risk management and financial engineering

TOPIC2:EQUITYRISKMANAGEMENTANDRELATEDFINANCIALENGINEERINGINSTRUMENTS2.1.EquityOptions2.2.StockIndexFutures2.3.ExchangeTradedFunds(ETFs)2.4.MarketRiskManagement17Topic22EQUITYRISKMANAGEMENTANDRELATEDFINANCIALENGINEERINGINSTRUMENTS......16-2662.1EQUITYOPTIONS.......................................25-732.1.1SyntheticPositions...............................................................25-262.1.2PortfolioInsurancewithIndexOptions........................27-342.1.3VolatilityTrading..................................................................34-42A.OverpricedandUnderpricedOptions.......................34B.FactorsAffectingIndexOptionsPrices..................34-36C.VolatilityEstimation:Historical,Present&ExpectedVolatility................36-40D.ImpliedVolatility&RealWorldExperience............41E.ImpliedVolatilityTrading..............................................422.1.4OptionsPricingModels(Black-Scholes,BinomialandTrinomialModels)..........43-46A.Black-ScholesModel.......................................................43B.BinomialModel...................................................................44-45C.TrinomialModel.................................................................462.1.5RiskExposure,DynamicDeltaandDeltaHedging......47-64A.OptionsRiskExposure...................................................47B.Sensitivities.......................................................................47B.1OptionsRiskParameters.........................................48B.2DeltaandDynamicDeltaHedging.......................49-59B.3PracticalIllustration–PositionGreeks&Interpretation....................60-642.1.6OptionsTradingStrategies...............................................65-72A.BasicOptionsStrategies,Analysis&Selection.....65-66B.AdvancedOptionsStrategies......................................66-722.1.7Roll-overTechniquesandMarketMakingTechniques73A.ProbabilityDistribution,NormalDistributionAndOptionMarketMaking..........................................73B.StrangleIllustrationbyProfessorMalickSy.........73182.2STOCKINDEXFUTURESTRADING....................74-1122.2.1StockIndexes:TheUnderlyingInstrumentandUsers...........................75-95A.StockIndexes..................................................................75-79B.UsersofStockIndexFutureContract....................79-87C.MechanicsofTradingwithStockIndexFuturesContracts..................................88-90D.SpreadTrading.................................................................91-962.2.2StockIndexFuturesPricing.............................................962.2.3HedgingEquityPositionswithStockIndexFuturesContracts.......................................97-103A.Introduction......................................................................97B.LongHedgeVersusShortHedge................................98-100B.1.ShortHedge.............................................................98-100B.2.LongHedge...............................................................98-100C.HedgingMarketRiskwithStockIndexFuturesContracts............................................................................100-102D.UseofStockIndexFuturesContractsToAdjustPortfolio’sBeta............................................1032.2.4ArbitragewithStockIndexFutures..............................104-1082.2.5ArbitragewithSPXCOMBOsandSyntheticFutures1092.2.6TriangularArbitrage............................................................1092.2.7ProgramTrading....................................................................110-1122.3EXCHANGETRADEDFUNDS............................113-1732.3.1ProductsBenefitsandTrading.........................................114-130A.WhatareExchangeTradedFunds?...........................114-115B.BasicsofExchangeTradedFunds..............................116C.FactsandFiguresofExchangeTradedFunds........117-122D.ExchangeTradedFundsandOtherProducts.........122-123E.ExchangeTradedFundsVersusTraditionalMutualFunds...............................................123-125F.DifferencesBetweenETFsandMutualFunds........125-129G.AdvantagesofInvestinginETFs................................130192.3.2ETFStructuresandTheCreationRedemptionProcess...................................131-148A.TheCreationandRedemptionProcess......................134-138B.ACreationProcessExample.........................................138B.1TheEntitiesintheProcess....................................138-141B.2AnAnalogyforHowItWorks..............................142B.3TheIllustration.........................................................142-143B.4ETFsandTrackingError........................................143-1482.3.3ArbitrageTechniquesBetweenCash,ETFs,andEquityDerivatives.................................149-157A.ArbitrageBetweenETFsandNAV.............................149B.RelationshipBetweenTheNAVsandThePriceofETFs............................................................149-1572.3.4AssetAllocationwithETFstoMaximizeProfits........158-1722.3.5PricingofETFs................................