Rent 9780138874988 | Options, futures, and Other Derivatives

Summary Table of Contents

It deals with a wide range of derivative products, providing complete coverage of key analytical material. Topics include Futures Markets and the Use of Futures for Hedging; Exchange-Traded Options Markets; Properties of Stock Option Prices; Options on Stock Indices, Currencies, and Futures Contracts; Estimating Volatilities and Correlations; Extensions of the Theoretical Framework for Pricing Derivatives; Interest Rate Derivatives; and more.

Preface	p. xvii
Introduction	p. 1
Forward Contracts	p. 1
Futures Contracts	p. 4
Options	p. 5
Other Derivatives	p. 10
Types of Traders	p. 11
Those Big Losses	p. 14
Futures Markets and the Use of Futures for Hedging	p. 19
Trading Futures Contracts	p. 19
Specification of the Futures Cont... MOREract	p. 20
Operation of Margins	p. 23
Newspaper Quotes	p. 27
Convergence of Futures Price to Spot Price	p. 32
Settlement	p. 33
Regulation	p. 34
Hedging Using Futures	p. 35
Optimal Hedge Ratio	p. 39
Rolling the Hedge Forward	p. 40
Accounting and Tax	p. 42
Forward and Futures Prices	p. 50
Some Preliminaries	p. 51
The Forward Price for an Investment Asset	p. 55
The Effect of Known Income	p. 57
The Effect of a Known Dividend Yield	p. 58
Value of a Forward Contract	p. 59
Forward Prices versus Futures Prices	p. 60
Stock Index Futures	p. 62
Foreign Currencies	p. 68
Futures on Commodities	p. 70
The Cost of Carry	p. 73
Delivery Options	p. 73
Futures Prices and the Expected Future Spot Price	p. 74
Assets Providing Dividend Yields	p. 83
Proof That Forward and Futures Prices Are Equal When Interest Rates Are Constant	p. 85
Interest Rates and Duration	p. 87
Types of Rates	p. 87
Zero Rates	p. 88
Bond Pricing	p. 88
Determining Zero Rates	p. 90
Forward Rates	p. 93
Forward-Rate Agreements	p. 95
Theories of the Term Structure	p. 97
Day Count Conventions	p. 98
Quotations	p. 99
Interest Rate Futures	p. 101
Treasury Bond Futures	p. 103
Eurodollar Futures	p. 107
Duration	p. 108
Duration-Based Hedging Strategies	p. 111
Limitations of Duration	p. 112
Swaps	p. 121
Mechanics of Interest Rate Swaps	p. 121
The Comparative Advantage Argument	p. 128
Valuation of Interest Rate Swaps	p. 131
Currency Swaps	p. 135
Valuation of Currency Swaps	p. 139
Other Swaps	p. 141
Credit Risk	p. 143
Construction of Zero-Coupon LIBOR Curve	p. 150
Options Markets	p. 151
Underlying Assets	p. 151
Specification of Stock Options	p. 152
Newspaper Quotes	p. 156
Trading	p. 158
Commissions	p. 159
Margins	p. 160
The Options Clearing Corporation	p. 162
Regulation	p. 163
Taxation	p. 163
Warrants, Executive Stock Options, and Convertibles	p. 165
Properties of Stock Option Prices	p. 168
Factors Affecting Option Prices	p. 168
Assumptions and Notation	p. 170
Upper and Lower Bounds for Option Prices	p. 171
Put--Call Parity	p. 174
Early Exercise: Calls on a Non-Dividend-Paying Stock	p. 175
Early Exercise: Puts on a Non-Dividend-Paying Stock	p. 176
Relationship Between American Put and Call Prices	p. 178
The Effect of Dividends	p. 179
Empirical Research	p. 180
Trading Strategies Involving Options	p. 185
Strategies Involving a Single Option and a Stock	p. 185
Spreads	p. 187
Combinations	p. 194
Other Payoffs	p. 197
Introduction to Binomial Trees	p. 201
A One-Step Binomial Model	p. 201
Risk-Neutral Valuation	p. 205
Two-Step Binomial Trees	p. 206
A Put Option Example	p. 209
American Options	p. 210
Delta	p. 211
Matching Volatility with u and d	p. 213
Binomial Trees in Practice	p. 214
Model of the Behavior of Stock Prices	p. 218
The Markov Property	p. 218
Continuous Time Stochastic Processes	p. 219
The Process for Stock Prices	p. 225
Review of the Model	p. 226
The Parameters	p. 228
Ito's Lemma	p. 229
Derivation of Ito's Lemma	p. 235
The Black--Scholes Model	p. 237
Lognormal Property of Stock Prices	p. 237
The Distribution of the Rate of Return	p. 239
Volatility	p. 241
Concepts Underlying the Black--Scholes--Merton Differential Equation	p. 244
Derivation of the Black--Scholes--Merton Differential Equation	p. 246
Risk-Neutral Valuation	p. 248
Black--Scholes Pricing Formulas	p. 250
Cumulative Normal Distribution Function	p. 252
Warrants Issued by a Company on Its Own Stock	p. 253
Implied Volatilities	p. 255
The Causes of Volatility	p. 255
Dividends	p. 257
Proof of Black--Scholes--Merton Formula	p. 268
Exact Procedure for Calculating Values of American Calls on Dividend-Paying Stocks	p. 271
Calculation of Cumulative Probability in Bivariate Normal Distribution	p. 272
Options on Stock Indices, Currencies, and Futures	p. 273
Results for a Stock Paying a Continuous Dividend Yield	p. 273
Option Pricing Formulas	p. 275
Options on Stock Indices	p. 277
Currency Options	p. 282
Futures Options	p. 285
Valuation of Futures Options Using Binomial Trees	p. 291
A Futures Price as a Stock Paying a Continuous Dividend Yield	p. 293
Black's Model for Valuing Futures Options	p. 294
Comparison of Futures Option and Spot Option Prices	p. 295
Derivation of Differential Equation Satisfied by a Derivative Dependent on a Stock Providing a Continuous Dividend Yield	p. 303
Derivation of Differential Equation Satisfied by a Derivative Dependent on a Futures Price	p. 305
The Greek Letters	p. 307
Example	p. 307
Naked and Covered Positions	p. 308
A Stop-Loss Strategy	p. 308
Delta Hedging	p. 310
Theta	p. 319
Gamma	p. 322
Relationship among Delta, Theta, and Gamma	p. 326
Vega	p. 326
Rho	p. 329
Hedging in Practice	p. 329
Scenario Analysis	p. 330
Portfolio Insurance	p. 331
Stock Market Volatility	p. 334
Taylor Series Expansions and Hedge Parameters	p. 341
Value at Risk	p. 342
Daily Volatilities	p. 342
Calculation of VaR in Simple Situations	p. 343
A Linear Model	p. 345
How Interest Rates Are Handled	p. 346
When the Linear Model Can Be Used	p. 350
A Quadratic Model	p. 352
Monte Carlo Simulation	p. 355
Historical Simulation	p. 356
Stress Testing and Back-Testing	p. 357
Principal Components Analysis	p. 357
Use of the Cornish-Fisher Expansion to Estimate VaR	p. 366
Estimating Volatilities and Correlations	p. 368
Estimating Volatility	p. 368
The Exponentially Weighted Moving Average Model	p. 370
The GARCH (1,1) Model	p. 372
Choosing Between the Models	p. 374
Maximum Likelihood Methods	p. 374
Using GARCH (1,1) to Forecast Future Volatility	p. 379
Correlations	p. 382
Numerical Procedures	p. 388
Binomial Trees	p. 388
Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts	p. 395
Binomial Model for a Dividend-Paying Stock	p. 398
Extensions of the Basic Tree Approach	p. 401
Alternative Procedures for Constructing Trees	p. 403
Monte Carlo Simulation	p. 406
Variance Reduction Procedures	p. 411
Finite Difference Methods	p. 415
Analytic Approximation to American Option Prices	p. 425
Analytic Approximation to American Option Prices	p. 432
Volatility Smiles and Alternatives to Black-Scholes	p. 435
Preliminaries	p. 435
Foreign Currency Options	p. 436
Equity Options	p. 438
The Volatility Term Structure	p. 440
Volatility Matrices	p. 441
Relaxing the Assumptions in Black-Scholes	p. 442
Alternative Models for Stock Options	p. 443
Pricing Models Involving Jumps	p. 445
Stochastic Volatility Models	p. 446
Empirical Research	p. 448
Pricing Formulas for Alternative Models	p. 455
Exotic Options	p. 458
Types of Exotic Options	p. 458
Path-Dependent Derivatives	p. 471
Lookback Options	p. 475
Barrier Options	p. 477
Options on Two Correlated Assets	p. 482
Implied Trees	p. 485
Hedging Issues	p. 487
Static Options Replication	p. 487
Calculation of the First Two Moments of Arithmetic Averages and Baskets	p. 496
Extensions of the Theoretical Framework for Pricing Derivatives: Martingales and Measures	p. 498
The Market Price of Risk	p. 498
Derivitives Dependent on Several State Variables	p. 503
Derivatives Dependent on Commodity Prices	p. 506
Martingales and Measures	p. 507
Alternative Choices for the Numeraire	p. 510
Extension to Multiple Independent Factors	p. 513
Applications	p. 514
Change of Numeraire	p. 517
Quantos	p. 518
Siegel's Paradox	p. 521
Generalization of Ito's Lemma	p. 526
Derivation of the General Differential Equation Satisfied by Derivatives	p. 527
Interest Rate Derivatives: The Standard Market Models	p. 530
Black's Model	p. 531
Bond Options	p. 533
Interest Rate Caps	p. 537
European Swap Options	p. 543
Generalizations	p. 547
Convexity Adjustments	p. 547
Timing Adjustments	p. 552
When Is an Adjustment Necessary?	p. 555
Accrual Swaps	p. 556
Spread Options	p. 557
Hedging Interest Rate Derivatives	p. 557
Proof of the Convexity Adjustment Formula	p. 563
Interest Rate Derivatives: Models of the Short Rate	p. 564
Equilibrium Models	p. 564
One-Factor Equilibrium Model	p. 565
The Rendleman and Bartter Model	p. 566
The Vasicek Model	p. 567
The Cox, Ingersoll, and Ross Model	p. 570
Two-Factor Equilibrium Models	p. 571
No-Arbitrage Models	p. 571
The Ho and Lee Model	p. 572
The Hull and White Model	p. 574
Options on Coupon-Bearing Bonds	p. 577
Interest Rate Trees	p. 578
A General Tree-Building Procedure	p. 580
Nonstationary Models	p. 591
Calibration	p. 593
Hedging Using a One-Factor Model	p. 594
Forward Rates and Futures Rates	p. 595
Interest Rate Derivatives: More Advanced Models	p. 601
Two-Factor Models of the Short Rate	p. 601
The Heath, Jarrow, and Morton Approach	p. 604
The LIBOR Market Model	p. 609
Mortgage-Backed Securities	p. 615
The A(t, T), [sigma][rho] and [thetas](t) Functions in the Two-Factor Hull-White Model	p. 621
Credit Risk	p. 623
The Probability of Default and Expected Losses	p. 624
Adjusting the Prices of Derivatives to Reflect Counterparty Default Risk	p. 632
Credit Value at Risk	p. 641
Credit Derivatives	p. 644
Valuation of Convertible Bonds	p. 646
Manipulation of the Matrices of Credit Rating Changes	p. 654
Glossary of Notation	p. 655
Glossary of Terms	p. 658
DerivaGem Software	p. 672
Major Exchanges Trading Futures and Options	p. 676
Table for N(x) when x [less than or equal] 0	p. 678
Table for N(x) when x [greater than or equal] 0	p. 679
Author Index	p. 680
Subject Index	p. 683
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