Options, Futures, and Other Derivatives with Derivagem CD,9780131499089

Options, Futures, and Other Derivatives with Derivagem CD

by
Edition: 6th
ISBN13: 9780131499089
ISBN10: 0131499084
Format: Hardcover w/CD
Pub. Date: 2009-01-01
Publisher(s): Pearson College Div
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List Price: $223.28

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Summary

Designed to bridge the gap between theory and practice, this successful book is regarded as "the bible" in trading rooms throughout the world.The books covers both derivatives markets and risk management, including credit risk and credit derivatives; forward, futures, and swaps; insurance, weather, and energy derivatives; and more.For options traders, options analysts, risk managers, swaps traders, financial engineers, and corporate treasurers.

Table of Contents

List of Business Snapshots
xvi
List of Technical Notes
xvii
Preface xix
Introduction
1(20)
Exchange-traded markets
1(1)
Over-the-counter markets
2(1)
Forward contracts
3(3)
Futures contracts
6(1)
Options
6(2)
Types of traders
8(1)
Hedgers
9(2)
Speculators
11(3)
Arbitrageurs
14(1)
Dangers
15(6)
Summary
15(1)
Further reading
16(1)
Questions and problems
16(2)
Assignment questions
18(3)
Mechanics of futures markets
21(26)
Background
21(2)
Specification of a futures contract
23(3)
Convergence of futures price to spot price
26(1)
Daily settlement and margins
26(5)
Newspaper quotes
31(4)
Delivery
35(1)
Types of traders and types of orders
36(1)
Regulation
37(2)
Accounting and tax
39(1)
Forward vs. futures contracts
40(7)
Summary
41(1)
Further reading
42(1)
Questions and problems
43(1)
Assignment questions
44(3)
Hedging strategies using futures
47(28)
Basic principles
47(3)
Arguments for and against hedging
50(3)
Basis risk
53(3)
Cross hedging
56(4)
Stock index futures
60(7)
Rolling the hedge forward
67(8)
Summary
68(1)
Further reading
69(1)
Questions and problems
70(1)
Assignment questions
71(2)
Appendix: Proof of the minimum variance hedge ratio formula
73(2)
Interest rates
75(24)
Types of rates
75(2)
Measuring interest rates
77(3)
Zero rates
80(1)
Bond pricing
80(2)
Determining Treasury zero rates
82(2)
Forward rates
84(3)
Forward rate agreements
87(2)
Duration
89(3)
Convexity
92(1)
Theories of the term structure of interest rates
93(6)
Summary
94(1)
Further reading
95(1)
Questions and problems
95(2)
Assignment questions
97(2)
Determination of forward and futures prices
99(30)
Investment assets vs. consumption assets
99(1)
Short selling
99(2)
Assumptions and notation
101(1)
Forward price for an investment asset
101(3)
Known income
104(3)
Known yield
107(1)
Valuing forward contracts
107(2)
Are forward prices and futures prices equal?
109(1)
Futures prices of stock indices
110(2)
Forward and futures contracts on currencies
112(4)
Futures on commodities
116(2)
The cost of carry
118(1)
Delivery options
119(1)
Futures prices and expected future spot prices
119(10)
Summary
121(1)
Further reading
122(1)
Questions and problems
123(2)
Assignment questions
125(2)
Appendix: Proof that forward and futures prices are equal when interest rates are constant
127(2)
Interest rate futures
129(20)
Day count conventions
129(2)
Quotations for Treasury bonds
131(2)
Treasury bond futures
133(4)
Eurodollar futures
137(5)
Duration-based hedging strategies
142(1)
Hedging portfolios of assets and liabilities
143(6)
Summary
144(1)
Further reading
145(1)
Questions and problems
145(2)
Assignment questions
147(2)
Swaps
149(32)
Mechanics of interest rate swaps
149(6)
Day count issues
155(1)
Confirmations
156(1)
The comparative-advantage argument
157(3)
The nature of swap rates
160(1)
Determining the LIBOR/swap zero rates
160(1)
Valuation of interest rate swaps
161(4)
Currency swaps
165(3)
Valuation of currency swaps
168(3)
Credit risk
171(2)
Other types of swaps
173(8)
Summary
175(1)
Further reading
176(1)
Questions and problems
176(2)
Assignment questions
178(3)
Mechanics of options markets
181(24)
Types of options
181(2)
Option positions
183(2)
Underlying assets
185(2)
Specification of stock options
187(3)
Newspaper quotes
190(2)
Trading
192(1)
Commissions
192(2)
Margins
194(1)
The options clearing corporation
195(1)
Regulation
196(1)
Taxation
196(1)
Warrants, executive stock options, and convertibles
197(1)
Over-the-counter markets
198(7)
Summary
200(1)
Further reading
200(1)
Questions and problems
201(1)
Assignment questions
202(3)
Properties of stock options
205(18)
Factors affecting option prices
205(4)
Assumptions and notation
209(1)
Upper and lower bounds for option prices
209(3)
Put--call parity
212(3)
Early exercise: calls on a non-dividend-paying stock
215(1)
Early exercise: puts on a non-dividend-paying stock
216(2)
Effect of dividends
218(5)
Summary
219(1)
Further reading
220(1)
Questions and problems
220(2)
Assignment questions
222(1)
Trading strategies involving options
223(18)
Strategies involving a single option and a stock
223(2)
Spreads
225(9)
Combinations
234(3)
Other payoffs
237(4)
Summary
237(1)
Further reading
238(1)
Questions and problems
238(1)
Assignment questions
239(2)
Binomial trees
241(22)
One-step binomial model
241(3)
Risk-neutral valuation
244(3)
Two-step binomial trees
247(2)
A put example
249(1)
American options
250(1)
Delta
251(1)
Matching volatility with u and d
252(3)
Increasing the number of steps
255(1)
Options on other assets
256(7)
Summary
260(1)
Further reading
260(1)
Questions and problems
261(1)
Assignment questions
262(1)
Wiener processes and Ito's lemma
263(18)
The Markov property
263(1)
Continuous-time stochastic processes
264(5)
The process for a stock price
269(3)
The parameters
272(1)
Ito's lemma
273(1)
The lognormal property
274(7)
Summary
275(1)
Further reading
276(1)
Questions and problems
276(1)
Assignment questions
277(2)
Appendix: Derivation of Ito's lemma
279(2)
The Black--Scholes--Merton model
281(32)
Lognormal property of stock prices
281(2)
The distribution of the rate of return
283(1)
The expected return
284(2)
Volatility
286(3)
Concepts underlying the Black--Scholes--Merton differential equation
289(2)
Derivation of the Black--Scholes--Merton differential equation
291(2)
Risk-neutral valuation
293(2)
Black--Scholes pricing formulas
295(2)
Cumulative normal distribution function
297(1)
Warrants and executive stock options
298(2)
Implied volatilities
300(1)
Dividends
301(12)
Summary
304(1)
Further reading
305(1)
Questions and problems
306(3)
Assignment questions
309(1)
Appendix: Proof of Black--Scholes--Merton formula
310(3)
Options on stock indices, currencies, and futures
313(28)
Results for a stock paying a known dividend yield
313(1)
Option pricing formulas
314(2)
Options on stock indices
316(5)
Currency options
321(2)
Futures options
323(6)
Valuation of futures options using binomial trees
329(2)
The drift of futures prices in a risk-neutral world
331(1)
Black's model for valuing futures options
332(1)
Futures options vs. spot options
333(8)
Summary
334(1)
Further reading
335(1)
Questions and problems
336(3)
Assignment questions
339(2)
The Greek letters
341(34)
Illustration
341(1)
Naked and covered positions
342(1)
A stop-loss strategy
342(2)
Delta hedging
344(9)
Theta
353(2)
Gamma
355(4)
Relationship between delta, theta, and gamma
359(1)
Vega
359(3)
Rho
362(1)
The realities of hedging
363(1)
Scenario analysis
364(1)
Portfolio insurance
364(3)
Stock market volatility
367(8)
Summary
368(1)
Further reading
369(1)
Questions and problems
369(2)
Assignment questions
371(2)
Appendix: Taylor series expansions and hedge parameters
373(2)
Volatility smiles
375(16)
Put--call parity revisited
375(1)
Foreign currency options
376(3)
Equity options
379(2)
The volatility term structure and volatility surfaces
381(2)
Greek letters
383(1)
When a single large jump is anticipated
383(8)
Summary
385(1)
Further reading
386(1)
Questions and problems
386(2)
Assignment questions
388(1)
Appendix: Determining implied risk-neutral distributions from volatility smiles
389(2)
Basic numerical procedures
391(44)
Binomial trees
391(7)
Using the binomial tree for options on indices, currencies, and futures contracts
398(3)
Binomial model for a dividend-paying stock
401(5)
Alternative procedures for constructing trees
406(3)
Time-dependent parameters
409(1)
Monte Carlo simulation
410(7)
Variance reduction procedures
417(2)
Finite difference methods
419(16)
Summary
430(1)
Further reading
430(1)
Questions and problems
431(1)
Assignment questions
432(3)
Value at risk
435(26)
The VaR measure
435(3)
Historical simulation
438(2)
Model-building approach
440(2)
Linear model
442(4)
Quadratic model
446(2)
Monte Carlo simulation
448(1)
Comparison of approaches
449(1)
Stress testing and back testing
450(1)
Principal components analysis
450(11)
Summary
454(1)
Further reading
454(1)
Questions and problems
455(1)
Assignment questions
456(2)
Appendix: Cash-flow mapping
458(3)
Estimating volatilities and correlations
461(20)
Estimating volatility
461(2)
The exponentially weighted moving average model
463(2)
The GARCH (1, 1) model
465(1)
Choosing between the models
466(1)
Maximum likelihood methods
467(4)
Using GARCH (1,1) to forecast future volatility
471(4)
Correlations
475(6)
Summary
477(1)
Further reading
478(1)
Questions and problems
478(2)
Assignment questions
480(1)
Credit risk
481(26)
Credit ratings
481(1)
Historical default probabilities
482(1)
Recovery rates
483(1)
Estimating default probabilities from bond prices
484(2)
Comparison of default probability estimates
486(3)
Using equity prices to estimate default probabilities
489(2)
Credit risk in derivatives transactions
491(2)
Credit risk mitigation
493(2)
Default correlation
495(4)
Credit VaR
499(8)
Summary
502(1)
Further reading
503(1)
Questions and problems
503(2)
Assignment questions
505(2)
Credit derivatives
507(22)
Credit default swaps
507(3)
Credit indices
510(1)
Valuation of credit default swaps
510(4)
CDS forwards and options
514(1)
Total return swaps
515(1)
Basket credit default swaps
516(1)
Collateralized debt obligations
516(3)
Valuation of a basket CDS and CDO
519(1)
Convertible bonds
520(9)
Summary
523(1)
Further reading
524(1)
Questions and problems
524(2)
Assignment questions
526(3)
Exotic options
529(22)
Packages
529(1)
Nonstandard American options
530(1)
Forward start options
531(1)
Compound options
531(1)
Chooser options
532(1)
Barrier options
533(2)
Binary options
535(1)
Lookback options
536(1)
Shout options
537(1)
Asian options
538(2)
Options to exchange one asset for another
540(1)
Options involving several assets
541(1)
Static options replication
541(10)
Summary
544(1)
Further reading
544(1)
Questions and problems
545(2)
Assignment questions
547(2)
Appendix: Calculation of moments for valuation of basket options and Asian options
549(2)
Weather, energy, and insurance derivatives
551(10)
Review of pricing issues
551(1)
Weather derivatives
552(1)
Energy derivatives
553(3)
Insurance derivatives
556(5)
Summary
557(1)
Further reading
558(1)
Questions and problems
558(1)
Assignment question
559(2)
More on models and numerical procedures
561(28)
Alternatives to Black--Scholes
562(4)
Stochastic volatility models
566(2)
The IVF model
568(1)
Path-dependent derivatives
569(4)
Barrier options
573(3)
Options on two correlated assets
576(3)
Monte Carlo simulation and American options
579(10)
Summary
583(1)
Further reading
584(1)
Questions and problems
585(1)
Assignment questions
586(3)
Martingales and measures
589(22)
The market price of risk
590(3)
Several state variables
593(1)
Martingales
594(2)
Alternative choices for the numeraire
596(3)
Extension to several factors
599(1)
Applications
600(2)
Change of numeraire
602(9)
Summary
603(1)
Further reading
604(1)
Questions and problems
604(2)
Assignment questions
606(1)
Appendix: Handling multiple sources of uncertainty
607(4)
Interest rate derivatives: the standard market models
611(24)
Black's model
611(3)
Bond options
614(5)
Interest rate caps and floors
619(6)
European swap options
625(4)
Generalizations
629(1)
Hedging interest rate derivatives
630(5)
Summary
630(1)
Further reading
631(1)
Questions and problems
631(1)
Assignment questions
632(3)
Convexity, timing, and quanto adjustments
635(14)
Convexity adjustments
635(4)
Timing adjustments
639(2)
Quantos
641(8)
Summary
644(1)
Further reading
644(1)
Questions and problems
645(1)
Assignment questions
646(2)
Appendix: Proof of the convexity adjustment formula
648(1)
Interest rate derivatives: models of the short rate
649(30)
Background
649(1)
Equilibrium models
650(4)
No-arbitrage models
654(4)
Options on bonds
658(1)
Volatility structures
659(1)
Interest rate trees
660(2)
A general tree-building procedure
662(10)
Calibration
672(1)
Hedging using a one-factor model
673(6)
Summary
673(1)
Further reading
674(1)
Questions and problems
674(2)
Assignment questions
676(3)
Interest rate derivatives: HJM and LMM
679(18)
The Health, Jarrow, and Morton model
679(3)
The LIBOR market model
682(10)
Mortgage-backed securities
692(5)
Summary
694(1)
Further reading
695(1)
Questions and problems
696(1)
Assignment questions
696(1)
Swaps Revisited
697(16)
Variations on the vanilla deal
697(2)
Compounding swaps
699(1)
Currency swaps
700(1)
More complex swaps
701(3)
Equity swaps
704(1)
Swaps with embedded options
705(3)
Other swaps
708(5)
Summary
709(1)
Further reading
710(1)
Questions and problems
710(1)
Assignment questions
711(2)
Real options
713(16)
Capital investment appraisal
713(1)
Extension of the risk-neutral valuation framework
714(2)
Estimating the market price of risk
716(1)
Application to the valuation of a business
717(1)
Commodity prices
717(5)
Evaluating options in an investment opportunity
722(7)
Summary
727(1)
Further reading
727(1)
Questions and problems
727(1)
Assignment questions
728(1)
Derivatives mishaps and what we can learn from them
729(12)
Lessons for all users of derivatives
729(4)
Lessons for financial institutions
733(4)
Lessons for nonfinancial corporations
737(4)
Summary
738(1)
Further reading
738(3)
Glossary of terms 741(20)
DerivaGem software 761(6)
Major exchanges trading futures and options 767(1)
Table for N(x) when x ≤ 0 768(1)
Table for N(x) when x > 0 769(2)
Author index 771(4)
Subject index 775

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