UWE WYSTUP is the founder and managing director of Math-Finance AG, a consulting and software company specializing in quantitative finance, implementation of derivatives models, valuation and validation services. During his career, he worked as a financial engineer, structurer and consultant in FX options trading teams for such banks as Commerzbank, Deutsche Bank, Citibank, UBS and Sal. Oppenheim jr. & Cie. An internationally known FX options expert in academia and practice, he lectures on financial engineering as an honorary professor at Frankfurt School of Finance & Management and a professor of financial option price modeling and foreign exchange derivatives at Antwerp University, in addition to giving seminars all over the world. He coedited (with Jürgen Hakala) the industry standard, Foreign Exchange Risk.

0 Preface 17

0.1 Scope of this Book  17

0.2 The Readership  18

0.3 About the Author  19

0.4 Acknowledgments  19

1 Foreign Exchange Derivatives 21

1.1 Literature Review  21

1.2 A Journey through the History of Options 21

1.3 Currency Options  23

1.4 Technical Issues for Vanilla Options  24

1.5 Volatility 55

1.6 Basic Strategies Containing Vanilla Options 83

1.7 First Generation Exotics 104

1.8 Second Generation Exotics (Single Currency Pair) 192

1.9 Second Generation Exotics (Multiple Currency Pairs)  217

2 Structured Products 237

2.1 Forward Transactions  237

2.2 Target Forwards  291

2.3 Series of Strategies  320

2.4 Deposits, Loans, Bonds and Certificates 324

2.5 Interest Rate and Cross Currency Swaps 344

2.6 Participation Notes  376

2.7 Hybrid FX Products  381

2.8 Treasury Case Studies  389

3 Hedge Accounting 403

3.1 Hedge Accounting under IAS 39  403

3.2 Hedge Accounting under IFRS 9  475

4 Foreign Exchange Markets 483

4.1 Vanna-Volga Pricing  483

4.2 Bid–Ask Spreads  495

4.3 Systems and Software  498

4.4 Trading and Sales  500

4.5 Currency Pairs  506

4.6 Things to Remember  510

4.7 Glossary 510

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