Title:
Derivatives : an introduction
Personal Author:
Edition:
2nd ed.
Publication Information:
Mason, OH : Thomson/South-Western, 2005
ISBN:
9780324273021
Subject Term:
Available:*
Library | Item Barcode | Call Number | Material Type | Item Category 1 | Status |
---|---|---|---|---|---|
Searching... | 30000003582222 | HG6024.A3 S77 2005 | Open Access Book | Book | Searching... |
On Order
Summary
Summary
Bob Strong's practical, applied approach, and his ability to explain the intuition underlyingthe math, makes this text the first truly accessible, yet comprehensive, derivatives book.
Table of Contents
Chapter 1 Introduction | p. 1 |
Introduction | p. 1 |
Types of Derivatives | p. 3 |
Options | p. 3 |
Futures Contracts | p. 3 |
Swaps | p. 4 |
Product Characteristies | p. 4 |
Participants in the Derivatives World | p. 5 |
Hedging | p. 5 |
Speculation | p. 5 |
Arbitrage | p. 6 |
Uses of Derivatives | p. 7 |
Risk Management | p. 7 |
Income Generation | p. 8 |
Financial Engineering | p. 8 |
Effective Study of Derivatives | p. 9 |
Appendix | p. 11 |
A Review of Statistical Principles Useful in the Study of Derivatives | p. 11 |
Chapter 2 Basic Principles Of Stock Options | p. 15 |
What Options Are and Where They Come From | p. 16 |
Call Options | p. 16 |
Put Options | p. 17 |
Where Options Come From | p. 18 |
Opening and Closing Transactions | p. 18 |
The Role of the Options Clearing Corporation | p. 21 |
Why Options Are a Good Idea | p. 21 |
Portfolio Risk Management | p. 22 |
Risk Transfer | p. 22 |
Financial Leverage | p. 23 |
Income Generation | p. 23 |
Where and How Options Trade | p. 23 |
Exchanges | p. 23 |
Over-the-Counter Options | p. 24 |
Other Listed Options | p. 25 |
Trading Mechanics | p. 26 |
The Option Premium | p. 29 |
Intrinsic Value and Time Value | p. 29 |
Option Price Quotations | p. 29 |
Profits and Losses with Options | p. 31 |
Understanding the Exercise of an Option | p. 31 |
Profit and Loss Diagrams | p. 33 |
Buying a Call Option | p. 33 |
Writing a Call Option | p. 34 |
Buying a Put Option | p. 35 |
Writing a Put Option | p. 36 |
A Note on Margin Requirements | p. 37 |
Chapter 3 Basic Option Strategies: Covered Calls And Protective Puts | p. 41 |
Using Options as a Hedge | p. 41 |
Protective Puts | p. 42 |
Using Calls to Hedge a Short Position | p. 47 |
Writing Covered Calls to Protect Against Market Downturns | p. 50 |
Using Options to Generate Income | p. 52 |
Writing Calls to Generate Income | p. 52 |
Writing Puts to Generate Income | p. 55 |
Profit and Loss Diagrams with Seasoned Stock Positions | p. 58 |
Adding a Put to an Existing Stock Position | p. 58 |
Writing a Call Against an Existing Stock Position | p. 59 |
Improving on the Market | p. 60 |
Writing Calls to Improve on the Market | p. 60 |
Writing Puts to Improve on the Market | p. 61 |
Chapter 4 Option Combinations and Spreads | p. 66 |
Combinations | p. 66 |
Spreads | p. 73 |
Types of Spreads | p. 73 |
Nonstandard Spreads | p. 83 |
Other Strategies | p. 85 |
Margin Considerations | p. 87 |
Evaluating Spreads | p. 90 |
Chapter 5 Option Pricing | p. 97 |
A Brief History of Options Pricing | p. 98 |
The Early Work | p. 98 |
The Middle Years | p. 99 |
The Present | p. 99 |
Arbitrage and Option Pricing | p. 100 |
Free Lunches | p. 100 |
The Theory of Put/Call Parity | p. 101 |
The Binomial Option Pricing Model | p. 107 |
Put Pricing in the Presence of Call Options: Further Study | p. 112 |
Binomial Put Pricing | p. 113 |
Binomial Pricing with Asymmetric Branches | p. 114 |
The Effect of Time | p. 115 |
The Effect of Volatility | p. 116 |
Intuition into Black-Scholes | p. 118 |
Continuous Time and Multiple Periods | p. 118 |
Option Pricing and the Roll of Dice | p. 119 |
Appendix | p. 126 |
Multi-Period Binomial Option Pricing | p. 126 |
Option Pricing with Continuous Compounding | p. 126 |
Risk Neutrality and Implied Branch Probabilities | p. 127 |
Extension of Two Periods | p. 128 |
Recombining Binomial Trees | p. 131 |
Another Example | p. 131 |
Binomial Pricing with Lognormal Returns | p. 132 |
Multiperiod Binomial Put Pricing | p. 134 |
Exploiting Arbitrage | p. 136 |
American vs. European Option Pricing | p. 137 |
Chapter 6 The Black-Scholes Option Pricing Model | p. 139 |
The Black-Scholes Option Pricing Model | p. 140 |
The Model | p. 140 |
Development and Assumptions of the Model | p. 140 |
Determinants of the Option Premium | p. 141 |
Assumptions of the Black-Scholes Model | p. 143 |
Intuition Into the Black-Scholes Model | p. 147 |
Calculating Black-Scholes Prices from Historical Data | p. 149 |
Call Values | p. 149 |
Implied Volatility | p. 153 |
Calculating Implied Volatility | p. 153 |
An Implied Volatility Heuristic | p. 154 |
Historical Versus Implied Volatility | p. 154 |
Pricing in Volatility Units | p. 156 |
Volatility Smiles | p. 158 |
Using Black-Scholes to Solve for the Put Premium | p. 162 |
Problems Using the Black-Scholes Model | p. 162 |
Chapter 7 Option Greeks | p. 167 |
The Principal Option Pricing Derivatives | p. 167 |
Delta | p. 167 |
Measure of Option Sensitivity | p. 168 |
Hedge Ratio | p. 169 |
Likelihood of Becoming in-the-Money | p. 169 |
Theta | p. 170 |
Gamma | p. 171 |
Sign Relationships | p. 172 |
Other Derivatives | p. 173 |
Vega | p. 173 |
Rho | p. 174 |
The Greeks of Vega | p. 175 |
Others | p. 175 |
Position Derivatives | p. 175 |
An Example | p. 175 |
Caveats About Position Derivatives | p. 175 |
Delta Neutrality | p. 176 |
Calculating Delta Hedge Ratios | p. 177 |
Why Delta Neutrality Matters | p. 177 |
Two Markets: Directional and Speed | p. 179 |
Directional Market | p. 179 |
Speed Market | p. 179 |
Combining Directional and Speed Markets | p. 179 |
Dynamic Hedging | p. 180 |
Minimizing the Cost of Delta Adjustments | p. 181 |
Position Risk | p. 182 |
Chapter 8 Fundamentals Of The Futures Market | p. 190 |
The Concept of Futures Contracts | p. 191 |
The Futures Promise | p. 191 |
Why We Have Futures Contracts | p. 194 |
Ensuring the Promise Is Kept | p. 195 |
Market Mechanics | p. 196 |
Types of Orders | p. 196 |
Ambience of the Marketplace | p. 198 |
Creation of a Contract | p. 200 |
Market Participants | p. 201 |
Hedgers | p. 201 |
Processors | p. 202 |
Speculators | p. 204 |
Scalpers | p. 205 |
The Clearing Process | p. 206 |
Matching Trades | p. 206 |
Accounting Supervision | p. 208 |
Intramarket Settlement | p. 211 |
Settlement Prices | p. 212 |
Delivery | p. 212 |
Principles of Futures Contract Pricing | p. 213 |
The Expectations Hypothesis | p. 213 |
Normal Backwardation | p. 214 |
A Full Carrying Charge Market | p. 215 |
Reconciling the Three Theories | p. 217 |
Spreading with Commodity Futures | p. 217 |
Intercommodity Spreads | p. 217 |
Intermarket Spreads | p. 218 |
Intracommodity Spreads | p. 218 |
Why Spread in the First Place? | p. 219 |
Chapter 9 Stock Index Futures | p. 223 |
Stock Indexes and Their Futures Contracts | p. 223 |
Stock Indexes | p. 224 |
Stock Index Futures Contracts | p. 227 |
The SandP 500 Stock Index Futures Contract | p. 227 |
Pricing of Stock Index Futures | p. 228 |
Basis Convergence | p. 232 |
Use of Stock Index Futures | p. 232 |
Speculation | p. 232 |
Spreading | p. 233 |
Arbitrage | p. 233 |
Anticipation of Stock Purchase or Sale | p. 234 |
Hedging | p. 234 |
Hedging with Stock Index Futures | p. 235 |
Systematic and Unsystematic Risk | p. 235 |
The Need to Hedge | p. 236 |
The Hedge Ratio | p. 236 |
Hedging in Retrospect | p. 239 |
Adjusting Market Risk | p. 241 |
Chapter 10 Foreign Exchange Futures | p. 245 |
Foreign Exchange Risk | p. 246 |
FX Risk and Interest Rates | p. 247 |
The Concept of Exposure | p. 248 |
Accounting Exposure | p. 248 |
Economic Exposure | p. 248 |
FX Risk from a Business Perspective | p. 249 |
FX Risk from an Investment Perspective | p. 251 |
Forward Rates | p. 252 |
Purchasing Power Parity | p. 253 |
Interest Rate Parity | p. 254 |
Foreign Currency Futures | p. 256 |
Pricing of Foreign Exchange Futures Contracts | p. 256 |
Dealing with the Risk | p. 258 |
Dealing with the Exposure | p. 258 |
A Business Example | p. 258 |
An Investment Example | p. 260 |
Key Issues in Foreign Exchange Risk Management | p. 261 |
Chapter 11 Fundamentals Of Interest Rate Futures | p. 265 |
Interest Rate Futures | p. 266 |
Treasury Bills, Eurodollars, and Their Futures Contracts | p. 266 |
Characteristics of U.S. Treasury Bills | p. 266 |
The Treasury Bill Futures Contract | p. 268 |
Characteristics of Eurodollars | p. 269 |
The Eurodollar Futures Contract | p. 269 |
Speculating with T-Bill Futures | p. 271 |
Hedging with T-Bill Futures | p. 272 |
Treasury Bonds and Their Futures Contracts | p. 273 |
Characteristics of U.S. Treasury Bonds | p. 273 |
Pricing of Treasury Bonds | p. 274 |
The Treasury Bond Futures Contract | p. 275 |
Dealing with Coupon Differences | p. 275 |
The Matter of Accrued Interest | p. 278 |
Delivery Procedures | p. 279 |
The Invoice Price | p. 280 |
Cheapest to Deliver | p. 281 |
Pricing Interest Rate Futures Contracts | p. 282 |
Arbitrage with T-Bill Futures | p. 285 |
Delivery Options | p. 286 |
Spreading with Interest Rate Futures | p. 287 |
TED Spread | p. 287 |
The NOB Spread | p. 289 |
Other Spreads with Financial Futures | p. 290 |
Chapter 12 Futures Contracts And Portfolio Management | p. 294 |
The Concept of Immunization | p. 295 |
Bond Risks | p. 295 |
Duration Matching | p. 296 |
Bank Immunization | p. 298 |
Duration Shifting | p. 301 |
Hedging with Interest Rate Futures | p. 303 |
Increasing Duration with Futures | p. 304 |
Disadvantages of Immunizing | p. 306 |
Altering Asset Allocation with Futures | p. 308 |
Tactical Changes | p. 308 |
Initial Situation | p. 309 |
Bond Adjustment | p. 310 |
Stock Adjustment | p. 310 |
Neutralizing Cash | p. 311 |
Chapter 13 Swaps And Interest Rate Options | p. 315 |
Interest Rate Swaps | p. 316 |
Immunizing with Interest Rate Swaps | p. 322 |
Exploiting Comparative Advantage in the Credit Market | p. 324 |
Foreign Currency Swaps | p. 325 |
Circus Swap | p. 329 |
Swap Variations | p. 329 |
Interest Rate Options | p. 330 |
Interest Rate Cap | p. 330 |
Interest Rate Floor | p. 332 |
Calculating Cap and Floor Payoffs | p. 333 |
Interest Rate Collar | p. 334 |
Swaption | p. 334 |
Chapter 14 Swap Pricing | p. 340 |
Intuition Into Swap Pricing | p. 340 |
Swaps as a Pair of Bonds | p. 341 |
Swaps as a Series of Forward Contracts | p. 341 |
Swaps as a Pair of Option Contracts | p. 342 |
Solving for the Swap Price | p. 342 |
The Role of the Forward Curve for LIBOR | p. 343 |
Implied Forward Rates | p. 344 |
Initial Condition Pricing | p. 346 |
Quoting the Swap Price | p. 348 |
Counterparty Risk Implications | p. 349 |
Valuing an Off-Market Swap | p. 350 |
Hedging the Swap | p. 351 |
Hedging Against a Parallel Shift in the Yield Curve | p. 352 |
Hedging Against Any Shift in the Yield Curve | p. 353 |
Tailing the Hedge | p. 355 |
Pricing a Currency Swap | p. 356 |
Chapter 15 Other Derivative Assets | p. 361 |
Futures Options | p. 361 |
Characteristics | p. 362 |
Speculating with Futures Options | p. 365 |
Spreading with Futures Options | p. 365 |
Basis Risk with Spreads | p. 365 |
Hedging with Futures Options | p. 366 |
Speculators and Hedging | p. 367 |
Early Exercise of Futures Options | p. 368 |
Pricing Futures Options | p. 368 |
Disposing of Valuable Options | p. 369 |
Futures Option Deltas | p. 370 |
Implied Volatility | p. 370 |
Warrants | p. 370 |
Characteristics | p. 371 |
Pricing | p. 371 |
Hedging with Stock Warrants | p. 373 |
Other Derivative Assets | p. 374 |
Characteristics | p. 375 |
A Note on the Pricing of Foreign Currency Options | p. 375 |
When-Issued Stock | p. 376 |
Common Stock Trading on a When-Issued Basis | p. 377 |
Chapter 16 Financial Engineering And Risk Management | p. 381 |
Financial Engineering | p. 382 |
Engineering an Option | p. 383 |
Gamma Risk | p. 388 |
Risk Management | p. 390 |
Managing Company Risk | p. 391 |
A Case Study | p. 392 |
Managing Market Risk | p. 395 |
Chapter 17 Contemporary Issues | p. 401 |
Long-Term Capital Management | p. 402 |
Value at Risk | p. 403 |
VAR Calculation | p. 405 |
New Product Development | p. 406 |
Weather Derivatives | p. 406 |
Telecom Capacity | p. 409 |
Rental Caps | p. 409 |
Equity Swaps | p. 410 |
Program Trading | p. 411 |
Implementation | p. 412 |
The Open Outcry and Specialist Systems | p. 413 |
FAS 133 | p. 414 |
Requirements | p. 414 |
Criticism | p. 415 |
Implications | p. 416 |
Glossary | p. 419 |
Self Test Answers | p. 435 |
Index | p. 440 |