Exotic options and structured products are two of the most popular
financial products over the past ten years and will soon become very
important to the emerging markets, especially China. This book first
discusses the products' recent development in the world and provides
comprehensive overview of the major products. The book also discusses
the risks of issuing and buying such products as well as the techniques
to price them and to assess the risks. Volatility is the most important
factor in determining the return and risk. Therefore, significant part
of the book's content discusses how we can measure the volatility by
using local and stochastic volatility models -- Heston Model and Dupire
Model, the volatility surface, the term structure of volatility,
variance swaps, and breakeven volatility.
The book introduces a set of dimensions which can be used to describe
structured products to help readers to classify them. It also describes
the more commonly traded exotic options with details. The book discusses
key features of each exotic option which can be used to develop
structured products and covers their pricing models and when to issue
such products that contain such exotic options. This book contains
several case studies about how to use the models or techniques to price
and hedge risks. These case analyses are illuminating.
