Futures, Options, and Swaps

by Kolb, Robert W.

• ISBN13: 9780631214991
• ISBN10: 0631214992
• Edition: Disk
• Format: Hardcover
• Copyright: 1999-06-01
• Publisher: John Wiley & Sons Inc

Summary

Futures, Options and Swaps is the American Institute of Management Research's recommended text for students preparing for the Chartered Financial Analyst exam. It is an ideal text for students in finance or economics/finance programs who have completed one semester of investments at either the undergraduate or post-graduate level.

Table of Contents

Preface	xi
1 Introduction	1	(11)
Overview	1	(1)
Financial Derivatives	2	(3)
Applications of Financial Derivatives	5	(2)
The Concept of Arbitrage	7	(1)
Organization of the Text	7	(2)
Questions and Problems	9	(1)
Notes	10	(2)
2 Futures Markets	12	(31)
Overview	12	(1)
Futures Markets	13	(9)
Exchanges and Types of Futures	22	(3)
Purposes of Futures Markets	25	(3)
Regulation of Futures Markets	28	(4)
Taxation of Futures Trading	32	(1)
Brokers, Advisors, and Commodity Fund Managers	33	(1)
The Changing Environment of Futures Markets	34	(2)
Electronic Futures Trading	36	(1)
Market Corners and Squeezes	37	(3)
Conclusion	40	(1)
Questions and Problems	40	(1)
Notes	41	(2)
3 Futures Prices	43	(42)
Overview	43	(1)
Reading Futures Prices	44	(3)
The Basis and Spreads	47	(4)
Models of Futures Prices	51	(19)
Futures Prices and Expectations	70	(2)
Futures Prices and Risk Aversion	72	(6)
Characteristics of Futures Prices	78	(3)
Conclusion	81	(1)
Questions and Problems	82	(2)
Notes	84	(1)
4 Using Futures Markets	85	(27)
Overview	85	(1)
Price Discovery	86	(2)
Speculation	88	(6)
Speculative Profits	94	(4)
Hedging	98	(10)
Conclusion	108	(1)
Questions and Problems	109	(1)
Notes	110	(2)
5 Interest Rate Futures: Introduction	112	(36)
Overview	112	(1)
Interest Rate Futures Contracts	113	(12)
Pricing Interest Rate Futures Contracts	125	(9)
Speculating with Interest Rate Futures	134	(4)
Hedging with Interest Rate Futures	138	(7)
Conclusion	145	(1)
Questions and Problems	145	(2)
Notes	147	(1)
6 Interest Rate Futures: Refinements	148	(50)
Overview	148	(1)
The T-Bond Futures Contract in Detail	149	(10)
Seller's Options in T-Bond Futures	159	(4)
Interest Rate Futures Market Efficiency	163	(6)
Applications: Eurodollar and T-Bill Futures	169	(10)
Hedging with T-Bond Futures	179	(15)
Conclusion	194	(1)
Questions and Problems	194	(2)
Notes	196	(2)
7 Stock Index Futures: Introduction	198	(22)
Overview	198	(1)
The Four Indexes	199	(3)
Stock Index Futures Contracts	202	(2)
Stock Index Futures Prices	204	(3)
Index Arbitrage and Program Trading	207	(5)
Speculating with Stock Index Futures	212	(2)
Risk Management with Stock Index Futures	214	(3)
Conclusion	217	(1)
Questions and Problems	217	(2)
Notes	219	(1)
8 Stock Index Futures: Refinements	220	(31)
Overview	220	(1)
Stock Index Futures Prices	221	(3)
Real-World Program Trading	224	(3)
Hedging with Stock Index Futures	227	(6)
Asset Allocation	233	(2)
Portfolio Insurance	235	(2)
Index Futures and Stock Market Volatility	237	(6)
Index Futures and Stock Market Crashes	243	(4)
Conclusion	247	(1)
Questions and Problems	247	(2)
Notes	249	(2)
9 Foreign Currency Futures	251	(30)
Overview	251	(1)
Price Quotations	252	(1)
Geographical and Cross-Rate Arbitrage	252	(3)
Forward and Futures Market Characteristics	255	(2)
European Monetary Union	257	(1)
Determinants of Foreign Exchange Rates	258	(3)
Forward and Futures Prices for Foreign Exchange	261	(1)
More Futures Price Parity Relationships	262	(6)
Foreign Exchange Forecasting Accuracy	268	(1)
The Efficiency of Foreign Exchange Futures Markets	269	(1)
Speculation in Foreign Exchange Futures	270	(3)
Hedging with Foreign Exchange Futures	273	(3)
Conclusion	276	(1)
Questions and Problems	277	(2)
Notes	279	(2)
10 The Options Market	281	(23)
Overview	281	(1)
An Option Example	282	(1)
Moneyness	282	(1)
American and European Options	283	(1)
Why Trade Options?	283	(1)
The Option Contract	284	(1)
The Options Market	284	(8)
Option Trading Procedures	292	(4)
The Clearinghouse	296	(1)
Margins	296	(2)
Commissions	298	(1)
Taxation	298	(2)
Conclusion	300	(1)
Questions and Problems	300	(3)
Notes	303	(1)
11 Option Payoffs and Option Strategies	304	(48)
Overview	304	(1)
Stocks and Bonds	305	(2)
Option Notation	307	(1)
European and American Option Values at Expiration	308	(1)
Buy or Sell a Call Option	308	(4)
Call Options at Expiration and Arbitrage	312	(1)
Buy or Sell a Put Option	313	(3)
Moneyness	316	(1)
Option Combinations	316	(19)
Combining Options with Bonds and Stocks	335	(11)
Conclusion	346	(1)
Questions and Problems	347	(3)
Notes	350	(2)
12 Bounds on Option Prices	352	(29)
Overview	352	(1)
The Boundary Space for Call and Put Options	353	(2)
Relationships Between Call Option Prices	355	(7)
Relationships Between Put Option Prices	362	(8)
Option Prices and the Interest Rate	370	(2)
Option Prices and Stock Price Movements	372	(3)
Option Prices and the Riskiness of Stocks	375	(2)
Conclusion	377	(1)
Questions and Problems	377	(2)
Notes	379	(2)
13 European Option Pricing	381	(41)
Overview	381	(1)
The Single-Period Binomial Model	382	(3)
The Multi-Period Binomial Model	385	(5)
Stock Price Movements	390	(4)
The Binomial Approach to the Black-Scholes Model	394	(2)
The Black-Scholes Option Pricing Model	396	(3)
Inputs for the Black-Scholes Model	399	(3)
European Options and Dividends	402	(9)
Tests of the Option Pricing Model	411	(2)
Conclusion	413	(1)
Questions and Problems	414	(5)
Notes	419	(3)
14 Option Sensitivities and Option Hedging	422	(37)
Overview	422	(1)
Option Sensitivities in the Merton and Black-Scholes Models	423	(2)
DELTA	425	(5)
THETA	430	(1)
VEGA	431	(1)
RHO	432	(1)
GAMMA	433	(4)
Creating Neutral Portfolios	437	(2)
Option Sensitivities and Option Trading Strategies	439	(11)
Conclusion	450	(1)
Questions and Problems	451	(7)
Note	458	(1)
15 American Option Pricing	459	(27)
Overview	459	(1)
American versus European Options	460	(2)
American versus European Calls	462	(1)
Psuedo-American Call Option Pricing	463	(1)
Exact American Call Option Pricing	464	(4)
Analytical Approximations of American Option Prices	468	(4)
The Binomial Model and American Option Prices	472	(10)
Conclusion	482	(1)
Questions and Problems	483	(2)
Notes	485	(1)
16 Options on Stock Indexes, Foreign Currency, and Futures	486	(23)
Overview	486	(1)
European Option Pricing	487	(6)
Option Sensitivities	493	(1)
Pricing American Options	494	(12)
Conclusion	506	(1)
Questions and Problems	507	(1)
Notes	508	(1)
17 The Options Approach to Corporate Securities	509	(14)
Overview	509	(1)
Equity and a Pure Discount Bond	510	(3)
Senior and Subordinated Debt	513	(2)
Callable Bonds	515	(1)
Convertible Bonds	516	(1)
Warrants	517	(1)
Conclusion	518	(1)
Questions and Problems	519	(3)
Notes	522	(1)
18 Exotic Options	523	(45)
Overview	523	(1)
Assumptions of the Analysis and the Pricing Environment	524	(1)
Forward-Start Options	524	(2)
Compound Options	526	(4)
Chooser Options	530	(4)
Barrier Options	534	(7)
Binary Options	541	(7)
Lookback Options	548	(3)
Average Price Options	551	(3)
Exchange Options	554	(2)
Rainbow Options	556	(8)
Conclusion	564	(1)
Questions and Problems	565	(1)
Notes	566	(2)
19 Interest Rate Options	568	(40)
Overview	568	(1)
Interest Rate Options: Markets and Instruments	569	(4)
The Term Structure of Interest Rates	573	(4)
Stripped Treasury Securities and Forward Rate Agreements (FRAs)	577	(3)
The Option-Adjusted Spread (OAS)	580	(3)
The Black Model	583	(2)
Applications of the Black Model	585	(10)
Forward Put-Call Parity	595	(4)
Caps, Floors, and Collars	599	(5)
Conclusion	604	(1)
Questions and Problems	605	(1)
Notes	606	(2)
20 The Swaps Market: Introduction	608	(40)
Overview	608	(1)
Swaps	609	(1)
The Swaps Market	609	(2)
Plain Vanilla Swaps	611	(6)
Motivations for Swaps	617	(6)
Swap Facilitators	623	(2)
Pricing of Swaps	625	(3)
Swap Portfolios	628	(4)
Beyond Plain Vanilla Swaps	632	(4)
Commodity Swaps	636	(2)
Equity Swaps	638	(1)
Swaptions	639	(4)
Conclusion	643	(1)
Questions and Problems	643	(3)
Notes	646	(2)
21 Swaps: Economic Analysis and Pricing	648	(41)
Overview	648	(1)
The Economic Analysis of Swaps	649	(22)
Interest Rate Swap Pricing	671	(7)
Currency Swap Pricing	678	(4)
Conclusion	682	(1)
Questions and Problems	682	(6)
Notes	688	(1)
22 Swaps: Applications	689	(65)
Overview	689	(1)
The Parallel Loan--How Swaps Began	690	(1)
Creating Synthetic Securities with Swaps	691	(3)
The All-In Cost	694	(3)
B. F. Goodrich--Rabobank Interest Rate Swap	697	(3)
The Duration of Interest Rate Swaps	700	(2)
Interest Rate Immunization with Swaps	702	(6)
Structured Notes	708	(9)
Pricing Flavored Interest Rate and Currency Swaps	717	(12)
Equity Swap Pricing and Applications	729	(5)
Swaption Pricing and Applications	734	(9)
Day Count Conventions	743	(2)
Conclusion	745	(1)
Questions and Problems	746	(7)
Notes	753	(1)
OPTION! Installation and Tutorial	754	(10)
Installation	754	(1)
Tutorial: Introduction	754	(1)
Entering Data and Calculating a Solution	755	(1)
OPTION! Hot Buttons and Menu Commands	756	(3)
Creating Graphs in OPTION!	759	(2)
Moving and Zooming Graphs	761	(1)
Printing Graphs	761	(1)
Saving a Graph to a File	762	(2)
Exercises for OPTION!	764	(15)
Appendix A Summary of Accounting Rules for Derivative Instruments	779	(5)
Appendix B Cumulative Distribution Function for the Standard Normal Random Variable	784	(1)
Answers to Selected End-of-Chapter Problems	785	(8)
Index	793