPACTS OF STOCHASTIC VOLATILITY ON THE PRICING AND HEDGING OF CONTINGENT CLAIMS
This section considers the sensitivities of derivative products to changes in volatility. The concept of vega will be considered extensively across a wide variety of alternative structures. Specifically, we will consider how the prices of the following derivatives change.
- The Measure of Implied Volatility Exposure – The Vega
- Estimation of Volatility Exposures
- European & American Options
- Compounds
- Digital Options
- Barrier Options
- Lookback Options
- Exchange Options
- Quantos
INSTRUMENTS TO HEDGE VOLATILITY
This section considers instruments that allow direct hedging of volatility risks. These products include:
- Volatility Futures / Forward Contracts
- Volatility Swaps
- Volatility Options
- Log Contracts
- Power Straddles
HEDGING VOLATILITY EXPOSURES
This final section considers alternative strategies for managing volatility risks for specific and common derivative products. From Tompkins (2001), we consider the risks of hedging when volatility is stochastic. Two alternative hedging strategies are proposed: dynamic and static hedging. We identify appropriate super-replication strategies and compare by simulation the hedging performance. This section is both lecture and hands on computer simulation.
- Dynamic Hedging Strategies: Do they Work when Volatility is Changing?
- Alternative Hedging with Static Strategies
- Examples of Hedging Simulations with Stochastic Volatilities
- Dynamic & Static Hedging of Compound Options
- Dynamic & Static Hedging of Digital Options
- Dynamic & Static Hedging of Barrier Options
- Dynamic & Static Hedging of Lookback Options
- Dynamic Hedging of a Exchange Options
- Dynamic Hedging of a Quanto
For full agenda, please email us your detail contact information to enquiry@neo-edge.com. Please indicate subject title "Mastering Volatility Asia 2011".
Dr. Robert G. Tompkins,
World Wide Expert in Volatility Analysis and Exotic Options Hedging with 30 years of experience in financial market derivatives
Founding Managing Director, Minerva Group
Honorary Professorship, University of Warwick Business School
Professor of Quantitative Finance, Frankfurt School of Finance and Management
Adjunct Professor, Rotterdam School of Management
Dr. Tompkins has thirty years experience in financial market derivatives. This includes the design and launch of the first exchange traded financial options in the early 1980s at the Chicago Mercantile Exchange. He traded these products attwo major Chicago banks, sold derivatives and developed new products at Merrill Lynch, London, established a successful international consultancy firm serving over 300 financial institutions in 28 countries, created investment funds and structured products using derivative products, and finally has published significant theoretical research on these markets.
Significant contributions include analysis of implied volatility smiles for options on financial markets, Stochastic volatility models, pricing and hedging of exotic options, venture capital, model-free derivative pricing and risk evaluation, analysis of stock market anomalies and the use of derivatives in fund management.
He is currently a Professor of Quantitative Finance at the Frankfurt School of Finance and Management. He is also an Adjunct Professor at the Rotterdam School of Management and holds an Honorary Professorship at the University of Warwick Business School.
Prior to entering academia in 1998, Dr. Tompkins worked for 18 years in fund management, investment banking, derivatives trading and established a successful international training and consultancy firm, the Minerva Group. Areas of consultancy included fund management, derivatives trading and risk management systems, regulatory issues, customised training and new product development.
Dr. Tompkins was formerly the Head of International Quantitative Research at Kleinwort Benson Investment Management. Prior to this, he was the Futures and Options Specialist at Merrill Lynch, Europe and an Interest Rate Options Dealer and Currency Options Trader at two major Chicago banks. He has three degrees from the University of Chicago, including an MA in Quantitative Methods and an MBA (honours).
In addition, he completed his Ph.D. in Finance at the University of Warwick in 1998 and his Habilitation in Financial Economics at the University of Technology, Vienna in 2000.
Dr. Tompkins has authored three books on Options and edited a book on exotic options. He has published widely in RISK Magazine, and a number of peer reviewed academic journals.
Who Should Attend
Volatility is the most crucial input into the pricing and hedging of derivative products and currently the most important factor in the markets. It is a measure of market sentiments, indicates the health of a market, determines the appropriate investment portfolio and determines the appropriate amount of capital that must be maintained for a financial institution to remain solvent. Read the detailed programme to discover for yourself the urgent imperative for advanced volatility analysis implementation in your work. Companies that have participated in Neoedge’s Finance courses include Bank Julius Baer & Co Ltd, BNP Paribas, ChinaTrust Commercial Bank, CIMB Bank, Commerzbank AG, Credit Agricole Suisse, Credit Industriel et Commercial, DBS, DZ Bank AG Singapore, KasikornBank Public Company Limited Thailand, OCBC, Skandlnaviska Enskilda Banken AB, Standard Chartered), State Bank of India, The Bank of Tokyo-Mitsubishi UFJ Ltd, UniCredit, Bank of Singapore, UOB, Bank BNI, BSI Bank, GFI Fenics, Siam Commercial Bank etc; Course Format Pre-course Questionnaire Certificate of Attendance Color printing of charts in Course Material for your easy reading!
Delegate Fee Please contact us at enquiry@neo-edge.com or customer service hotline at +65 6557 9166 for details. Payment Terms Payment must be made within 5 working days upon your registration in order to guarantee your seat. All payments must quote the delegate name and event code. Payment can be made via the following ways: Cheque Made payable to Neoedge Pte. Ltd. Credit card We accept Mastercard, Visa and American Express Bank Transfer Please refer to the Invoice for our Bank A/C details. All bank charges to be borne by payer. Please ensure that Neoedge receives the full invoiced amount. Unpaid registrations will be billed 40% of the registration fee if you do not attend the event. A complete set of the conference documentation in CD-Rom will be sent to you by post. Substitutions & Cancellations Should you be unable to attend, you may substitute delegates at any time before the event at no extra charge. Alternatively, you may choose to credit the full value of your registration towards another Neoedge event for up to 18 months from the date of issuance. No refunds will be available for cancellations.
The course will be held in a highly interactive workshop format with case studies and real world examples for a small class.
A pre-course questionnaire will be sent upon registration which allows you to raise your specific areas of interest. Dr. Tompkins will review and analyze these in advance seeking to fully satisfy your learning needs.
Upon the successful completion of this course, you will receive a Certificate of Attendance bearing the signatures from both the Trainer and the Organizer. This Certificate will testify your endeavour and serve towards your professional advancement
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This event will be held at Novotel Singapore Clarke Quay
We recommend our delegates to book the hotel rooms early as there are only limited rooms available at Corporate Rate. Kindly contact the following for reservation
Novotel Singapore Clarke Quay
177A River Valley Road, Singapore 179031
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Business Services Executive
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Venue: Novotel Singapore Clarke Quay, Singapore