Additional Information
Book Details
Abstract
For undergraduate courses in derivatives, options and futures, financial engineering, financial mathematics, and risk management.
A reader-friendly book with an abundance of numerical and real-life examples.
Based on Hull's Options, Futures and Other Derivatives, Fundamentals of Futures and Options Markets presents an accessible and student-friendly overview of the topic without the use of calculus. Packed with numerical examples and accounts of real-life situations, this text effectively guides students through the material while helping them prepare for the working world.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 1 | ||
| Copyright Page | 2 | ||
| Contents in Brief | 4 | ||
| Contents | 5 | ||
| Preface | 13 | ||
| Chapter 1: Introduction | 17 | ||
| 1.1 Futures Contracts | 17 | ||
| 1.2 History of Futures Markets | 18 | ||
| 1.3 The Over-the-Counter Market | 20 | ||
| 1.4 Forward Contracts | 22 | ||
| 1.5 Options | 23 | ||
| 1.6 History of Options Markets | 26 | ||
| 1.7 Types of Trader | 27 | ||
| 1.8 Hedgers | 27 | ||
| 1.9 Speculators | 30 | ||
| 1.10 Arbitrageurs | 33 | ||
| 1.11 Dangers | 34 | ||
| Summary | 34 | ||
| Further Reading | 36 | ||
| Quiz | 36 | ||
| Practice Questions | 36 | ||
| Further Questions | 38 | ||
| Chapter 2: Mechanics of Futures Markets | 40 | ||
| 2.1 Opening and Closing Futures Positions | 40 | ||
| 2.2 Speci?cation of a Futures Contract | 41 | ||
| 2.3 Convergence of Futures Price to Spot Price | 44 | ||
| 2.4 The Operation of Margin Accounts | 45 | ||
| 2.5 OTC Markets | 48 | ||
| 2.6 Market Quotes | 52 | ||
| 2.7 Delivery | 53 | ||
| 2.8 Types of Trader and Types of Order | 54 | ||
| 2.9 Regulation | 55 | ||
| 2.10 Accounting and Tax | 56 | ||
| 2.11 Forward vs. Futures Contracts | 58 | ||
| Summary | 60 | ||
| Further Reading | 61 | ||
| Quiz | 61 | ||
| Practice Questions | 62 | ||
| Further Questions | 63 | ||
| Chapter 3: Hedging Strategies Using Futures | 65 | ||
| 3.1 Basic Principles | 65 | ||
| 3.2 Arguments for and Against Hedging | 68 | ||
| 3.3 Basis Risk | 71 | ||
| 3.4 Cross Hedging | 75 | ||
| 3.5 Stock Index Futures | 79 | ||
| 3.6 Stack and Roll | 85 | ||
| Summary | 86 | ||
| Further Reading | 87 | ||
| Quiz | 88 | ||
| Practice Questions | 89 | ||
| Further Questions | 90 | ||
| Appendix: Review of Key Concepts in Statistics and the CAPM | 92 | ||
| Chapter 4: Interest Rates | 97 | ||
| 4.1 Types of Rates | 97 | ||
| 4.2 Measuring Interest Rates | 99 | ||
| 4.3 Zero Rates | 101 | ||
| 4.4 Bond Pricing | 102 | ||
| 4.5 Determining Treasury Zero Rates | 104 | ||
| 4.6 Forward Rates | 106 | ||
| 4.7 Forward Rate Agreements | 108 | ||
| 4.8 Theories of the Term Structure of Interest Rates | 110 | ||
| Summary | 113 | ||
| Further Reading | 114 | ||
| Quiz | 114 | ||
| Practice Questions | 115 | ||
| Further Questions | 116 | ||
| Appendix: Exponential and Logarithmic Functions | 118 | ||
| Chapter 5: Determination of Forward and Futures Prices | 120 | ||
| 5.1 Investment Assets vs. Consumption Assets | 120 | ||
| 5.2 Short Selling | 121 | ||
| 5.3 Assumptions and Notation | 122 | ||
| 5.4 Forward Price for an Investment Asset | 123 | ||
| 5.5 Known Income | 126 | ||
| 5.6 Known Yield | 128 | ||
| 5.7 Valuing Forward Contracts | 128 | ||
| 5.8 Are Forward Prices and Futures Prices Equal? | 131 | ||
| 5.9 Futures Prices of Stock Indices | 131 | ||
| 5.10 Forward and Futures Contracts on Currencies | 133 | ||
| 5.11 Futures on Commodities | 137 | ||
| 5.12 The Cost of Carry | 140 | ||
| 5.13 Delivery Options | 140 | ||
| 5.14 Futures Prices and the Expected Spot Prices | 141 | ||
| Summary | 143 | ||
| Further Reading | 144 | ||
| Quiz | 145 | ||
| Practice Questions | 145 | ||
| Further Questions | 147 | ||
| Chapter 6: Interest Rate Futures | 149 | ||
| 6.1 Day Count and Quotation Conventions | 149 | ||
| 6.2 Treasury Bond Futures | 152 | ||
| 6.3 Eurodollar Futures | 157 | ||
| 6.4 Duration | 160 | ||
| 6.5 Duration-Based Hedging Strategies Using Futures | 165 | ||
| Summary | 169 | ||
| Further Reading | 170 | ||
| Quiz | 170 | ||
| Practice Questions | 171 | ||
| Further Questions | 172 | ||
| Chapter 7: Swaps | 174 | ||
| 7.1 Mechanics of Interest Rate Swaps | 174 | ||
| 7.2 Day Count Issues | 180 | ||
| 7.3 Confirmations | 181 | ||
| 7.4 The Comparative-Advantage Argument | 181 | ||
| 7.5 The Nature of Swap Rates | 185 | ||
| 7.6 Overnight Indexed Swaps | 185 | ||
| 7.7 Valuation of Interest Rate Swaps | 187 | ||
| 7.8 Estimating the Zero Curve for Discounting | 187 | ||
| 7.9 Forward Rates | 190 | ||
| 7.10 Valuation in Terms of Bonds | 191 | ||
| 7.11 Term Structure E?ects | 194 | ||
| 7.12 Fixed-for-Fixed Currency Swaps | 194 | ||
| 7.13 Valuation of Fixed-for-Fixed Currency Swaps | 198 | ||
| 7.14 Other Currency Swaps | 199 | ||
| 7.15 Credit Risk | 201 | ||
| 7.16 Other Types of Swap | 204 | ||
| Summary | 205 | ||
| Further Reading | 206 | ||
| Quiz | 207 | ||
| Practice Questions | 208 | ||
| Further Questions | 209 | ||
| Chapter 8: Securitization and the Credit Crisis of 2007 | 211 | ||
| 8.1 Securitization | 211 | ||
| 8.2 The U.S. Housing Market | 215 | ||
| 8.3 What Went Wrong? | 219 | ||
| 8.4 The Aftermath | 221 | ||
| Summary | 222 | ||
| Further Reading | 223 | ||
| Quiz | 224 | ||
| Practice Questions | 224 | ||
| Further Questions | 224 | ||
| Chapter 9: Mechanics of Options Markets | 226 | ||
| 9.1 Types of Option | 226 | ||
| 9.2 Option Positions | 229 | ||
| 9.3 Underlying Assets | 231 | ||
| 9.4 Speci?cation of Stock Options | 232 | ||
| 9.5 Trading | 236 | ||
| 9.6 Commissions | 237 | ||
| 9.7 Margin Requirements | 238 | ||
| 9.8 The Options Clearing Corporation | 240 | ||
| 9.9 Regulation | 241 | ||
| 9.10 Taxation | 241 | ||
| 9.11 Warrants, Employee Stock Options, and Convertibles | 242 | ||
| 9.12 Over-the-Counter Options Markets | 243 | ||
| Summary | 244 | ||
| Further Reading | 244 | ||
| Quiz | 245 | ||
| Practice Questions | 245 | ||
| Further Questions | 246 | ||
| Chapter 10: Properties of Stock Options | 248 | ||
| 10.1 Factors Affecting Option Prices | 248 | ||
| 10.2 Assumptions and Notation | 252 | ||
| 10.3 Upper and Lower Bounds for Option Prices | 252 | ||
| 10.4 Put–Call Parity | 256 | ||
| 10.5 Calls on a Non-Dividend-Paying Stock | 260 | ||
| 10.6 Puts on a Non-Dividend-Paying Stock | 261 | ||
| 10.7 Effect of Dividends | 264 | ||
| Summary | 265 | ||
| Further Reading | 266 | ||
| Quiz | 266 | ||
| Practice Questions | 267 | ||
| Further Questions | 268 | ||
| Chapter 11: Trading Strategies Involving Options | 270 | ||
| 11.1 Principal-Protected Notes | 270 | ||
| 11.2 Strategies Involving a Single Option and a Stock | 272 | ||
| 11.3 Spreads | 274 | ||
| 11.4 Combinations | 282 | ||
| 11.5 Other Pay o?s | 285 | ||
| Summary | 285 | ||
| Further Reading | 286 | ||
| Quiz | 286 | ||
| Practice Questions | 287 | ||
| Further Questions | 287 | ||
| Chapter 12: Introduction to Binomial Trees | 289 | ||
| 12.1 A One-Step Binomial Model and a No-Arbitrage Argument | 289 | ||
| 12.2 Risk-Neutral Valuation | 293 | ||
| 12.3 Two-Step Binomial Trees | 295 | ||
| 12.4 A Put Example | 298 | ||
| 12.5 American Options | 299 | ||
| 12.6 Delta | 300 | ||
| 12.7 Determining u and d | 301 | ||
| 12.8 Increasing the Number of Time Steps | 302 | ||
| 12.9 Using DerivaGem | 303 | ||
| 12.10 Options on Other Assets | 303 | ||
| Summary | 308 | ||
| Further Reading | 308 | ||
| Quiz | 308 | ||
| Practice Questions | 309 | ||
| Further Questions | 310 | ||
| Appendix: Derivation of the Black–Scholes–Merton Option Pricing Formula from Binomial Tree | 312 | ||
| Chapter 13: Valuing Stock Options: The Black–Scholes–Merton Model | 314 | ||
| 13.1 AssumptionsaboutHowStockPricesEvolve | 315 | ||
| 13.2 Expected Return | 318 | ||
| 13.3 Volatility | 319 | ||
| 13.4 Estimating Volatility from Historical Data | 320 | ||
| 13.5 Assumptions Underlying Black–Scholes–Merton | 322 | ||
| 13.6 The Key No-Arbitrage Argument | 323 | ||
| 13.7 The Black–Scholes–Merton Pricing Formulas | 325 | ||
| 13.8 Risk-Neutral Valuation | 327 | ||
| 13.9 Implied Volatilities | 328 | ||
| 13.10 Dividends | 330 | ||
| Summary | 332 | ||
| Further Reading | 333 | ||
| Quiz | 334 | ||
| Practice Questions | 334 | ||
| Further Questions | 336 | ||
| Appendix: The Early Exercise of American Call Options on Dividend-Paying Stocks | 337 | ||
| Chapter 14: Employee Stock Options | 339 | ||
| 14.1 Contractual Arrangements | 339 | ||
| 14.2 Do Options Align the Interests of Shareholders and Managers? | 341 | ||
| 14.3 AccountingIssues | 342 | ||
| 14.4 Valuation | 344 | ||
| 14.5 Backdating Scandals | 345 | ||
| Summary | 347 | ||
| Further Reading | 347 | ||
| Quiz | 348 | ||
| Practice Questions | 348 | ||
| Further Questions | 349 | ||
| Chapter 15: Options on Stock Indices and Currencies | 350 | ||
| 15.1 Options on Stock Indices | 350 | ||
| 15.2 Currency Options | 353 | ||
| 15.3 Options on Stocks Paying Known Dividend Yields | 355 | ||
| 15.4 Valuation of European Stock Index Options | 357 | ||
| 15.5 Valuation of European Currency Options | 360 | ||
| 15.6 American Options | 361 | ||
| Summary | 362 | ||
| Further Reading | 363 | ||
| Quiz | 363 | ||
| Practice Questions | 364 | ||
| Further Questions | 365 | ||
| Chapter 16: Futures Options | 366 | ||
| 16.1 Nature of Futures Options | 366 | ||
| 16.2 Reasons for the Popularity of Futures Options | 368 | ||
| 16.3 European Spot and Futures Options | 369 | ||
| 16.4 Put–Call Parity | 369 | ||
| 16.5 Bounds for Futures Options | 371 | ||
| 16.6 Valuation of Futures Options Using Binomial Trees | 371 | ||
| 16.7 A Futures Price as an Asset Providing a Yield | 374 | ||
| 16.8 Black’s Model for Valuing Futures Options | 374 | ||
| 16.9 Using Black’s Model Instead of Black–Scholes–Merton | 374 | ||
| 16.10 American Futures Options vs. American Spot Options | 376 | ||
| 16.11 Futures-Style Options | 376 | ||
| Summary | 377 | ||
| Further Reading | 378 | ||
| Quiz | 378 | ||
| Practice Questions | 378 | ||
| Further Questions | 380 | ||
| Chapter 17: The Greek Letters | 381 | ||
| 17.1 Illustration | 381 | ||
| 17.2 Naked and Covered Positions | 382 | ||
| 17.3 A Stop-Loss Strategy | 382 | ||
| 17.4 Delta Hedging | 384 | ||
| 17.5 Theta | 391 | ||
| 17.6 Gamma | 393 | ||
| 17.7 Relationship Between Delta, Theta, and Gamma | 396 | ||
| 17.8 Vega | 397 | ||
| 17.9 Rho | 399 | ||
| 17.10 The Realities of Hedging | 400 | ||
| 17.11 Scenario Analysis | 400 | ||
| 17.12 Extension of Formulas | 402 | ||
| 17.13 Creating Options Synthetically for Portfolio Insurance | 404 | ||
| 17.14 Stock Market Volatility | 406 | ||
| Summary | 407 | ||
| Further Reading | 408 | ||
| Quiz | 408 | ||
| Practice Questions | 409 | ||
| Further Questions | 411 | ||
| Chapter 18: Binomial Trees in Practice | 412 | ||
| 18.1 The Binomial Model for a Non-Dividend-Paying Stock | 412 | ||
| 18.2 Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts | 419 | ||
| 18.3 The Binomial Model for a Dividend-Paying Stock | 422 | ||
| 18.4 Extensions of the Basic Tree Approach | 426 | ||
| 18.5 Alternative Procedure for Constructing Trees | 428 | ||
| 18.6 Monte Carlo Simulation | 428 | ||
| Summary | 430 | ||
| Further Reading | 431 | ||
| Quiz | 431 | ||
| Practice Questions | 432 | ||
| Further Questions | 433 | ||
| Chapter 19: Volatility Smiles | 434 | ||
| 19.1 Foreign Currency Options | 434 | ||
| 19.2 Equity Options | 437 | ||
| 19.3 The Volatility Term Structure and Volatility Surfaces | 439 | ||
| 19.4 When a Single Large Jump Is Anticipated | 441 | ||
| Summary | 442 | ||
| Further Reading | 443 | ||
| Quiz | 444 | ||
| Practice Questions | 444 | ||
| Further Questions | 445 | ||
| Appendix: Why the Put Volatility Smile is the Same as the Call Volatility Smile | 447 | ||
| Chapter 20: Value at Risk | 449 | ||
| 20.1 The VaR Measure | 449 | ||
| 20.2 Historical Simulation | 452 | ||
| 20.3 Model-Building Approach | 456 | ||
| 20.4 Generalization of Linear Model | 459 | ||
| 20.5 Quadratic Model | 464 | ||
| 20.6 Estimating Volatilities and Correlations | 466 | ||
| 20.7 Comparison of Approaches | 472 | ||
| 20.8 Stress Testing and Back Testing | 472 | ||
| Summary | 473 | ||
| Further Reading | 474 | ||
| Quiz | 475 | ||
| Practice Questions | 475 | ||
| Further Questions | 477 | ||
| Chapter 21: InterestRateOptions | 479 | ||
| 21.1 Exchange-Traded Interest Rate Options | 479 | ||
| 21.2 Embedded Bond Options | 481 | ||
| 21.3 Black’s Model | 481 | ||
| 21.4 European Bond Options | 483 | ||
| 21.5 Interest Rate Caps | 485 | ||
| 21.6 European Swap Options | 491 | ||
| 21.7 Term Structure Models | 494 | ||
| Summary | 495 | ||
| Further Reading | 496 | ||
| Quiz | 496 | ||
| Practice Questions | 497 | ||
| Further Questions | 498 | ||
| Chapter 22: Exotic Options and Other Nonstandard Products | 499 | ||
| 22.1 Exotic Options | 499 | ||
| 22.2 Agency Mortgage-Backed Securities | 506 | ||
| 22.3 Nonstandard Swaps | 507 | ||
| Summary | 514 | ||
| Further Reading | 515 | ||
| Quiz | 515 | ||
| Practice Questions | 516 | ||
| Further Questions | 517 | ||
| Chapter 23: Credit Derivatives | 519 | ||
| 23.1 Credit Default Swaps | 520 | ||
| 23.2 Valuation of Credit Default Swaps | 524 | ||
| 23.3 Total Return Swaps | 528 | ||
| 23.4 CDS Forwards and Options | 530 | ||
| 23.5 Credit Indices | 530 | ||
| 23.6 The Use of Fixed Coupons | 531 | ||
| 23.7 Collateralized Debt Obligations | 532 | ||
| Summary | 535 | ||
| Further Reading | 535 | ||
| Quiz | 536 | ||
| Practice Questions | 536 | ||
| Further Questions | 537 | ||
| Chapter 24: Weather, Energy, and Insurance Derivatives | 538 | ||
| 24.1 Weather Derivatives | 538 | ||
| 24.2 Energy Derivatives | 539 | ||
| 24.3 Insurance Derivatives | 542 | ||
| Summary | 543 | ||
| Further Reading | 544 | ||
| Quiz | 544 | ||
| Practice Questions | 545 | ||
| Further Question | 545 | ||
| Chapter 25: Derivatives Mishaps and What We Can Learn From Them | 546 | ||
| 25.1 Lessons for All Users of Derivatives | 546 | ||
| 25.2 Lessons for Financial Institutions | 550 | ||
| 25.3 Lessons for Non?nancial Corporations | 555 | ||
| Summary | 557 | ||
| Further Reading | 557 | ||
| Answers to Quiz Questions | 558 | ||
| Glossary of Terms | 582 | ||
| Deriva Gem Software | 600 | ||
| Major Exchanges Trading Futures and Options | 605 | ||
| Table for N(x) When x < 0 | 606 | ||
| Table for N(x) When x > 0 | 607 | ||
| Index | 609 |