Risk management in exotic derivatives trading - Lessons from the recent past
09/01/2015
By Jérôme FRUGIER (BNP Paribas)





Table of contents
Risk management in exotic derivatives trading ................................................................................. 17
Abstract ............................................................................................................................................ 17
1. Introduction .............................................................................................................................. 18
2. An accumulation of risky products ............................................................................................ 18
3. When risk comes true - A sudden and unexpected inversion of the EUR curve .......................... 24
4. The consequences - A basic illustration ..................................................................................... 30
5. A problematic shared with other asset classes - Focus on commodities ...................................... 31
6. It could have been avoided... ..................................................................................................... 34
7. Efficient risk management techniques ....................................................................................... 36
A. Bending strategies ............................................................................................................ 36
B. Examples of bending strategies ........................................................................................ 37
C. Manage risk concentration and limits ............................................................................... 38
1. Monitoring observation dates and distance to barrier ................................................... 38
2. Monitoring gamma by barrier strike ............................................................................. 39
D. Stress testing .................................................................................................................... 40
8. Conclusion ................................................................................................................................ 41
Bibliography .................................................................................................................................... 42