Trading Volatility 4: Forward Starts, Exotics, and Correlation

This episode explains various methods for trading volatility, focusing on forward-starting products and light exotic options. It details three main approaches to trading forward volatility: forward starting options, futures on volatility indices, and forward starting variance swaps, comparing their pricing, hedging strategies, and market dynamics. The document then thoroughly examines several light exotic options, including barriers, worst-of/best-of, outperformance, look-back, and contingent premium options, analyzing their structures, pricing models, and typical investor behavior. Finally, it covers composite and quanto options, highlighting the impact of currency fluctuations on pricing and hedging. Throughout, the text emphasizes the role of implied volatility, correlation, and term structure in option pricing.