Options, Futures, and Other Derivatives, Global Edition

John C. Hull

BOOK

Options, Futures, and Other Derivatives, Global Edition

John C. Hull

(2017)

Additional Information

Book Details

ISBN: 978-1-292-21292-0
Edition: 9
Language: English
Pages: 896
Subjects

Abstract

For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets

Practitioners refer to it as “the bible;” in the university and college marketplace it’s the best seller; and now it’s been revised and updated to cover the industry’s hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today’s derivatives markets.

This program provides a better teaching and learning experience—for you and your students. Here’s how:

NEW! Available with a new version of DerivaGem software—including two Excel applications, the Options Calculator and the Applications Builder
Bridges the gap between theory and practice—a best-selling college text, and considered “the bible” by practitioners, it provides the latest information in the industry
Provides the right balance of mathematical sophistication—careful attention to mathematics and notation

Offers outstanding ancillaries to round out the high quality of the teaching and learning package

Section Title	Page	Action	Price
Cover\r	Cover
Title Page	3
Copyright Page	4
Contents in Brief	6
Contents	7
List of Business Snapshots	17
List of Technical Notes	18
Preface	19
Chapter 1.Introduction	23
1.1 Exchange-traded markets	24
1.2 Over-the-counter markets	25
1.3 Forward contracts	28
1.4 Futures contracts	30
1.5 Options	30
1.6 Types of traders	33
1.7 Hedgers	33
1.8 Speculators	36
1.9 Arbitrageurs	38
1.10 Dangers	39
Summary	40
Further reading	41
Practice questions	41
Further questions	43
Chapter 2.Mechanics of futures markets	46
2.1 Background	46
2.2 Specification of a futures contract\r	48
2.3 Convergence of futures price to spot price	50
2.4 The operation of margin accounts	51
2.5 OTC markets	54
2.6 Market quotes	57
2.7 Delivery	60
2.8 Types of traders and types of orders	61
2.9 Regulation	62
2.10 Accounting and tax	63
Summary	66
Further reading	67
Practice questions	67
Further questions	69
Chapter 3.Hedging strategies using futures	71
3.1 Basic principles	71
3.2 Arguments for and against hedging	73
3.3 Basis risk	76
3.4 Cross hedging	80
3.5 Stock index futures	84
3.6 Stack and roll	90
Summary	92
Further reading	92
Practice questions	93
Further questions	95
Appendix: Capital asset pricing model	97
Chapter 4.Interest rates	99
4.1 Types of rates	99
4.2 Measuring interest rates	101
4.3 Zero rates	104
4.4 Bond pricing	104
4.5 Determining Treasury zero rates	106
4.6 Forward rates	108
4.7 Forward rate agreements	110
4.8 Duration	113
4.9 Convexity	117
4.10 Theories of the term structure of interest rates	118
Summary	120
Further reading	121
Practice questions	121
Further questions	124
Chapter 5.Determination of forward and futures prices	126
5.1 Investment assets vs. consumption assets	126
5.2 Short selling	127
5.3 Assumptions and notation	128
5.4 Forward price for an investment asset	129
5.5 Known income	132
5.6 Known yield	134
5.7 Valuing forward contracts	134
5.8 Are forward prices and futures prices equal?	136
5.9 Futures prices of stock indices	137
5.10 Forward and futures contracts on currencies	139
5.11 Futures on commodities	142
5.12 The cost of carry	145
5.13 Delivery options	146
5.14 Futures prices and expected future spot prices	146
Summary	148
Further reading	150
Practice questions	150
Further questions	152
Chapter 6.Interest rate futures	154
6.1 Day count and quotation conventions	154
6.2 Treasury bond futures	157
6.3 Eurodollar futures	162
6.4 Duration-based hedging strategies using futures	167
6.5 Hedging portfolios of assets and liabilities	169
Summary	169
Further reading	170
Practice questions	170
Further questions	172
Chapter 7.Swaps	174
7.1 Mechanics of interest rate swaps	175
7.2 Day count issues	180
7.3 Confirmations\r	181
7.4 The comparative-advantage argument	181
7.5 The nature of swap rates	185
7.6 Determining LIBOR/swap zero rates	186
7.7 Valuation of interest rate swaps	186
7.8 Term structure effects\r	190
7.9 Fixed-for-fixed currency swaps\r	190
7.10 Valuation of fixed-for-fixed currency swaps\r	194
7.11 Other currency swaps	197
7.12 Credit risk	198
7.13 Other types of swaps\r	200
Summary	202
Further reading	203
Practice questions	203
Further questions	205
Chapter 8.Securitization and the credit crisis of 2007	207
8.1 Securitization	207
8.2 The US housing market	211
8.3 What went wrong?	215
8.4 The aftermath	217
Summary	218
Further reading	219
Practice questions	220
Further questions	220
Chapter 9.OIS discounting, credit issues, and funding costs	222
9.1 The risk-free rate	222
9.2 The OIS rate	224
9.3 Valuing swaps and FRAs with OIS discounting	227
9.4 OIS vs. LIBOR: Which is correct?	228
9.5 Credit risk: CVA and DVA	229
9.6 Funding costs	231
Summary	232
Further reading	233
Practice questions	233
Further questions	234
Chapter 10.Mechanics of options markets	235
10.1 Types of options	235
10.2 Option positions	237
10.3 Underlying assets	239
10.4 Specification of stock options\r	240
10.5 Trading	245
10.6 Commissions	245
10.7 Margin requirements	246
10.8 The options clearing corporation	248
10.9 Regulation	249
10.10 Taxation	249
10.11 Warrants, employee stock options, and convertibles	251
10.12 Over-the-counter options markets	251
Summary	252
Further reading	253
Practice questions	253
Further questions	254
Chapter 11.Properties of stock options	256
11.1 Factors affecting option prices\r	256
11.2 Assumptions and notation	260
11.3 Upper and lower bounds for option prices	260
11.4 Put–call parity	263
11.5 Calls on a non-dividend-paying stock	267
11.6 Puts on a non-dividend-paying stock	268
11.7 Effect of dividends\r	271
Summary	272
Further reading	273
Practice questions	273
Further questions	275
Chapter 12.Trading strategies involving options	276
12.1 Principal-protected notes	276
12.2 Trading an option and the underlying asset	278
12.3 Spreads	280
12.4 Combinations	288
12.5 Other payoffs\r	291
Summary	292
Further reading	293
Practice questions	293
Further questions	294
Chapter 13.Binomial trees	296
13.1 A one-step binomial model and a no-arbitrage argument	296
13.2 Risk-neutral valuation	300
13.3 Two-step binomial trees	302
13.4 A put example	305
13.5 American options	306
13.6 Delta	307
13.7 Matching volatility with u and d	308
13.8 The binomial tree formulas	310
13.9 Increasing the number of steps	310
13.10 Using DerivaGem	311
13.11 Options on other assets	312
Summary	315
Further reading	316
Practice questions	317
Further questions	318
Appendix: Derivation of the Black–Scholes–Merton option-pricing formula from a binomial tree	320
Chapter 14.Wiener processes and Itô’s lemma\r	324
14.1 The Markov property	324
14.2 Continuous-time stochastic processes	325
14.3 The process for a stock price	330
14.4 The parameters	333
14.5 Correlated processes	334
14.6 Itô’s lemma\r	335
14.7 The lognormal property	336
Summary	337
Further reading	338
Practice questions	338
Further questions	339
Appendix: Derivation of Itô’s lemma \r	341
Chapter 15.The Black–Scholes–Merton model	343
15.1 Lognormal property of stock prices	344
15.2 The distribution of the rate of return	345
15.3 The expected return	346
15.4 Volatility	347
15.5 The idea underlying the Black–Scholes–Merton differential equation\r	351
15.6 Derivation of the Black–Scholes–Merton differential equation\r	353
15.7 Risk-neutral valuation	356
15.8 Black–Scholes–Merton pricing formulas	357
15.9 Cumulative normal distribution function	360
15.10 Warrants and employee stock options	361
15.11 Implied volatilities	363
15.12 Dividends	365
Summary	368
Further reading	369
Practice questions	370
Further questions	372
Appendix: Proof of Black–Scholes–Merton formula using risk-neutral valuation	374
Chapter 16.Employee stock options	376
16.1 Contractual arrangements	376
16.2 Do options align the interests of shareholders and managers?	378
16.3 Accounting issues	379
16.4 Valuation	380
16.5 Backdating scandals	385
Summary	386
Further reading	387
Practice questions	387
Further questions	388
Chapter 17.Options on stock indices and currencies	389
17.1 Options on stock indices	389
17.2 Currency options	391
17.3 Options on stocks paying known dividend yields	394
17.4 Valuation of European stock index options	396
17.5 Valuation of European currency options	399
17.6 American options	400
Summary	401
Further reading	401
Practice questions	402
Further questions	404
Chapter 18.Futures options	405
18.1 Nature of futures options	405
18.2 Reasons for the popularity of futures options	408
18.3 European spot and futures options	408
18.4 Put–call parity	409
18.5 Bounds for futures options	410
18.6 Valuation of futures options using binomial trees	411
18.7 Drift of a futures price in a risk-neutral world	413
18.8 Black’s model for valuing futures options	414
18.9 American futures options vs. American spot options	416
18.10 Futures-style options	416
Summary	417
Further reading	418
Practice questions	418
Further questions	419
Chapter 19.The Greek letters	421
19.1 Illustration	421
19.2 Naked and covered positions	422
19.3 A stop-loss strategy	422
19.4 Delta hedging	424
19.5 Theta	431
19.6 Gamma	433
19.7 Relationship between delta, theta, and gamma	436
19.8 Vega	437
19.9 Rho	439
19.10 The realities of hedging	440
19.11 Scenario analysis	441
19.12 Extension of formulas	441
19.13 Portfolio insurance	444
19.14 Stock market volatility	446
Summary	446
Further reading	448
Practice questions	448
Further questions	450
Appendix: Taylor series expansions and hedge parameters	452
Chapter 20.Volatility smiles	453
20.1 Why the volatility smile is the same for calls and puts	453
20.2 Foreign currency options	455
20.3 Equity options	458
20.4 Alternative ways of characterizing the volatility smile	459
20.5 The volatility term structure and volatility surfaces	460
20.6 Greek letters	461
20.7 The role of the model	462
20.8 When a single large jump is anticipated	462
Summary	464
Further reading	465
Practice questions	465
Further questions	467
Appendix: Determining implied risk-neutral distributions from volatility smiles	469
Chapter 21.Basic numerical procedures	472
21.1 Binomial trees	472
21.2 Using the binomial tree for options on indices, currencies, and futures contracts	480
21.3 Binomial model for a dividend-paying stock	482
21.4 Alternative procedures for constructing trees	487
21.5 Time-dependent parameters	490
21.6 Monte Carlo simulation	491
21.7 Variance reduction procedures	497
21.8 Finite difference methods\r	500
Summary	510
Further reading	511
Practice questions	512
Further questions	514
Chapter 22.Value at risk	516
22.1 The VaR measure	516
22.2 Historical simulation	519
22.3 Model-building approach	523
22.4 The linear model	526
22.5 The quadratic model	531
22.6 Monte Carlo simulation	533
22.7 Comparison of approaches	534
22.8 Stress testing and back testing	535
22.9 Principal components analysis	535
Summary	539
Further reading	539
Practice questions	540
Further questions	541
Chapter 23.Estimating volatilities and correlations	543
23.1 Estimating volatility	543
23.2 The exponentially weighted moving average model	545
23.3 The GARCH (1,1) model	547
23.4 Choosing between the models	548
23.5 Maximum likelihood methods	549
23.6 Using GARCH (1,1) to forecast future volatility	554
23.7 Correlations	557
23.8 Application of EWMA to four-index example	560
Summary	562
Further reading	562
Practice questions	562
Further questions	564
Chapter 24.Credit risk	566
24.1 Credit ratings	566
24.2 Historical default probabilities	567
24.3 Recovery rates	568
24.4 Estimating default probabilities from bond yield spreads	569
24.5 Comparison of default probability estimates	572
24.6 Using equity prices to estimate default probabilities	575
24.7 Credit risk in derivatives transactions	577
24.8 Default correlation	583
24.9 Credit VaR	586
Summary	589
Further reading	589
Practice questions	590
Further questions	591
Chapter 25.Credit derivatives	593
25.1 Credit default swaps	594
25.2 Valuation of credit default swaps	597
25.3 Credit indices	601
25.4 The use of ?xed coupons	602
25.5 CDS forwards and options	603
25.6 Basket credit default swaps	603
25.7 Total return swaps	603
25.8 Collateralized debt obligations	605
25.9 Role of correlation in a basket CDS and CDO	607
25.10 Valuation of a synthetic CDO	607
25.11 Alternatives to the standard market model	614
Summary	616
Further reading	616
Practice questions	617
Further questions	618
Chapter 26.Exoticoptions	620
26.1 Packages	620
26.2 Perpetual American call and put options	621
26.3 Nonstandard American options	622
26.4 Gap options	623
26.5 Forward start options	624
26.6 Cliquet options	624
26.7 Compound options	624
26.8 Chooser options	625
26.9 Barrier options	626
26.10 Binary options	628
26.11 Lookback options	629
26.12 Shout options	631
26.13 Asian options	631
26.14 Options to exchange one asset for another	633
26.15 Options involving several assets	634
26.16 Volatility and variance swaps	635
26.17 Static options replication	638
Summary	640
Further reading	641
Practice questions	641
Further questions	643
Chapter 27.More on models and numerical procedures\r	646
27.1 Alternatives to Black–Scholes–Merton	647
27.2 Stochastic volatility models	652
27.3 The IVF model	654
27.4 Convertible bonds	655
27.5 Path-dependent derivatives	658
27.6 Barrier options	662
27.7 Options on two correlated assets	665
27.8 Monte Carlo simulation and American options	668
Summary	672
Further reading	673
Practice questions	674
Further questions	675
Chapter 28.Martingales and measures	677
28.1 The market price of risk	678
28.2 Several state variables	681
28.3 Martingales	682
28.4 Alternative choices for the numeraire	683
28.5 Extension to several factors	687
28.6 Black’s model revisited	688
28.7 Option to exchange one asset for another	689
28.8 Change of numeraire	690
Summary	691
Further reading	692
Practice questions	692
Further questions	694
Chapter 29.Interest rate derivatives: The standard market models	695
29.1 Bond options	695
29.2 Interest rate caps and ?oors	700
29.3 European swap options	706
29.4 OIS discounting	710
29.5 Hedging interest rate derivatives	710
Summary	711
Further reading	712
Practice questions	712
Further questions	714
Chapter 30.Convexity, timing, and quanto adjustments	715
30.1 Convexity adjustments	715
30.2 Timing adjustments	719
30.3 Quantos	721
Summary	724
Further reading	724
Practice questions	724
Further questions	726
Appendix: Proof of the convexity adjustment formula	727
Chapter 31.Interest rate derivatives: Models of the short rate	728
31.1 Background	728
31.2 Equilibrium models	729
31.3 No-arbitrage models	736
31.4 Options on bonds	741
31.5 Volatility structures	742
31.6 Interest rate trees\r	743
31.7 A general tree-building procedure	745
31.8 Calibration	754
31.9 Hedging using a one-factor model	756
Summary	757
Further reading	757
Practice questions	758
Further questions	760
Chapter 32.HJM, LMM, and multiple zero curves	762
32.1 The Heath, Jarrow, and Morton model	762
32.2 The LIBOR market model	765
32.3 Handling multiple zero curves	775
32.4 Agency mortgage-backed securities	777
Summary	779
Further reading	780
Practice questions	780
Further questions	781
Chapter 33.Swaps Revisited	782
33.1 Variations on the vanilla deal	782
33.2 Compounding swaps	784
33.3 Currency swaps	785
33.4 More complex swaps	786
33.5 Equity swaps	789
33.6 Swaps with embedded options	791
33.7 Other swaps	793
Summary	794
Further reading	795
Practice questions	795
Further questions	796
Chapter 34.Energy and commodity derivatives	797
34.1 Agricultural commodities	797
34.2 Metals	798
34.3 Energy products	799
34.4 Modeling commodity prices	801
34.5 Weather derivatives	807
34.6 Insurance derivatives	808
34.7 Pricing weather and insurance derivatives	808
34.8 How an energy producer can hedge risks	810
Summary	811
Further reading	811
Practice questions	812
Further questions	813
Chapter 35.Real options	814
35.1 Capital investment appraisal	814
35.2 Extension of the risk-neutral valuation framework	815
35.3 Estimating the market price of risk	817
35.4 Application to the valuation of a business	818
35.5 Evaluating options in an investment opportunity	818
Summary	825
Further reading	825
Practice questions	826
Further questions	826
Chapter 36.Derivatives mishaps and what we can learn from them	828
36.1 Lessons for all users of derivatives	828
36.2 Lessons for financial institutions\r	832
36.3 Lessons for nonfinancial corporations\r	837
Summary	839
Further reading	839
DerivaGem software	862
Major exchanges trading futures and options	867
Tables for N(x)	868
Author index	870
Subject index	874

Options, Futures, and Other Derivatives, Global Edition

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