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Options, Futures and Other Derivatives,9780130224446
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Options, Futures and Other Derivatives

by
Edition:
4th
ISBN13:

9780130224446

ISBN10:
0130224448
Format:
Hardcover
Pub. Date:
7/1/1999
Publisher(s):
Prentice Hall

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Summary

For undergraduate and graduate courses in Options and Futures, Financial Engineering and Risk Management, typically found in business, finance, economics and mathematics departments. Also suitable for practitioners who want to acquire a working knowledge of how derivatives can be analyzed. This best seller represents how academia and real-world practice have come together with a common respect and focus of theory and practice. It provides a unifying approach to the valuation of all derivativesnot just futures and options. It assumes that the reader has taken an introductory course in finance and an introductory course in probability and statistics. No prior knowledge of options, futures contracts, swaps, and so on is assumed.

Table of Contents

Preface xvii
CHAPTER 1. Introduction
1(18)
1.1 Forward Contracts
1(3)
1.2 Futures Contracts
4(1)
1.3 Options
5(5)
1.4 Other Derivatives
10(1)
1.5 Types of Traders
11(3)
1.6 Those Big Losses
14(1)
Summary
15(1)
Questions and Problems
16(2)
Assignment Questions
18(1)
CHAPTER 2. Futures Markets and the Use of Futures for Hedging
19(31)
2.1 Trading Futures Contracts
19(1)
2.2 Specification of the Futures Contract
20(3)
2.3 Operation of Margins
23(4)
2.4 Newspaper Quotes
27(5)
2.5 Convergence of Futures Price to Spot Price
32(1)
2.6 Settlement
33(1)
2.7 Regulation
34(1)
2.8 Hedging Using Futures
35(4)
2.9 Optimal Hedge Ratio
39(1)
2.10 Rolling the Hedge Forward
40(2)
2.11 Accounting and Tax
42(2)
Summary
44(1)
Suggestions for Further Reading
45(1)
Questions and Problems
46(2)
Assignment Questions
48(2)
CHAPTER 3. Forward and Futures Prices
50(37)
3.1 Some Preliminaries
51(4)
3.2 The Forward Price for an Investment Asset
55(2)
3.3 The Effect of Known Income
57(1)
3.4 The Effect of a Known Dividend Yield
58(1)
3.5 Value of a Forward Contract
59(1)
3.6 Forward Prices versus Futures Prices
60(2)
3.7 Stock Index Futures
62(6)
3.8 Foreign Currencies
68(2)
3.9 Futures on Commodities
70(3)
3.10 The Cost of Carry
73(1)
3.11 Delivery Options
73(1)
3.12 Futures Prices and the Expected Future Spot Price
74(2)
Summary
76(1)
Suggestions for Further Reading
77(2)
Questions and Problems
79(2)
Assignment Questions
81(2)
Appendix 3A: Assets Providing Dividend Yields
83(2)
Appendix 3B: Proof That Forward and Futures Prices Are Equal When Interest Rates Are Constant
85(2)
CHAPTER 4. Interest Rates and Duration
87(34)
4.1 Types of Rates
87(1)
4.2 Zero Rates
88(1)
4.3 Bond Pricing
88(2)
4.4 Determining Zero Rates
90(3)
4.5 Forward Rates
93(2)
4.6 Forward-Rate Agreements
95(2)
4.7 Theories of the Term Structure
97(1)
4.8 Day Count Conventions
98(1)
4.9 Quotations
99(2)
4.10 Interest Rate Futures
101(2)
4.11 Treasury Bond Futures
103(4)
4.12 Eurodollar Futures
107(1)
4.13 Duration
108(3)
4.14 Duration-Based Hedging Strategies
111(1)
4.15 Limitations of Duration
112(2)
Summary
114(1)
Suggestions for Further Reading
115(1)
Questions and Problems
116(3)
Assignment Questions
119(2)
CHAPTER 5. Swaps
121(30)
5.1 Mechanics of Interest Rate Swaps
121(7)
5.2 The Comparative Advantage Argument
128(3)
5.3 Valuation of Interest Rate Swaps
131(4)
5.4 Currency Swaps
135(4)
5.5 Valuation of Currency Swaps
139(2)
5.6 Other Swaps
141(2)
5.7 Credit Risk
143(1)
Summary
144(1)
Suggestions for Further Reading
145(1)
Questions and Problems
146(2)
Assignment Questions
148(2)
Appendix 5A: Construction of Zero-Coupon LIBOR Curve
150(1)
CHAPTER 6. Options Markets
151(17)
6.1 Underlying Assets
151(1)
6.2 Specification of Stock Options
152(4)
6.3 Newspaper Quotes
156(2)
6.4 Trading
158(1)
6.5 Commissions
159(1)
6.6 Margins
160(2)
6.7 The Options Clearing Corporation
162(1)
6.8 Regulation
163(1)
6.9 Taxation
163(2)
6.10 Warrants, Executive Stock Options, and Convertibles
165(1)
Summary
166(1)
Suggestions for Further Reading
166(1)
Questions and Problems
167(1)
Assignment Questions
167(1)
CHAPTER 7. Properties of Stock Option Prices
168(17)
7.1 Factors Affecting Option Prices
168(2)
7.2 Assumptions and Notation
170(1)
7.3 Upper and Lower Bounds for Option Prices
171(3)
7.4 Put-Call Parity
174(1)
7.5 Early Exercise: Calls on a Non-Dividend-Paying Stock
175(1)
7.6 Early Exercise: Puts on a Non-Dividend-Paying Stock
176(2)
7.7 Relationship Between American Put and Call Prices
178(1)
7.8 The Effect of Dividends
179(1)
7.9 Empirical Research
180(1)
Summary
181(1)
Suggestions for Further Reading
182(1)
Questions and Problems
183(1)
Assignment Questions
184(1)
CHAPTER 8. Trading Strategies Involving Options
185(16)
8.1 Strategies Involving a Single Option and a Stock
185(2)
8.2 Spreads
187(7)
8.3 Combinations
194(3)
8.4 Other Payoffs
197(1)
Summary
197(1)
Suggestions for Further Reading
198(1)
Questions and Problems
198(1)
Assignment Questions
199(2)
CHAPTER 9. Introduction to Binomial Trees
201(17)
9.1 A One-Step Binomial Model
201(4)
9.2 Risk-Neutral Valuation
205(1)
9.3 Two-Step Binomial Trees
206(3)
9.4 A Put Option Example
209(1)
9.5 American Options
210(1)
9.6 Delta
211(2)
9.7 Matching Volatility with u and d
213(1)
9.8 Binomial Trees in Practice
214(1)
Summary
215(1)
Suggestions for Further Reading
216(1)
Questions and Problems
216(1)
Assignment Questions
217(1)
CHAPTER 10. Model of the Behavior of Stock Prices
218(19)
10.1 The Markov Property
218(1)
10.2 Continuous Time Stochastic Processes
219(6)
10.3 The Process for Stock Prices
225(1)
10.4 Review of the Model
226(2)
10.5 The Parameters
228(1)
10.6 Ito's Lemma
229(2)
Summary
231(1)
Suggestions for Further Reading
232(1)
Questions and Problems
232(2)
Assignment Questions
234(1)
Appendix 10A: Derivation of Ito's Lemma
235(2)
CHAPTER 11. The Black-Scholes Model
237(36)
11.1 Lognormal Property of Stock Prices
237(2)
11.2 The Distribution of the Rate of Return
239(2)
11.3 Volatility
241(3)
11.4 Concepts Underlying the Black-Scholes-Merton Differential Equation
244(2)
11.5 Derivation of the Black-Scholes-Merton Differential Equation
246(2)
11.6 Risk-Neutral Valuation
248(2)
11.7 Black-Scholes Pricing Formulas
250(2)
11.8 Cumulative Normal Distribution Function
252(1)
11.9 Warrants Issued by a Company on Its Own Stock
253(2)
11.10 Implied Volatilities
255(1)
11.11 The Causes of Volatility
255(2)
11.12 Dividends
257(5)
Summary
262(1)
Suggestions for Further Reading
263(1)
Questions and Problems
264(2)
Assignment Questions
266(2)
Appendix 11A: Proof of Black-Scholes-Merton Formula
268(3)
Appendix 11B: Exact Procedure for Calculating Values of American Calls on Dividend-Paying Stocks
271(1)
Appendix 11C: Calculation of Cumulative Probability in Bivariate Normal Distribution
272(1)
CHAPTER 12. Options on Stock Indices, Currencies, and Futures
273(34)
12.1 Results for a Stock Paying a Continuous Dividend Yield
273(2)
12.2 Option Pricing Formulas
275(2)
12.3 Options on Stock Indices
277(5)
12.4 Currency Options
282(3)
12.5 Futures Options
285(6)
12.6 Valuation of Futures Options Using Binomial Trees
291(2)
12.7 A Futures Price as a Stock Paying a Continuous Dividend Yield
293(1)
12.8 Black's Model for Valuing Futures Options
294(1)
12.9 Comparison of Futures Option and Spot Option Prices
295(1)
Summary
296(1)
Suggestions for Further Reading
297(1)
Questions and Problems
298(4)
Assignment Questions
302(1)
Appendix 12A: Derivation of Differential Equation Satisfied by a Derivative Dependent on a Stock Providing a Continuous Dividend Yield
303(2)
Appendix 12B: Derivation of Differential Equation Satisfied by a Derivative Dependent on a Futures Price
305(2)
CHAPTER 13. The Greek Letters
307(35)
13.1 Example
307(1)
13.2 Naked and Covered Positions
308(1)
13.3 A Stop-Loss Strategy
308(2)
13.4 Delta Hedging
310(9)
13.5 Theta
319(3)
13.6 Gamma
322(4)
13.7 Relationship among Delta, Theta, and Gamma
326(1)
13.8 Vega
326(3)
13.9 Rho
329(1)
13.10 Hedging in Practice
329(1)
13.11 Scenario Analysis
330(1)
13.12 Portfolio Insurance
331(3)
13.13 Stock Market Volatility
334(1)
Summary
335(1)
Suggestions for Further Reading
336(1)
Questions and Problems
337(2)
Assignment Questions
339(2)
Appendix 13A: Taylor Series Expansions and Hedge Parameters
341(1)
CHAPTER 14. Value at Risk
342(26)
14.1 Daily Volatilities
342(1)
14.2 Calculation of VaR in Simple Situations
343(2)
14.3 A Linear Model
345(1)
14.4 How Interest Rates Are Handled
346(4)
14.5 When the Linear Model Can Be Used
350(2)
14.6 A Quadratic Model
352(1)
14.7 Monte Carlo Simulation
355(1)
14.8 Historical Simulation
356(1)
14.9 Stress Testing and Back-Testing
357(1)
14.10 Principal Components Analysis
357(4)
Summary
361(1)
Suggestions for Further Reading
362(1)
Questions and Problems
362(2)
Assignment Questions
364(2)
Appendix 14A: Use of the Cornish-Fisher Expansion to Estimate VaR
366(2)
CHAPTER 15. Estimating Volatilities and Correlations
368(20)
15.1 Estimating Volatility
368(2)
15.2 The Exponentially Weighted Moving Average Model
370(2)
15.3 The GARCH (1,1) Model
372(2)
15.4 Choosing Between the Models
374(1)
15.5 Maximum Likelihood Methods
374(5)
15.6 Using GARCH (1,1) to Forecast Future Volatility
379(3)
15.7 Correlations
382(2)
Summary
384(1)
Suggestions for Further Reading
385(1)
Questions and Problems
386(1)
Assignment Questions
387(1)
CHAPTER 16. Numerical Procedures
388(47)
16.1 Binomial Trees
388(7)
16.2 Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts
395(3)
16.3 Binomial Model for a Dividend-Paying Stock
398(3)
16.4 Extensions of the Basic Tree Approach
401(2)
16.5 Alternative Procedures for Constructing Trees
403(3)
16.6 Monte Carlo Simulation
406(5)
16.7 Variance Reduction Procedures
411(4)
16.8 Finite Difference Methods
415(10)
16.9 Analytic Approximation to American Option Prices
425(1)
Summary
425(1)
Suggestions for Further Reading
426(2)
Questions and Problems
428(3)
Assignment Questions
431(1)
Appendix 16A: Analytic Approximation to American Option Prices
432(3)
CHAPTER 17. Volatility Smiles and Alternatives to Black-Scholes
435(23)
17.1 Preliminaries
435(1)
17.2 Foreign Currency Options
436(2)
17.3 Equity Options
438(2)
17.4 The Volatility Term Structure
440(1)
17.5 Volatility Matrices
441(1)
17.6 Relaxing the Assumptions in Black-Scholes
442(1)
17.7 Alternative Models for Stock Options
443(2)
17.8 Pricing Models Involving Jumps
445(1)
17.9 Stochastic Volatility Models
446(2)
17.10 Empirical Research
448(2)
Summary
450(1)
Suggestions for Further Reading
450(3)
Questions and Problems
453(1)
Assignment Questions
454(1)
Appendix 17A: Pricing Formulas for Alternative Models
455(3)
CHAPTER 18. Exotic Options
458(40)
18.1 Types of Exotic Options
458(13)
18.2 Path-Dependent Derivatives
471(4)
18.3 Lookback Options
475(2)
18.4 Barrier Options
477(5)
18.5 Options on Two Correlated Assets
482(3)
18.6 Implied Trees
485(2)
18.7 Hedging Issues
487(1)
18.8 Static Options Replication
487(2)
Summary
489(2)
Suggestions for Further Reading
491(1)
Questions and Problems
492(2)
Assignment Questions
494(2)
Appendix 18A: Calculation of the First Two Moments of Arithmetic Averages and Baskets
496(2)
CHAPTER 19. Extensions of the Theoretical Framework for Pricing Derivatives: Martingales and Measures
498(32)
19.1 The Market Price of Risk
498(5)
19.2 Derivitives Dependent on Several State Variables
503(3)
19.3 Derivatives Dependent on Commodity Prices
506(1)
19.4 Martingales and Measures
507(3)
19.5 Alternative Choices for the Numeraire
510(3)
19.6 Extension to Multiple Independent Factors
513(1)
19.7 Applications
514(3)
19.8 Change of Numeraire
517(1)
19.9 Quantos
518(3)
19.10 Siegel's Paradox
521(1)
Summary
521(1)
Suggestions for Further Reading
522(1)
Questions and Problems
523(2)
Assignment Questions
525(1)
Appendix 19A: Generalization of Ito's Lemma
526(1)
Appendix 19B: Derivation of the General Differential Equation Satisfied by Derivatives
527(3)
CHAPTER 20. Interest Rate Derivatives: The Standard Market Models
530(34)
20.1 Black's Model
531(2)
20.2 Bond Options
533(4)
20.3 Interest Rate Caps
537(6)
20.4 European Swap Options
543(4)
20.5 Generalizations
547(1)
20.6 Convexity Adjustments
547(5)
20.7 Timing Adjustments
552(3)
20.8 When Is an Adjustment Necessary?
555(1)
20.9 Accrual Swaps
556(1)
20.10 Spread Options
557(1)
20.11 Hedging Interest Rate Derivatives
557(1)
Summary
558(1)
Suggestions for Further Reading
559(1)
Questions and Problems
559(2)
Assignment Questions
561(2)
Appendix 20A: Proof of the Convexity Adjustment Formula
563(1)
CHAPTER 21. Interest Rate Derivatives: Models of the Short Rate
564(37)
21.1 Equilibrium Models
564(1)
21.2 One-Factor Equilibrium Models
565(1)
21.3 The Rendleman and Bartter Model
566(1)
21.4 The Vasicek Model
567(3)
21.5 The Cox, Ingersoll, and Ross Model
570(1)
21.6 Two-Factor Equilibrium Models
571(1)
21.7 No-Arbitrage Models
571(1)
21.8 The Ho and Lee Model
572(2)
21.9 The Hull and White Model
574(3)
21.10 Options on Coupon-Bearing Bonds
577(1)
21.11 Interest Rate Trees
578(2)
21.12 A General Tree-Building Procedure
580(11)
21.13 Nonstationary Models
591(2)
21.14 Calibration
593(1)
21.15 Hedging Using a One-Factor Model
594(1)
21.16 Forward Rates and Futures Rates
595(1)
Summary
596(1)
Suggestions for Further Reading
596(2)
Questions and Problems
598(1)
Assignment Questions
599(2)
CHAPTER 22. Interest Rate Derivatives: More Advanced Models
601(22)
22.1 Two-Factor Models of the Short Rate
601(3)
22.2 The Heath, Jarrow, and Morton Approach
604(5)
22.3 The LIBOR Market Model
609(6)
22.4 Mortgage-Backed Securities
615(3)
Summary
618(1)
Suggestions for Further Reading
618(2)
Questions and Problems
620(1)
Assignment Questions
620(1)
Appendix 22A: The A(t, T), Sigma(p), and Theta(t) Functions in the Two-Factor Hull-White Model
621(2)
CHAPTER 23. Credit Risk
623(32)
23.1 The Probability of Default and Expected Losses
624(8)
23.2 Adjusting the Prices of Derivatives to Reflect Counterparty Default Risk
632(9)
23.3 Credit Value at Risk
641(3)
23.4 Credit Derivatives
644(2)
23.5 Valuation of Convertible Bonds
646(2)
Summary
648(1)
Suggestions for Further Reading
649(1)
Questions and Problems
650(2)
Assignment Questions
652(2)
Appendix 23A: Manipulation of the Matrices of Credit Rating Changes
654(1)
Glossary of Notation 655(3)
Glossary of Terms 658(14)
DerivaGem Software 672(4)
Major Exchanges Trading Futures and Options 676(2)
Table for N(x) when x is less than or equal to 0
678(1)
Table for N(x) when x is greater than or equal to 0
679(1)
Author Index 680(3)
Subject Index 683


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