Commodities, Derivatives and Structured Products
Interest Rate & FX Options - Part 4
Interest rate option traders are required to manage portfolios of options and cope with various risks. They often attempt to optimize a hedging strategy by maximizing liquidity, whilst minimizing transaction costs and basis risk.
This tutorial provides an overview of managing an interest rate option book. It explains in detail how delta and vega exposures of an option trade are hedged and looks at the problems in combining exposures associated with different instruments, for example, combining swaption exposures with caps and floors. The tutorial also discusses the problems associated with interest rate option models and provides an overview of the various market participants.
On completion of this tutorial, you will be able to:
- identify the hedge requirements of interest rate option portfolios
- hedge the exposures for simple interest rate options
- identify the key problems relating to interest rate option models
- list the various market participants and outline their roles in the interest rate option market