Additional Information
Book Details
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
Table of Contents
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 |