Fundamentals of Futures and Options Markets

Cover
Title Page
Copyright
Dedication
Contents In Brief
Business Snapshots
Contents
Preface
Chapter 1: Introduction
	1.1 Futures Contracts
	1.2 History of Futures Markets
	1.3 The Over-the-Counter Market
	1.4 Forward Contracts
	1.5 Options
	1.6 History of Options Markets
	1.7 Types of Trader
	1.8 Hedgers
	1.9 Speculators
	1.10 Arbitrageurs
	1.11 Dangers
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 2: Futures Markets and Central Counterparties
	2.1 Opening and Closing Futures Positions
	2.2 Specification of a Futures Contract
	2.3 Convergence of Futures Price to Spot Price
	2.4 The Operation of Margin Accounts
	2.5 OTC Markets
	2.6 Market Quotes
	2.7 Delivery
	2.8 Types of Trader and Types of Order
	2.9 Regulation
	2.10 Accounting and Tax
	2.11 Forward vs. Futures Contracts
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 3: Hedging Strategies Using Futures
	3.1 Basic Principles
	3.2 Arguments for and Against Hedging
	3.3 Basis Risk
	3.4 Cross Hedging
	3.5 Stock Index Futures
	3.6 Stack and Roll
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
		Appendix: Review of Key Concepts in Statistics and the CAPM
Chapter 4: Interest Rates
	4.1 Types of Rates
	4.2 Swap Rates
	4.3 The Risk-Free Rate
	4.4 Measuring Interest Rates
	4.5 Zero Rates
	4.6 Bond Pricing
	4.7 Determining Zero Rates
	4.8 Forward Rates
	4.9 Forward Rate Agreements
	4.10 Theories of the Term Structure of Interest Rates
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
		Appendix: Exponential and Logarithmic Functions
Chapter 5: Determination of Forward and Futures Prices
	5.1 Investment Assets vs. Consumption Assets
	5.2 Short Selling
	5.3 Assumptions and Notation
	5.4 Forward Price for an Investment Asset
	5.5 Known Income
	5.6 Known Yield
	5.7 Valuing Forward Contracts
	5.8 Are Forward Prices and Futures Prices Equal?
	5.9 Futures Prices of Stock Indices
	5.10 Forward and Futures Contracts on Currencies
	5.11 Futures on Commodities
	5.12 The Cost of Carry
	5.13 Delivery Options
	5.14 Futures Prices and Expected Spot Prices
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 6: Interest Rates Futures
	6.1 Day Count and Quotation Conventions
	6.2 Treasury Bond Futures
	6.3 Eurodollar Futures
	6.4 Duration
	6.5 Duration-Based Hedging Strategies Using Futures
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 7: Swaps
	7.1 Mechanics of Interest Rate Swaps
	7.2 Day Count Issues
	7.3 Confirmations
	7.4 The Comparative-Advantage Argument
	7.5 Valuation of Interest Rate Swaps
	7.6 How the Value Changes through Time
	7.7 Fixed-for-Fixed Currency Swaps
	7.8 Valuation of Fixed-for-Fixed Currency Swaps
	7.9 Other Currency Swaps
	7.10 Credit Risk
	7.11 Credit Default Swaps
	7.12 Other Types of Swaps
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 8: Securitization and the Credit Crisis of 2007
	8.1 Securitization
	8.2 The U.S. Housing Market
	8.3 What Went Wrong?
	8.4 The Aftermath
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 9: Mechanics of Options Markets
	9.1 Types of Option
	9.2 Option Positions
	9.3 Underlying Assets
	9.4 Specification of Stock Options
	9.5 Trading
	9.6 Commissions
	9.7 Margin Requirements
	9.8 The Options Clearing Corporation
	9.9 Regulation
	9.10 Taxation
	9.11 Warrants, Employee Stock Options, and Convertibles
	9.12 Over-the-Counter Options Markets
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 10: Properties of Stock Options
	10.1 Factors Affecting Option Prices
	10.2 Assumptions and Notation
	10.3 Upper and Lower Bounds for Option Prices
	10.4 Put–Call Parity
	10.5 Calls on a Non-Dividend-Paying Stock
	10.6 Puts on a Non-Dividend-Paying Stock
	10.7 Effect of Dividends
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 11: Trading Strategies Involving Options
	11.1 Principal-Protected Notes
	11.2 Strategies Involving a Single Option and a Stock
	11.3 Spreads
	11.4 Combinations
	11.5 Other Payoffs
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 12: Introduction to Binomial Trees
	12.1 A One-Step Binomial Model and a No-Arbitrage Argument
	12.2 Risk-Neutral Valuation
	12.3 Two-Step Binomial Trees
	12.4 A Put Example
	12.5 American Options
	12.6 Delta
	12.7 Determining u and d
	12.8 Increasing the Number of Time Steps
	12.9 Using DerivaGem
	12.10 Options on Other Assets
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
		Appendix: Derivation of Black–Scholes–Merton Option Pricing Formula from Binomial Tree
Chapter 13: Valuing Stock Options: The Black–Scholes–Merton Model
	13.1 Assumptions about How Stock Prices Evolve
	13.2 Expected Return
	13.3 Volatility
	13.4 Estimating Volatility from Historical Data
	13.5 Assumptions Underlying Black–Scholes–Merton
	13.6 The Key No-Arbitrage Argument
	13.7 The Black–Scholes–Merton Pricing Formulas
	13.8 Risk-Neutral Valuation
	13.9 Implied Volatilities
	13.10 Dividends
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
		Appendix: The Early Exercise of American Call Options on Dividend-Paying Stocks
Chapter 14: Employee Stock Options
	14.1 Contractual Arrangements
	14.2 Do Options Align the Interests of Shareholders and Managers?
	14.3 Accounting Issues
	14.4 Valuation
	14.5 Backdating Scandals
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 15: Options on Stock Indices and Currencies
	15.1 Options on Stock Indices
	15.2 Currency Options
	15.3 Options on Stocks Paying Known Dividend Yields
	15.4 Valuation of European Stock Index Options
	15.5 Valuation of European Currency Options
	15.6 American Options
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 16: Futures Options and Black’s Model
	16.1 Nature of Futures Options
	16.2 Reasons for the Popularity of Futures Options
	16.3 European Spot and Futures Options
	16.4 Put–Call Parity
	16.5 Bounds for Futures Options
	16.6 A Futures Price as an Asset Providing a Yield
	16.7 Black’s Model for Valuing Futures Options
	16.8 Using Black’s Model Instead of Black–Scholes–Merton
	16.9 Valuation of Futures Options Using Binomial Trees
	16.10 American Futures Options vs. American Spot Options
	16.11 Futures-Style Options
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 17: The Greek Letters
	17.1 Illustration
	17.2 Naked and Covered Positions
	17.3 Greek Letter Calculation
	17.4 Delta
	17.5 Theta
	17.6 Gamma
	17.7 Relationship Between Delta, Theta, and Gamma
	17.8 Vega
	17.9 Rho
	17.10 The Realities of Hedging
	17.11 Scenario Analysis
	17.12 Extension of Formulas
	17.13 Creating Options Synthetically for Portfolio Insurance
	17.14 Stock Market Volatility
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 18: Binomial Trees in Practice
	18.1 The Binomial Model for a Non-Dividend-Paying Stock
	18.2 Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts
	18.3 The Binomial Model for a Dividend-Paying Stock
	18.4 Extensions of the Basic Tree Approach
	18.5 Alternative Procedure for Constructing Trees
	18.6 Monte Carlo Simulation
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 19: Volatility Smiles
	19.1 Foreign Currency Options
	19.2 Equity Options
	19.3 The Volatility Term Structure and Volatility Surfaces
	19.4 When a Single Large Jump Is Anticipated
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
		Appendix: Why the Put Volatility Smile Is the Same As the Call Volatility Smile
Chapter 20: Value at Risk and Expected Shortfall
	20.1 The VaR and ES Measures
	20.2 Historical Simulation
	20.3 Model-Building Approach
	20.4 Generalization of Linear Model
	20.5 Quadratic Model
	20.6 Estimating Volatilities and Correlations
	20.7 Comparison of Approaches
	20.8 Back Testing
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 21: Interest Rate Options
	21.1 Exchange-Traded Interest Rate Options
	21.2 Embedded Bond Options
	21.3 Black’s Model
	21.4 European Bond Options
	21.5 Interest Rate Caps
	21.6 European Swap Options
	21.7 Term Structure Models
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 22: Exotic Options and Other Nonstandard Products
	22.1 Exotic Options
	22.2 Agency Mortgage-Backed Securities
	22.3 Nonstandard Swaps
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 23: Credit Derivatives
	23.1 Credit Default Swaps
	23.2 Valuation of Credit Default Swaps
	23.3 Total Return Swaps
	23.4 CDS Forwards and Options
	23.5 Credit Indices
	23.6 The Use of Fixed Coupons
	23.7 Collateralized Debt Obligations
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Questions
Chapter 24: Weather, Energy, and Insurance Derivatives
	24.1 Weather Derivatives
	24.2 Energy Derivatives
	24.3 Insurance Derivatives
		Summary
		Further Reading
		Quiz
		Practice Questions
		Further Question
Chapter 25: Derivatives Mishaps and What We Can Learn from Them
	25.1 Lessons for All Users of Derivatives
	25.2 Lessons for Financial Institutions
	25.3 Lessons for Nonfinancial Corporations
		Summary
		Further Reading
Answers to Quiz Questions
Glossary of Terms
DerivaGem Software
Major Exchanges Trading Futures and Options
Table for N(x) When x ≤ 0
Table for N(x) When x ≥ 0
Index