This will be a practical guide to understanding exotic options. One of the many factors that have contributed to the financial crisis has been investors misusing and misunderstanding exotic products. For example, in many cases, investors assume that in a worst case scenario, their principle investment is protected, however this is not always the case and they can lose everything. A proper understanding of how exotic options are structured would have avoided these failures. The book will cover all the key exotic products in Interest rates, equity and FX exotics. It will show readers how each product is structured; explain why they exist and how they work, and what risks are borne by which parties. By the time the reader has finished the book, he/she will be able to appraise, understand and make an informed decision on whether to invest in a particular structure or not. When confronted with derivatives salespeople, they will have a much clearer picture on what is being sold, and what to look out for. The book will avoid the complex mathematics use d in pricing, and will focus purely on what the investor needs to understand, what danger signs to look out for and how to understand all aspects of a complex derivative.
Book Details:
- Author: Chia Tan
- ISBN: 9780470686898
- Year Published: 2009
- Pages: 272
- BISAC: BUS036000, BUSINESS & ECONOMICS/Investments & Securities / General
About the Book and Topic:
This will be a practical guide to understanding exotic options. One of the many factors that have contributed to the financial crisis has been investors misusing and misunderstanding exotic products. For example, in many cases, investors assume that in a worst case scenario, their principle investment is protected, however this is not always the case and they can lose everything. A proper understanding of how exotic options are structured would have avoided these failures. The book will cover all the key exotic products in Interest rates, equity and FX exotics. It will show readers how each product is structured; explain why they exist and how they work, and what risks are borne by which parties. By the time the reader has finished the book, he/she will be able to appraise, understand and make an informed decision on whether to invest in a particular structure or not. When confronted with derivatives salespeople, they will have a much clearer picture on what is being sold, and what to look out for. The book will avoid the complex mathematics use d in pricing, and will focus purely on what the investor needs to understand, what danger signs to look out for and how to understand all aspects of a complex derivative.
An exotic option is a derivative which has features, such as advanced payoff calculations, which make them more complex than commonly traded vanilla products. These can include barrier options, Himalayans, basket options, quantoes and many more, which are generally traded over the counter (OTC) or embedded in structured notes. One of the key features of the financial crisis has been the use and misuse of derivatives, the reason for which stems in a real lack of understanding of how these products work, and what to look for in the contract of a derivative or structured products. There is a very common misconception that derivatives carry high risk. They do not. While the risk they carry can vary, depending on their content, they are commonly seen as a middle ground between bonds (low risk) and stocks high risks). What is accepted is that many investors do not fully understand how derivatives work, and having been caught up in the recent financial bubble, have misused derivatives and structured products in their portfolios, to their ultimate regret.
PRACTICAL ADVICE – offers practical advice on exotic options, their structures and what to look out for when investing in them. DEARTH OF INFORMATION – most if not all books on exotic derivatives approach the topic from a pricing perspective and are aimed at quants. This will be the first book to completely demystify the topic for investors. AUTHOR EXPERIENCE – the author has many years experience in exotic options pricing and modeling and knows exactly how difficult they can be for investors to unravel. In this book, he will help investors see through the complexities and choose the right product and risk levels for them. ESSENTIAL IN CURRENT MARKETS – even in the current market conditions, asset managers and other investors need to use derivatives as no other asset class allows them to meet certain needs effectively.
About the Author
Chia Chaing Tan (London, UK) is Vice President, Quantitative Research at Dresdner Kleinwort, where he is responsible for the development for models, algorithms and calibration routines for securities pricing in interest rates, FX and equities. Prior to this he worked in the quantitative analytics department at Barclays Global Investors where he worked in pricing models and model enhancement. He has also held positions at CIBC in risk analytics. Chia is CFA and FRM accredited, and an MSc in Mathematical Finance from the University of Toronto, and an LLB with First Class Honors from the University of London.