I just joined a support team for an equity exotic trading desk in a bank, I am looking for a high level overview of how exotic trading works in a bank.
For my questions let's take a common product: an Autocall on a stock with barriers: KO 100% and KI 70% with valuation every 6 months. Here are a few questions I currently have.
I never studied Finance an have some trouble to understand a few basic topics, any answer even partial is welcome.
What does it mean to "price" an Autocall. When the client buy an Autocall does he pay a premium like for an option ? or is it the KI barrier paying for the structure ? what is the price then ?
What does it mean to structure an Autocall ? I understood an autocall can be composed of a put down and in / barrier options, bonds for the coupon, etc.
Does it mean if the client buy an Autocall the bank will buy a put down and in and a bond to hedge, how does it work and what is structuration ?
- Risk management
On a high level how do traders hedge their risk, I understand they compute the greeks like for options.
What is the impact of the current positions and risks on the price of a product, can some products / autocall you sell to client help you hedge your risk, is it common ?
Do they usually lose money on the hedge (e.g. they sell the product and then need to hedge during the whole lifetime) ? I've heard of gamma trading, can they make money with the hedge, etc.
- PnL: Main Source
How is the trading desk in a bank making money ? with a premium, by managing risks, do they take directional position and don't hedge themselves completely ? what usually drives the PnL of an exotic desk in a bank ?
Is this correct:
Hedge: costly ? I've heard of gamma trading, can they make money with the hedge, etc.
Directional positions: possible but very limited ?
Margin: main revenue ?
How does it work for daily PnL, is the margin making most of the profits.
I just would like to have a high level overview of how it works. If you have any material to get started don't hesitate to send a link.
Thanks a lot for your help !