Derivatives: Theory and Practice

About the Authors About the Companion Site Preface Chapter 1. Derivative Securities 1. Forwards and Futures 2. Options 3. Swaps 4. Hedging, Speculation and Arbitrage 5. Short-Selling 6. Summary Part I: Forwards and Futures Chapter 2. Futures Markets 1. Trading on Futures Markets 2. Margins and Marking-to-Market 3. Summary Chapter 3. Forward and Futures Prices 1. Pricing Forward Contracts 2. Dividends, Storage Cost and Convenience Yield 3. Commodity Futures 4. Value of a Forward Contract 5. Summary Chapter 4. Futures: Hedging and Speculation 1. Hedging Using Futures 2. Cross-Hedge 3. Rolling Hedge 4. Novel Futures Contracts 5. Speculation 6. Summary Chapter 5. Index Futures 1. Stock Index Futures 2. Index Arbitrage 3. Hedging 4. Tailing the hedge 5. Summary 6. Appendix: Hedge Ratios Chapter 6. Strategies Using Stock Index Futures 1. Underpriced Stocks 2. Overpriced Stocks 3. Market-neutral Hedge Fund 4. Long-Short Hedge Fund 5. Changing Stock Market Exposure 6. Merger Arbitrage 7. Summary Appendix I. Stock Picking & Market Risk Appendix II. Market Timing Appendix III. Hedging: Long-Short Portfolio Chapter 7. Currency Forwards and Futures 1. FX-Futures Contracts 2. Pricing FX-Forward Contracts 3. Pricing FX-Futures Contracts 4. Hedging & Speculation: Forwards 5. Hedging & Speculation: Futures 6. Summary Appendix. Hedging Using FX Futures Part II: Fixed Income: Cash Markets Chapter 8. Interest Rates 1. LIBOR, Repos, Fed Funds & OIS Rates 2. Day-Count Conventions 3. Forward Rates 4. Forward Rate Agreements, FRAs 5. Summary Chapter 9. Bond Markets 1. Prices, Yields and Returns 2. Pricing Coupon-Bonds 3. Summary Chapter 10. Duration and Convexity 1. Yield Curves 2. Duration & Convexity 3. Summary 4. Appendix: Duration & Convexity Part III: Fixed-Income Futures Contracts Chapter 11. Interest rate futures 1. Three-Month Eurodollar Futures Contract 2. Sterling 3-Month Futures Contract 3. T-Bill Futures Contract 4. Futures Price & Forward Rates 5. Pricing Interest Rate Futures 6. Arbitrage: Implied Repo Rate 7. Speculation 8. Spread Trades 9. Summary 10. Appendix: Futures Prices & Interest Rates Chapter 12. Hedging Using Interest Rate Futures 1. Number of Futures Contracts 2. Different Types of Hedge 3. Hedging: T-Bill & Eurodollar Futures 4. Eurodollar Stack Hedge 5. Summary 6. Appendix: Hedge Ratios Chapter 13. T-Bond Futures 1. Contract Specifications 2. Conversion Factor & Cheapest to Deliver 3. Hedging using T-Bonds 4. Hedging: Further Issues 5. Market Timing 6. Wild Card Play 7. Pricing T-Bond Futures 8. T-Bond Futures Spreads 9. Summary Appendix I: Duration & Market Timing Appendix II: Implied Repo Rate & Arbitrage Part IV: Options Chapter 14. Options Markets 1. Market Organisation 2. Call Options 3. Put Options 4. Intrinsic Value & Time Value 5. Summary Chapter 15. Uses of Options 1. Protective Put 2. Put-Call Parity: European Options 3. Guaranteed Bond 4. Other Options 5. Summary Chapter 16. Black-Scholes Model 1. Determinants of Options Prices 2. Black-Scholes 3. Are Stocks Less Risky In The Long Run? 4. Delta-Hedging 5. Implied Volatility 6. Summary 7. Appendix I: Price Bounds on European Options Chapter 17. Option Strategies 1. Synthetic Securities 2. Bull & Bear Spreads 3. Straddle, Strangle, Butterfly & Condor 4. Horizontal (Time, Calendar) Spreads 5. Summary Chapter 18. Stock Options and Stock Index Options 1. Options on Stocks 2. Stock Index Options, SIO 3. Summary 4. Appendix I: Static Hedge: Index Puts 5. Appendix II: Dynamic Delta-Hedge Chapter 19. Foreign Currency Options 1. Contract Specifications 2. Speculation 3. Hedging Foreign Currency Exposure 4. Other Currency Options 5. Summary Chapter 20. Options on Futures 1. Market Conventions 2. Price Bounds on Futures Options 3. Trading Strategies 4. Summary Part V: Options Pricing Chapter 21. BOPM: Introduction 1. One-Period BOPM 2. Risk-Neutral Valuation 3. Determinants of Call Premium 4. Pricing a European Put Option 5. Summary 6. Appendix: No-Arbitrage Conditions Chapter 22. BOPM: Implementation 1. Generalising the BOPM 2. Replication Portfolio 3. BOPM to Black-Scholes 4. Summary 5. Appendix: Delta-Hedging & Arbitrage Chapter 23. BOPM: Extensions 1. American Options 2. Options on Other Underlying Assets 3. Options on Futures Contracts 4. Options on Dividend-Paying Stocks 5. Summary 6. Appendix: BOPM & Risk-Neutral Valuation Chapter 24. Analysis of Black Scholes 1. Volatility 2. Testing Black-Scholes 3. Limitations of Black-Scholes 4. Summary Chapter 25. Pricing European Options 1. European Options: Dividend-Paying Stocks 2. Foreign Currency & Futures Options 3. Put-Call Parity 4. Summary Chapter 26. Pricing Options: Monte-Carlo Simulation 1. Brownian Motion: Parallel Universe 2. Variance Reduction Methods 3. The Greeks 4. Multiple Stochastic Factors 5. Path-Dependent Options 6. Summary 7. Appendix I: MCS, Several Stochastic Variables Part VI: The Greeks Chapter 27. Delta Hedging 1. Delta 2. Dynamic Delta-Hedging 3. Summary Chapter 28. The Greeks 1. Different Greeks 2. Hedging with the Greeks 3. Greeks and the BOPM 4. Summary 5. Appendix: Black-Scholes & the Greeks Chapter 29. Portfolio Insurance 1. Static Hedge 2. Dynamic Portfolio Insurance 3. Summary Part VII: Advanced Options Chapter 30. Other Options 1. Corporate Equity & Debt 2. Warrants 3. Equity Collar 4. Summary Chapter 31. Exotic Options 1. Three-Period BOPM 2. Asian Options 3. Other Exotics: Lookbacks, Barrier, Compound & Chooser 4. Summary Chapter 32. Energy and Weather Derivatives 1. Energy Contracts 2. Hedging with Energy Futures 3. Energy Swaps 4. Weather Derivatives 5. Reinsurance & CAT Bonds 6. Summary Part VIII: Swaps Chapter 33. Interest Rate Swaps 1. Using Interest Rate Swaps 2. Cash Flows in a Swap 3. Settlement and Price Quotes 4. Terminating a Swap 5. Comparative Advantage 6. Summary 7. Appendix: Comparative Advantage with Swap Dealer Chapter 34. Pricing Interest Rate Swaps 1. Cash Flows in A Swap 2. Floating Rate Note, FRN 3. Pricing a Swap (Short-Method) 4. Pricing a Swap (Forward-Rate Method) 5. Market Value of a Swap 6. Swap-Delta and PVBP 7. Summary 8. Appendix: Value of an FRN using Arbitrage Chapter 35. Other Interest Rate Swaps 1. Uses 2. Pricing a Fixed-Fixed Currency Swap 3. Valuing a Fixed-Fixed Currency Swap 4. Summary Appendix I: Pricing a Currency Swap Appendix II: Valuation of a Currency Swap Chapter 36. Currency Swaps 1. Swap Deals 2. Pricing Non-Standard Swaps 3. Hedging Interest Rate Swaps 4. Credit Risk 5. Summary Chapter 37. Equity Swaps 1. Equity-for-LIBOR: Fixed Notional Principal 2. Unhedged Cross-Currency Equity Swap 3. Hedged Cross-Currency Equity Swap 4. Pricing Equity Swaps 5. Summary Appendix I: Valuation of Equity-for-LIBOR Swap Part IX: Fixed Income Derivatives Chapter 38. T-Bond Option, Caps, Floors and Collar 1. Options on T-Bonds and Eurodollars 2. Caplets and Floorlets 3. Interest Rate Cap 4. Interest Rate Floor 5. Interest Rate Collar 6. Summary Chapter 39. Swaption, Forward Swap & MBS 1. Swaptions 2. Forward Swap 3. Mortgage-Backed Securities, MBS 4. Hedging Fixed-Income Derivatives 5. Summary Chapter 40. Pricing: Black's Model and MCS 1. Black's Model: European Options 2. Pricing a Cap Using MCS 3. European Swaption: Black's Model 4. Summary Chapter 41. Pricing Fixed Income Derivatives: BOPM 1. No-Arbitrage Approach 2. Pricing a Coupon Bond 3. Pricing Options 4. Pricing a Callable Bond 5. Pricing Caps 6. Pricing FRAs 7. Pricing a Swaption 8. Pricing FRNs with Embedded Options 9. More Lattices 10. Summary Part X: Credit Derivatives Chapter 42. Credit Default Swaps, CDS 1. Credit Risk and CDS 2. Speculation with CDS 3. Contract Details 4. Pricing and Valuation 5. Bond Yields and the CDS Spread 6. Credit Indices and other CDS Contracts 7. Derivatives on the CDS Spread 8. Summary Chapter 43. Securitisation: ABS and CDOS 1. ABS and ABS-CDOs 2. Credit Enhancement 3. Losses on ABS and ABS-CDOs 4. Sub-Prime Crisis, 2007-8 5. Synthetic CDOs 6. Single-Tranche Trading 7. Total-Return Swap 8. Summary Part XI: Market Risk Chapter 44. Value at Risk: VaR 1. Introduction 2. Value at Risk: VaR 3. Forecasting Volatility 4. Backtesting 5. Capital Adequacy 6. Summary Chapter 45. VaR: Other Portfolios 1. Single-Index Model 2. VaR for Coupon-Bonds 3. VaR: Options 4. Summary 5. Appendix: VaR for Foreign Assets Chapter 46. VaR: Alternative Measures 1. Historical Simulation 2. Bootstrapping 3. Monte-Carlo Simulation 4. Alternative Methods 5. Summary Part XII: Price Dynamics Chapter 47. Asset Price Dynamics 1. Stochastic Processes 2. Geometric Brownian Motion and Ito's Lemma 3. Distribution of Log Stock Price and Stock Price 4. Summary 5. Appendix: Ito's Lemma Chapter 48. Black-Scholes PDE 1. Risk-Neutral Valuation and Black-Scholes PDE 2. Finite Difference Methods 3. Summary 4. Appendix: Derivation of Black-Scholes PDE Chapter 49. Equilibrium Models: Term Structure 1. Risk-Neutral Valuation 2. Models of the Short-Rate 3. Pricing using Continuous Time Models 4. Bond Prices and Derivatives Prices 5. Summary Glossary Bibliography Index