Futures And Options : Concepts And Applications

Half Title
Other Titles By The Author
Title Page
Copyright
Dedication
Foreword
Preface
Acknowledgments
Contents
Chapter 1: Introduction to Futures
	1.1 Introduction
	1.2 Cash/Spot versus Forward Contracts
	1.3 Options
	1.4 Swaps
	1.5 Forward Contracts versus Futures Contracts
	1.6 Standardization and the Role of the Exchange
	1.7 The Clearinghouse
	1.8 Margins and Marking to Market
	1.9 Arbitrage
	1.10 Spot-Futures Convergence at Expiration
	1.11 Delivery
	1.12 Trading Volume versus Open Interest
	1.13 Conversion Factors When There Are Multiple Deliverable Grades
	1.14 Profit Profiles
	1.15 Types of Assets Underlying Futures Contracts
	1.16 Futures Exchanges
	1.17 Hedgers and Speculators
	1.18 Leverage
	1.19 The Role of Futures and Options Markets
	1.20 Reasons for the Rapid Growth of Derivative Markets
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 2: Valuation of Futures Contracts
	2.1 Introduction
	2.2 Notation
	2.3 Assumptions
	2.4 Forward Contracts on a Security that Provides No Income
	2.5 Repos and Reverse Repos
	2.6 Short Selling
	2.7 The Value of a Forward Contract
	2.8 Forward Contracts on Assets that Provide a Known Cash Income
	2.9 Forward Contracts on Assets that Provide a Known Dividend Yield
	2.10 Forward Contracts on Commodities
	2.11 Investment Assets
	2.12 Consumption Assets
	2.13 Calendar Spreads and Arbitrage
	2.14 Net Carry
	2.15 Backwardation and Contango
	2.16 Delivery Options
	2.17 Imperfect Markets
	2.18 Synthetic Securities
	2.19 Forward Prices versus Futures Prices
	2.20 Stochastic Interest Rates
	2.21 Quasi-Arbitrage
	2.22 Risk and Futures Prices
	2.23 Risks Inherent in Arbitrage
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 3: Hedging and Speculation
	3.1 Introduction
	3.2 A Selling Hedge
	3.3 A Buying Hedge
	3.4 Options and Hedging
	3.5 Futures or Options
	3.6 Ex-post Regret
	3.7 Cash versus Delivery Settlement
	3.8 A Perfect Hedge
	3.9 Basis Risk
	3.10 Selecting a Futures Contract
	3.11 A Rolling Hedge
	3.12 The Hedge Ratio
	3.13 Estimating the Hedge Ratio
	3.14 Tailing a Hedge
	3.15 Hedging Processing Margins
	3.16 Speculation
	3.17 Speculation and Futures
	3.18 Speculation and Options
	3.19 Interchangeable?
	3.20 Developing Derivative Exchanges: Key Issues
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 4: Orders and Exchanges
	4.1 Introduction
	4.2 Market Orders and Limit Orders
	4.3 Marketable Limit Orders
	4.4 Trade Pricing Rules
	4.5 Stop-Loss and Stop-Limit Orders
	4.6 Equivalence with Options
	4.7 Validity Conditions
	4.8 Open-Outcry Trading Systems
	4.9 Merits and Demerits of the Trading Systems
	References
	Concept Check
	Questions and Problems
Chapter 5: Money Market Futures
	5.1 Introduction
	5.2 Eurodollars
	5.3 T-bills
	5.4 Federal Funds
	5.5 Eurodollar Futures
	5.6 Calculating Profits and Losses on ED Futures
	5.7 Bundles and Packs
	5.8 Locking in a Borrowing Rate
	5.9 Cash and Carry Arbitrage
	5.10 Reverse Cash and Carry Arbitrage
	5.11 The No-Arbitrage Pricing Equation
	5.12 Hedging Rates for Periods Not Equal to 90 Days
	5.13 Creating a Fixed Rate Loan
	5.14 LIBOR Futures
	5.15 Euroyen Futures
	5.16 T-bill Futures
	5.17 The TED Spread
	5.18 Fed Funds Futures
	Suggestions for Further Reading
	Web Sites
	Concept Check
	Questions and Problems
	Appendix-V
Chapter 6: Bond Market Futures
	6.1 Introduction
	6.2 Fundamentals of Bond Valuation
	6.3 Yield to Maturity: A Detailed Exposition
	6.4 Callable Bonds
	6.5 Valuation of a Bond Between Coupon Dates
	6.6 Duration
	6.7 The Cash Market
	6.8 The Futures Market
	6.9 Conversion Factors
	6.10 Calculating the Invoice Price for a T-bond
	6.11 The Cheapest to Deliver Bond
	6.12 Seller’s Options
	6.13 Hedging
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
	Appendix-VI
Chapter 7: Foreign Exchange Forwards and Futures
	7.1 Introduction
	7.2 Purchase and Sale
	7.3 The Spot Market
	7.4 The Forward Market
	7.5 The No-Arbitrage Forward Price
	7.6 One Way Arbitrage
	7.7 The Relationship Between Interest Rate Parity and One Way Arbitrage
	7.8 Option Forwards
	7.9 Futures Markets
	7.10 Hedging an Export Transaction
	7.11 Hedging an Import Transaction
	7.12 Creating Synthetic Investments
	7.13 Borrowing Funds Abroad
	Suggestions for Further Reading
	Concept Check
	Questions and Problems
	Appendix-VII
Chapter 8: Stock and Stock Index Futures
	8.1 Introduction
	8.2 Dividends
	8.3 Stock Dividends
	8.4 Splits and Reverse Splits
	8.5 Pre-emptive Rights
	8.6 Adjustment of Stock Futures Contracts for Corporate Actions
	8.7 Stock Indices
	8.8 Value Weighted Indices
	8.9 Equally Weighted Indices
	8.10 Tracking Portfolios
	8.11 Major Market Indices
	8.12 Stock Index Futures
	8.13 Pricing of Index Futures
	8.14 Cash and Carry Arbitrage
	8.15 Reverse Cash and Carry Arbitrage
	8.16 The No-arbitrage Equation
	8.17 Index Arbitrage and Program Trading
	8.18 Hedging with Index Futures
	8.19 Market Timing With Index Futures
	8.20 Using Index Futures to Change the Beta of a Portfolio
	8.21 Stock Picking
	8.22 Portfolio Insurance
	8.23 Index Futures and Stock Market Volatility
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
	Quiz–1
Chapter 9: Fundamentals of Options
	9.1 Introduction
	9.2 Options and Stocks: Similarities and Differences
	9.3 Common Terms Associated with Options
	9.4 Notation
	9.5 Exercising Call and Put Options
	9.6 Cash Settlement versus Delivery Settlement
	9.7 Exchange Traded versus OTC Options
	9.8 Moneyness of the Option
	9.9 Contract Specification
	9.10 Choosing Expiration Months
	9.11 Specification of Allowable Exercise Prices
	9.12 FLEX Options
	9.13 Assignment of Contracts
	9.14 Contract Value Margining
	9.15 Adjusting for Stock Splits and Stock Dividends
	9.16 The Put-Call Ratio
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 10: Arbitrage Restrictions
	10.1 The Absence of Arbitrage
	10.2 Assumptions
	10.3 Non-Negative Option Premia
	10.4 Properties of American Options
	10.5 Put-Call Parity for European Options
	10.6 Intrinsic Value and Time Value
	10.7 Option Premia at Expiration
	10.8 Upper Bounds for Call Options
	10.9 Lower Bounds for Call Options on Non-dividend Paying Stocks
	10.10 Upper Bounds for Puts
	10.11 Lower Bounds for Puts
	10.12 Early Exercise of American Options
	10.13 The Put-Call Parity Equivalent for American Options
	Suggestions for Further Reading
	Concept Check
	Questions and Problems
Chapter 11: Option Strategies and Profit Diagrams
	11.1 Introduction
	11.2 Long Call
	11.3 Long Put
	11.4 Writing a Naked Call
	11.5 Writing a Put
	11.6 Writing a Covered Call
	11.7 Spreads
	11.8 Bull Spreads
	11.9 Bear Spreads
	11.10 The Convexity Property
	11.11 Butterfly Spreads
	11.12 The Condor
	11.13 Combinations
	11.14 The Strangle
	11.15 A Strap
	11.16 A Strip
	11.17 Box Spreads
	Suggestions for Further Reading
	Concept Check
	Questions and Problems
Chapter 12: Valuation of Options
	12.1 Cash and Carry and Reverse Cash and Carry Arbitrage Strategies
	12.2 Variables of Interest
	12.3 The Binomial Model
	12.4 The One Period Model
	12.5 Pseudo Probabilities and Risk Neutrality
	12.6 A Replicating Portfolio
	12.7 The Two Period Case
	12.8 The Multi Period Case
	12.9 Binomial Pricing for European Puts
	12.10 Replicating Portfolio
	12.11 Valuing European Calls on Dividend Paying Stocks
	12.12 Valuing American Calls on Dividend Paying Stocks
	12.13 Rationale for Early Exercise
	12.14 The Breakdown of the Self-Financing Property
	12.15 European versus American Puts
	12.16 Another Approach to Dividends
	12.17 The Black–Scholes Model
	12.18 Estimating Volatility from Historical Data
	12.19 The Distribution of Discretely Compounded versus Continuously Compounded Rates of Return
	12.20 The Black–Scholes Differential Equation
	12.21 Risk Neutral Valuation
	12.22 The Black–Scholes Formula
	12.23 Put-Call Parity
	12.24 Interpretation of N(d1) and N(d2)
	12.25 Implied Volatility
	12.26 European Options on Dividend Paying Stocks
	12.27 Using the Binomial Model in Practice
	12.28 An Introduction to the Greeks
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
	Appendix
Chapter 13: Options on Stock Indexes, Foreign Currencies, Futures Contracts, and Volatility Indexes
	13.1 The Merton Model
	13.2 Lower Bound for European Call Options
	13.3 Lower Bound for European Put Options
	13.4 Index Options
	13.5 Foreign Currency Options
	13.6 The Garman Kohlhagen Model
	13.7 Futures Options
	13.8 Arbitrage Restrictions
	13.9 The Black Model
	13.10 Options on Futures versus Options on the Underlying
	13.11 Portfolio Insurance
	13.12 Options on Volatility
	13.13 SPAN
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 14: Exotic Options
	14.1 Introduction
	14.2 Digital or Binary Options
	14.3 Asian Options
	14.4 Lookback Options
	14.5 Compound Options
	14.6 Barrier Options
	Suggestions for Further Reading
	Concept Check
	Questions and Problems
Chapter 15: The Term Structure of Interest Rates and The Valuation of Interest Rate Options
	15.1 Introduction
	15.2 Analyzing the Yield Curve
	15.3 Spot Rates
	15.4 Relationship Between Spot Rates and the YTM
	15.5 Yield Curve versus The Term Structure
	15.6 Bootstrapping
	15.7 Practical Difficulties with Bootstrapping
	15.8 Coupon Yield Curves and Par Bond Yield Curves
	15.9 Deducing a Par Bond Yield Curve
	15.10 Implied Forward Rates
	15.11 Fitting the Yield Curve
	15.12 The Nelson-Siegel Model
	15.13 Theories of the Term Structure
	15.14 Issues in the Valuation of Interest Rate Derivatives
	15.15 Equilibrium Models of the Term Structure
	15.16 Arbitrage-Free Term Structure Models
	15.17 The Fundamental Bond Pricing Equation in Continuous Time
	15.18 The Binomial Tree Approach to The Term Structure
	15.19 Calibrating the Ho and Lee Model
	Suggestions for Further Reading
	References
	Concept Check
	Questions and Problems
Chapter 16: Fundamentals of Swaps
	16.1 Introduction
	16.2 Interest Rate Swaps
	16.3 Terminology
	16.4 Futures and Options versus Swaps
	16.5 Illustrative Swap Rates
	16.6 Valuing an Interest Rate Swap
	16.7 Terminating a Swap
	16.8 Equivalence with FRAs
	16.9 Currency Swaps
	16.10 Inherent Risks
	16.11 Valuation
	16.12 Swaptions
	Suggestions for Further Reading
	Concept Check
	Questions and Problems
	Quiz-2
Chapter 17: Financial Derivatives: The Indian Market
	17.1 Revival of Derivatives Trading in India
	17.2 Equity Derivatives on the NSE
	17.3 Currency Futures
	17.4 Currency Forwards
	17.5 Modification of Forward Contracts
	17.6 Clearing and Settlement on the NSE
	17.7 Margining
	17.8 Risk Management on the BSE
	Suggestions for Further Reading
	Websites
	Questions and Problems
	Appendices 17-A to 17-K
Index