Most ebook files are in PDF format, so you can easily read them using various software such as Foxit Reader or directly on the Google Chrome browser.
Some ebook files are released by publishers in other formats such as .awz, .mobi, .epub, .fb2, etc. You may need to install specific software to read these formats on mobile/PC, such as Calibre.
Please read the tutorial at this link: https://ebookbell.com/faq
We offer FREE conversion to the popular formats you request; however, this may take some time. Therefore, right after payment, please email us, and we will try to provide the service as quickly as possible.
For some exceptional file formats or broken links (if any), please refrain from opening any disputes. Instead, email us first, and we will try to assist within a maximum of 6 hours.
EbookBell Team
4.1
10 reviews
ISBN 10: 0321543084
ISBN 13: 978-0321543080
Author: Robert McDonald
To be financially literate in today’s market, one must have a solid understanding of derivatives concepts and instruments and the uses of those instruments in corporations. The Third Edition has an accessible mathematical presentation, and more importantly, helps readers gain intuition by linking theories and concepts together with an engaging narrative that emphasizes the core economic principles underlying the pricing and uses of derivatives.
1 Introduction to Derivatives
1.1 What is a Derivative?
1.2 An Overview of Financial Markets
Trading of Financial Assets
Measures of Market Size and Activity
Stock and Bond Markets
Derivatives Markets
1.3 The Role Of Financial Markets
Financial Markets and the Averages
Risk-Sharing
1.4 The Uses Of Derivatives
Uses of Derivatives
Perspectives on Derivatives
Financial Engineering and Security Design
1.5 Buying And Short-Selling Financial Assets
Transaction Costs and the Bid-Ask Spread
Example 1.1
Ways to Buy or Sell
Short-Selling
Example: Short-Selling Wine
Example: Short-Selling Stock
The Lease Rate of an Asset
Risk and Scarcity in Short-Selling
Credit Risk
Scarcity
Chapter Summary
Further Reading
Problems
Part 1 Insurance, Hedging, and Simple Strategies
2 An Introduction to Forwards and Options
2.1 Forward Contracts
The Payoff on a Forward Contract
Example 2.1
Graphing the Payoff on a Forward Contract
Comparing a Forward and Outright Purchase
Zero-Coupon Bonds in Payoff and Profit Diagrams
Cash Settlement Versus Delivery
Example 2.2
Credit Risk
2.2 Call Options
Example 2.3
Example 2.4
Option Terminology
Payoff and Profit for a Purchased Call Option
Example 2.5
Example 2.6
Payoff and Profit for a Written Call Option
Example 2.7
2.3 Put Options
Example 2.8
Payoff and Profit for a Purchased Put Option
Example 2.9
Example 2.10
Payoff and Profit for a Written Put Option
Example 2.11
The “Moneyness” of an Option
2.4 Summary of Forward and Option Positions
Positions Long with Respect to the Index
Positions Short with Respect to the Index
2.5 Options are Insurance
Homeowner’s Insurance Is a Put Option
But I Thought Insurance Is Prudent and Put Options Are Risky …
Call Options Are Also Insurance
2.6 Example: Equity-Linked CDS
Graphing the Payoff on the CD
Economics of the CD
Why Equity-Linked CDs?
Chapter Summary
Further Reading
Problems
Appendix 2.A More on Buying a Stock Option
Dividends
Exercise
Margins for Written Options
Taxes
3 Insurance, Collars, and Other Strategies
3.1 Basic Insurance Strategies
Insuring a Long Position: Floors
Insuring a Short Position: Caps
Selling Insurance
Covered Call Writing.
Covered Puts.
3.2 Put-Call Parity
Synthetic Forwards
The Put-Call Parity Equation
Example 3.1
Equivalence of Different Positions.
No Arbitrage.
3.3 Spreads and Collars
Bull and Bear Spreads
Example 3.2
Box Spreads
Example 3.3
Ratio Spreads
Collars
Example 3.4
Example 3.5
Zero-Cost Collars.
Understanding Collars.
The Cost of the Collar and the Forward Price.
3.4 Speculating on Volatility
Straddles
Strangle.
Written Straddle.
Butterfly Spreads
Asymmetric Butterfly Spreads
Chapter Summary
Further Reading
Problems
4 Introduction to Risk Management
4.1 Basic Risk Management: The Producer’s Perspective
Hedging with a Forward Contract
Insurance: Guaranteeing a Minimum Price with a Put Option
Insuring by Selling a Call
Adjusting the Amount of Insurance
4.2 Basic Risk Management: The Buyer’s Perspective
Hedging with a Forward Contract
Insurance: Guaranteeing a Maximum Price with a Call Option
4.3 Why Do Firms Manage Risk?
An Example Where Hedging Adds Value
Reasons to Hedge
Taxes.
Bankruptcy and Distress Costs.
Costly External Financing.
Increase Debt Capacity.
Managerial Risk Aversion.
Nonfinancial Risk Management.
Reasons Not to Hedge
Empirical Evidence on Hedging
4.4 Golddiggers Revisited
Selling the Gain: Collars
A 420–440 Collar.
A Zero-Cost Collar.
The Forward Contract as a Zero-Cost Collar.
Synthetic Forwards at Prices Other Than $420.
Other Collar Strategies
Paylater Strategies
4.5 Selecting The Hedge Ratio
Cross-Hedging
Example 4.1
Quantity Uncertainty
Chapter Summary
Further Reading
Problems
Part 2 Forwards, Futures, and Swaps
5 Financial Forwards and Futures
5.1 Alternative Ways to Buy a Stock
5.2 Prepaid Forward Contracts on Stock
Pricing the Prepaid Forward by Analogy
Pricing the Prepaid Forward by Discounted Present Value
Pricing the Prepaid Forward by Arbitrage
Pricing Prepaid Forwards with Dividends
Discrete Dividends
Example 5.1
Continuous Dividends
Example 5.2
5.3 Forward Contracts on Stock
Does the Forward Price Predict the Future Spot Price?
Creating a Synthetic Forward Contract
Synthetic Forwards in Market-Making and Arbitrage
No-Arbitrage Bounds with Transaction Costs
Quasi-Arbitrage
An Interpretation of the Forward Pricing Formula
5.4 Futures Contracts
The S&P 500 Futures Contract
Margins and Marking to Market
Comparing Futures and Forward Prices
Arbitrage in Practice: S&P 500 Index Arbitrage
Quanto Index Contracts
5.5 Uses of Index Futures
Asset Allocation
Switching from Stocks to T-bills
General Asset Allocation
Cross-hedging with Index Futures
Cross-hedging with Perfect Correlation
Cross-Hedging with Imperfect Correlation
Example 5.3
Risk Management for Stock-Pickers
5.6 Currency Contracts
Currency Prepaid Forward
Example 5.4
Currency Forward
Example 5.5
Covered Interest Arbitrage
Example 5.6
5.7 Eurodollar Futures
Chapter Summary
Further Reading
Problems
Appendix 5.A Taxes and the Forward Rate
Appendix 5.B Equating Forwards and Futures
Appendix 5.C Forward and Futures Prices
6 Commodity Forwards and Futures
6.1 Introduction to Commodity Forwards
Examples of Commodity Futures Prices
Differences Between Commodities and Financial Assets
Commodity Terminology
6.2 Equilibrium Pricing of Commodity Forwards
6.3 Pricing Commodity Forwards by Arbitrage
An Apparent Arbitrage
Short-selling and the Lease Rate
No-Arbitrage Pricing Incorporating Storage Costs
Cash-and-Carry Arbitrage
Example 6.1
Reverse Cash-and-Carry Arbitrage
Convenience Yields
Summary
6.4 Gold
Gold Leasing
Evaluation of Gold Production
Example 6.2
6.5 Corn
6.6 Energy Markets
Electricity
Natural Gas
Oil
Oil Distillate Spreads
Example 6.3
6.7 Hedging Strategies
Basis Risk
Hedging Jet Fuel with Crude Oil
Weather Derivatives
6.8 Synthetic Commodities
Chapter Summary
Further Reading
Problems
7 Interest Rate Forwards and Futures
7.1 Bond Basics
Zero-Coupon Bonds
Implied Forward Rates
Example 7.1
Coupon Bonds
Example 7.2
Zeros from Coupons
Interpreting the Coupon Rate
Continuously Compounded Yields
7.2 Forward Rate Agreements, Eurodollar Futures, and Hedging
Forward Rate Agreements
FRA Settlement in Arrears.
FRA Settlement at the Time of Borrowing
Synthetic FRAs
Example 7.3
Eurodollar Futures
Convexity Bias and Tailing
LIBOR Versus 3-Month T-Bills.
7.3 Duration and Convexity
Price Value of a Basis Point and DV01
Example 7.4
Duration
Example 7.5
Example 7.6
Example 7.7
Duration Matching
Example 7.8
Convexity
Example 7.9
7.4 Treasury-Bond and Treasury-Note Futures
Example 7.10
7.5 Repurchase Agreements
Example 7.11
Chapter Summary
Further Reading
Problems
Appendix 7.A INTEREST RATE AND BOND PRICE CONVENTIONS
Bonds
Example 7.12
Example 7.13
Example 7.14
Bills
8 Swaps
8.1 An Example of A Commodity Swap
Physical Versus Financial Settlement
Why Is the Swap Price Not $110.50?
The Swap Counterparty
The Market Value of a Swap
8.2 Computing The Swap Rate in General
Fixed Quantity Swaps
Swaps with Variable Quantity and Price
8.3 Interest Rate Swaps
A Simple Interest Rate Swap
Pricing and the Swap Counterparty
Swap Rate and Bond Calculations
Example 8.1
The Swap Curve
The Swap’s Implicit Loan Balance
Deferred Swaps
Related Swaps
Why Swap Interest Rates?
Amortizing and Accreting Swaps
8.4 Currency Swaps
Example 8.2
Example 8.3
Currency Swap Formulas
Other Currency Swaps
8.5 Swaptions
Example 8.4
8.6 Total Return Swaps
Example 8.5
Chapter Summary
Further Reading
Problems
Part 3 Options
9 Parity and Other Option Relationships
9.1 Put-Call Parity
Options on Stocks
Example 9.1
Example 9.2
Synthetic stock.
Synthetic T-bills.
Synthetic options.
Options on Currencies
Options on Bonds
Dividend Forward Contracts
9.2 Generalized Parity And Exchange Options
Example 9.3
Options to Exchange Stock
What Are Calls and Puts?
Currency Options
9.3 Comparing Options With Respect To Style, Maturity, And Strike
European Versus American Options
Maximum and Minimum Option Prices
Calls.
Puts.
Early Exercise for American Options
Calls on a non-dividend-paying stock.
Exercising calls just prior to a dividend.
Early exercise for puts.
Early exercise in general.
Time to Expiration
American options.
European options.
European options when the strike price grows over time.
Different Strike Prices
Example 9.4
Example 9.5
Example 9.6
Exercise and Moneyness
Chapter Summary
Further Reading
Problems
Appendix 9.A Parity Bounds For American Options
Appendix 9.B Algebraic Proofs Of Strike-Price Relations
10 Binomial Option Pricing: Basic Concepts
10.1 A One-Period Binomial Tree
Computing the Option Price
The Binomial Solution
Example 10.1
Arbitraging a Mispriced Option
The Option is Overpriced
The Option is Underpriced
A Graphical Interpretation of the Binomial Formula
Risk-Neutral Pricing
10.2 Constructing a Binomial Tree
Continuously Compounded Returns
Example 10.2
Example 10.3
Example 10.4
Volatility
Constructing u and d
Estimating Historical Volatility
One-Period Example with a Forward Tree
10.3 Two or More Binomial Periods
A Two-Period European Call
Constructing the Tree
Pricing the Call Option
Many Binomial Periods
10.4 Put Options
10.5 American Options
10.6 Options on Other Assets
Option on a Stock Index
Options on Currencies
Options on Futures Contracts
Options on Commodities
Options on Bonds
Summary
Chapter Summary
Further Reading
Problems
Appendix 10.A Taxes and Option Prices
11 Binomial Option Pricing: Selected Topics
11.1 Understanding Early Exercise
11.2 Understanding Risk-Neutral Pricing
The Risk-Neutral Probability
Pricing an Option Using Real Probabilities
A One-Period Example
A Multi-Period Example
11.3 The Binomial Tree and Lognormality
The Random Walk Model
Modeling Stock Prices as a Random Walk
The Binomial Model
Lognormality and the Binomial Model
Alternative Binomial Trees
The Cox-Ross-Rubinstein Binomial Tree
The Lognormal Tree
Is the Binomial Model Realistic?
11.4 Stocks Paying Discrete Dividends
Modeling Discrete Dividends
Problems with the Discrete Dividend Tree
A Binomial Tree Using the Prepaid Forward
Chapter Summary
Further Reading
Problems
Appendix 11.A Pricing Options with True Probabilities
Appendix 11.B Why Does Risk-Neutral Pricing Work?
Utility-Based Valuation
Standard Discounted Cash Flow
Risk-Neutral Pricing
Physical vs. Risk-Neutral Probabilities
Example
State Prices
Valuing the Risk-Free Bond
Valuing the Risky Stock Using Real Probabilities
Risk-Neutral Valuation of the Stock
12 The Black-Scholes Formula
12.1 Introduction to the Black-Scholes Formula
Call Options
Example 12.1
Put Options
Example 12.2
When Is the Black-Scholes Formula Valid?
12.2 Applying the Formula to Other Assets
Options on Stocks with Discrete Dividends
Example 12.3
Options on Currencies
Example 12.4
Options on Futures
Example 12.5
12.3 Option Greeks
Definition of the Greeks
Delta
Gamma
Vega
Theta
Rho
Psi
Greek Measures for Portfolios
Example 12.6
Option Elasticity
Dollar Risk of the Option
Example 12.7
Percentage Risk of the Option
Example 12.8
The Volatility of an Option
The Risk Premium and Beta of an Option
The Sharpe Ratio of an Option
The Elasticity and Risk Premium of a Portfolio
12.4 Profit Diagrams Before Maturity
Purchased Call Option
Example 12.9
Calendar Spreads
12.5 Implied Volatility
Computing Implied Volatility
Example 12.10
Using Implied Volatility
12.6 Perpetual American Options
Valuing Perpetual Options
Example 12.11
Barrier Present Values
Chapter Summary
Further Reading
Problems
Appendix 12.A THE STANDARD NORMAL DISTRIBUTION
Appendix 12.B FORMULAS FOR OPTION GREEKS
Delta (Δ)
Gamma (Γ)
Theta (θ)
Vega
Rho (ρ)
Psi (ψ)
13 Market-Making and Delta-Hedging
13.1 What do Market-Makers do?
13.2 Market-Maker Risk
Option Risk in the Absence of Hedging
Delta and Gamma as Measures of Exposure
13.3 Delta-Hedging
An Example of Delta-Hedging for 2 Days
Day 0
Day 1: Marking-to-Market
Day 1: Rebalancing the Portfolio
Day 2: Marking-to-Market
Interpreting the Profit Calculation
Delta-Hedging for Several Days
A Self-Financing Portfolio: The Stock Moves One σ
13.4 The Mathematics of Delta-Hedging
Using Gamma to Better Approximate the Change in the Option Price
Example 13.1
Delta-Gamma Approximations
Theta: Accounting for Time
Example 13.2
Understanding the Market-Maker’s Profit
13.5 The Black-Scholes Analysis
The Black-Scholes Argument
Delta-Hedging of American Options
What Is the Advantage to Frequent Re-Hedging?
Example 13.3
Delta-Hedging in Practice
Gamma-Neutrality
13.6 Market-Making as Insurance
Insurance
Market-Makers
Chapter Summary
Further Reading
Problems
Appendix 13.A TAYLOR SERIES APPROXIMATIONS
Appendix 13.B GREEKS IN THE BINOMIAL MODEL
14 Exotic Options: I
14.1 Introduction
14.2 Asian Options
XYZ’s Hedging Problem
Options on the Average
The Definition of the Average
Example 14.1
Whether the Average Is Used as the Asset Price or the Strike
Comparing Asian Options
An Asian Solution for XYZ
14.3 Barrier Options
Types of Barrier Options
Currency Hedging
14.4 Compound Options
Compound Option Parity
Options on Dividend-Paying Stocks
Example 14.2
Currency Hedging with Compound Options
14.5 Gap Options
14.6 Exchange Options
European Exchange Options
Example 14.3
Chapter Summary
Further Reading
Problems
Appendix 14.A Pricing Formulas for Exotic Options
Asian Options Based on the Geometric Average
Average Price Options
Average Strike Options
Compound Options
Infinitely Lived Exchange Option
Part 4 Financial Engineering and Applications
15 Financial Engineering and Security Design
15.1 The Modigliani-Miller Theorem
15.2 Structured Notes without Options
Single Payment Bonds
Zero-coupon equity-linked bond
Example 15.1
Example 15.2
Zero-coupon commodity-linked bond
Example 15.3
Zero-Coupon Currency-Linked Bond
Multiple Payment Bonds
Equity-linked bonds
Example 15.4
Commodity-linked bonds
Example 15.5
Perpetuities
Currency-linked bonds
15.3 Structured Notes with Options
Convertible Bonds
Valuing and Structuring an Equity-Linked CD
Structuring the Product
Alternative Structures
Example 15.6
Reverse Convertible Bonds
Tranched Payoffs
Variable Prepaid Forwards
Example 15.7
15.4 Strategies Motivated by Tax and Regulatory Considerations
Capital Gains Deferral
Hedging by Corporate Insiders
Tax Deferral for Corporations
Marshall & Ilsley SPACES
The M&I Issue
Design Considerations
15.5 Engineered Solutions for Golddiggers
Gold-Linked Notes
Notes with Embedded Options
Chapter Summary
Further Reading
Problems
16 Corporate Applications
16.1 Equity, Debt, And Warrants
Debt and Equity as Options
Example 16.1
Example 16.2
Leverage and the Expected Return on Debt and Equity
Example 16.3
Conflicts Between Debt and Equity
Multiple Debt Issues
Warrants
Convertible Bonds
Example 16.4
Example 16.5
Callable Bonds
Callable Nonconvertible Bonds
Callable Convertible Bonds
Bond Valuation Based on the Stock Price
Other Bond Features
Put Warrants
16.2 Compensation Options
The Use of Compensation Options
Valuation of Compensation Options
Whose Valuation
Valuation Inputs
Repricing of Compensation Options
Example 16.6
Reload Options
Level 3 Communications
Example 16.7
Valuing the Outperformance Feature
Accounting for the Multiplier
16.3 The Use Of Collars In Acquisitions
The Northrop Grumman—TRW merger
Chapter Summary
Further Reading
Problems
Appendix 16.A An Alternative Approach to Expensing Option Grants
17 Real Options
17.1 Investment And The Npv Rule
Static NPV
The Correct Use of NPV
The Project as an Option
17.2 Investment Under Uncertainty
A Simple DCF Problem
Example 17.1
Valuing Derivatives on the Cash Flow
Example 17.2
Evaluating a Project with a 2-Year Investment Horizon
A Tree for Project Value
Solving for the Optimal Investment Decision
Evaluating the Project with an Infinite Investment Horizon
17.3 Real Options In Practice
Peak-Load Electricity Generation8
Research and Development
17.4 Commodity Extraction As An Option
Single-Barrel Extraction under Certainty
Optimal Extraction
Value and Appreciation of the Land
Using the Option Pricing Formula
Changing Extraction Costs
Gold Extraction Revisited
Single-Barrel Extraction under Uncertainty
Valuing an Infinite Oil Reserve
Valuing the Producing Firm
Valuing the Option to Invest
Example 17.3
Example 17.4
17.5 Commodity Extraction With Shutdown And Restart Options
Permanent Shutting Down
Example 17.5
The value of the producing well
Investing When Shutdown Is Possible
Example 17.6
Restarting Production
Example 17.7
Additional Options
Chapter Summary
Further Reading
Problems
Appendix 17.A Calculation of Optimal Time to Drill an Oil Well
Appendix 17.B The Solution with Shutting Down and Restarting
Part 5 Advanced Pricing Theory and Applications
18 The Lognormal Distribution
18.1 The Normal Distribution
Example 18.1
Converting a Normal Random Variable to Standard Normal
Example 18.2
Sums of Normal Random Variables
The Central Limit Theorem
18.2 The Lognormal Distribution
18.3 A Lognormal Model of Stock Prices
Example 18.3
Example 18.4
Example 18.5
18.4 Lognormal Probability Calculations
Probabilities
Lognormal Prediction Intervals
Example 18.6
Example 18.7
The Conditional Expected Price
The Black-Scholes Formula
18.5 Estimating the Parameters of a Lognormal Distribution
Example 18.8
18.6 How are Asset Prices Distributed?
Histograms
Normal Probability Plots
Example 18.9
Example 18.10
Chapter Summary
Further Reading
Problems
Appendix 18.A The Expectation of a Lognormal Variable
Appendix 18.B Constructing a Normal Probability Plot
19 Monte Carlo Valuation
19.1 Computing the Option Price as a Discounted Expected Value
Valuation with Risk-Neutral Probabilities
Valuation with True Probabilities
19.2 Computing Random Numbers
19.3 Simulating Lognormal Stock Prices
Simulating a Sequence of Stock Prices
19.4 Monte Carlo Valuation
Monte Carlo Valuation of a European Call
Example 19.1
Accuracy of Monte Carlo
Arithmetic Asian Option
Example 19.2
19.5 Efficient Monte Carlo Valuation
Control Variate Method
Other Monte Carlo Methods
19.6 Valuation of American Options
19.7 The Poisson Distribution
Example 19.3
19.8 Simulating Jumps with the Poisson Distribution
Simulating the Stock Price with Jumps
Multiple Jumps
19.9 Simulating Correlated Stock Prices
Generating n Correlated Lognormal Random Variables
Chapter Summary
Further Reading
Problems
Appendix 19.A Formulas for Geometric Average Options
20 Brownian Motion and Itô’s Lemma
20.1 The Black-Scholes Assumption About Stock Prices
20.2 Brownian Motion
Definition of Brownian Motion
Properties of Brownian Motion
Arithmetic Brownian Motion
The Ornstein-Uhlenbeck Process
20.3 Geometric Brownian Motion
Lognormality
Relative Importance of the Drift and Noise Terms
Multiplication Rules
Modeling Correlated Asset Prices
Example 20.1
20.4 ItÔ’s Lemma
Functions of an Itô Process
Proposition 20.1
Example 20.2
Example 20.3
Multivariate Itô’s Lemma
Proposition 20.2
Example 20.4
Example 20.5
20.5 The Sharpe Ratio
20.6 Risk-Neutral Valuation
A Claim That Pays S(T)a
Proposition 20.3
Specific Examples
Valuing a Claim on SaQb
Proposition 20.4
20.7 Jumps In The Stock Price
Proposition 20.5
Chapter Summary
Further Reading
Problems
Appendix 20.A Valuation Using Discounted Cash Flow
b21 The Black-Scholes-Merton Equation
21.1 Differential Equations and Valuation Under Certainty
The Valuation Equation
Bonds
Dividend-Paying Stocks
The General Structure
21.2 The Black-Scholes Equation
Verifying the Formula for a Derivative
Simple Present Value Calculations.
All-Or-Nothing Options
The Black-Scholes Equation and Equilibrium Returns
What If the Underlying Asset Is Not an Investment Asset?
Example 21.1
21.3 Risk-Neutral Pricing
Interpreting the Black-Scholes Equation
The Backward Equation
Derivative Prices as Discounted Expected Cash Flows
21.4 Changing the Numeraire
Example 21.2
Proposition 21.1
Example 21.3
21.5 Option Pricing When the Stock Price Can Jump
Merton’s Solution for Diversifiable Jumps
Chapter Summary
Further Reading
Problems
Appendix 21.A Multivariate Black-Scholes Analysis
Appendix 21.B Proof of Proposition 21.1
Appendix 21.C Solutions For Prices and Probabilities
22 Risk-Neutral and Martingale Pricing
22.1 Risk Aversion and Marginal Utility
22.2 The First-Order Condition for Portfolio Selection
22.3 Change of Measure and Change of Numeraire
Change of Measure
The Martingale Property
Girsanov’s Theorem
22.4 Examples of Numeraire and Measure Change
The Money-Market Account as Numeraire (Risk-Neutral Measure)
The Money-Market Account
The Money-Market Account as Numeraire
Constructing a Process for Si(t)
Interpretation
Risky Asset as Numeraire
Zero Coupon Bond as Numeraire (Forward Measure)
22.5 Examples of Martingale Pricing
Cash-or-Nothing Call
Interpretation of Volatility
Dividends
Asset-or-Nothing Call
The Black-Scholes Formula
European Outperformance Option
Option on a Zero-Coupon Bond
22.6 Example: Long-Maturity Put Options
The Black-Scholes Put Price Calculation
Is the Put Price Reasonable?
The Likelihood of Exercise and Expected Payoff
Understanding the Option Price
Discussion
Chapter Summary
Further Reading
Problems
Appendix 22.A The Portfolio Selection Problem
The One-Period Portfolio Selection Problem
The Risk Premium of an Asset
Multiple Consumption and Investment Periods
Appendix 22.B Girsanov’s Theorem
The Theorem
Constructing Multi-Asset Processes from Independent Brownian Motions
Risk-Neutral Measure
Risky Asset as Numeraire
Appendix 22.C Risk-Neutral Pricing and Marginal Utility in the Binomial Model
23 Exotic Options: II
23.1 All-Or-Nothing Options
Terminology
Cash-or-Nothing Options
Example 23.1
Asset-or-Nothing Options
Example 23.2
Ordinary Options and Gap Options
Example 23.3
Delta-Hedging All-or-Nothing Options
23.2 All-Or-Nothing Barrier Options
Cash-or-Nothing Barrier Options
Down-And-In Cash Call.
Deferred Down Rebate Option
Down-And-Out Cash Call.
Down-And-In Cash Put.
Down-And-Out Cash Put.
Example 23.4
Example 23.5
Up-And-In Cash Put.
Deferred Up Rebate
Up-And-Out Cash Put.
Up-And-In Cash Call.
Up-And-Out Cash Call.
Asset-or-Nothing Barrier Options
Rebate Options
Perpetual American Options
23.3 Barrier Options
Example 23.6
23.4 Quantos
The Yen Perspective
Example 23.7
The Dollar Perspective
Example 23.8
A Binomial Model for the Dollar-Denominated Investor
Example 23.9
23.5 Currency-Linked Options
Foreign Equity Call Struck in Foreign Currency
Example 23.10
Foreign Equity Call Struck in Domestic Currency
Example 23.11
Fixed Exchange Rate Foreign Equity Call
Example 23.12
Equity-Linked Foreign Exchange Call
Example 23.13
23.6 Other Multivariate Options
Options on the Best of Two Assets
Basket Options
Chapter Summary
Further Reading
Problems
Appendix 23.A The Reflection Principle
24 Volatility
24.1 Implied Volatility
24.2 Measurement and Behavior of Volatility1
Historical Volatility
Exponentially Weighted Moving Average
Example 24.1
Time-Varying Volatility: ARCH
The ARCH Model
ARCH Volatility Forecasts
The GARCH Model
Maximum Likelihood Estimation of a GARCH Model
Volatility Forecasts
Example 24.2
Realized Quadratic Variation
24.3 Hedging and Pricing Volatility
Variance and Volatility Swaps
Example 24.3
Example 24.4
Pricing Volatility
The Log Contract
Valuing the Log Contract
Computing the VIX
24.4 Extending the Black-Scholes Model
Jump Risk and Implied Volatility
Constant Elasticity of Variance
The CEV Pricing Formula
Implied Volatility in the CEV Model
The Heston Model
Evidence
Chapter Summary
Further Reading
Problems
25 Interest Rate and Bond Derivatives
25.1 An Introduction To Interest Rate Derivatives
Bond and Interest Rate Forwards
Example 25.1
Options on Bonds and Rates
Bond Options.
Interest Rate Options.
Equivalence of a Bond Put and an Interest Rate Call
Example 25.2
Taxonomy of Interest Rate Models
Short-Rate Models.
Market Models.
25.2 Interest Rate Derivatives And The Black-Scholes-Merton Approach
An Equilibrium Equation for Bonds
25.3 Continuous-Time Short-Rate Models
The Rendelman-Bartter Model
The Vasicek Model
The Cox-Ingersoll-Ross Model
Comparing Vasicek and CIR
Duration and Convexity Revisited
Example 25.3
25.4 Short-Rate Models And Interest Rate Trees
An Illustrative Tree
Zero-Coupon Bond Prices.
Example 25.4
Yields and Expected Interest Rates.
Option Pricing.
Example 25.5
The Black-Derman-Toy Model
Example 25.6
Hull-White Model
Example 25.7
Constructing the Initial Interest Rate Grid.
Probabilities.
Matching Zero-Coupon Bond Prices.
Valuation.
Example 25.8
Example 25.9
25.5 Market Models
The Black Model
Example 25.10
LIBOR Market Model
Chapter Summary
Further Reading
Problems
Appendix 25.A Constructing The Bdt Tree
26 Value at Risk
26.1 Value at Risk
Value at Risk for One Stock
Example 26.1
Example 26.2
VaR for Two or More Stocks
Example 26.3
VaR for Nonlinear Portfolios
Delta Approximation
Example 26.4
Example 26.5
Monte Carlo Simulation
Example 26.6
Example 26.7
VaR for Bonds
Example 26.8
Example 26.9
Example 26.10
Estimating Volatility
Bootstrapping Return Distributions
26.2 Issues With VaR
Alternative Risk Measures
Tail VaR
Example 26.11
The Cost of Insurance
Example 26.12
VaR and the Risk-Neutral Distribution
Subadditive Risk Measures
Chapter Summary
Further Reading
Problems
27 Credit Risk
27.1 Default Concepts and Terminology
27.2 The Merton Default Model
Default at Maturity
Example 27.1
Related Models
Example 27.2
27.3 Bond Ratings and Default Experience
Rating Transitions
Recovery Rates
Reduced Form Bankruptcy Models
27.4 Credit Default Swaps
Single-Name Credit Default Swaps
Pricing a Default Swap
CDS Indices
Other Credit-Linked Structures
Total Rate of Return Swaps
Credit-Linked Notes
Credit Guarantees
27.5 Tranched Structures
Collateralized Debt Obligations
A CDO with Independent Defaults
A CDO with Correlated Defaults
Synthetic CDOs
CDO-Squareds
Nth to default baskets
Chapter Summary
Further Reading
Problems
Appendixes
Appendix A The Greek Alphabet
Appendix B Continuous Compounding
B.1 The Language of Interest Rates
B.2 The Logarithmic and Exponential Functions
Problems
Appendix C Jensen’s Inequality
C.1 Example: The Exponential Function
C.2 Example: The Price of a Call
C.3 Proof Of Jensen’s Inequality2
Problems
Appendix D An Introduction to Visual Basic for Applications
D.1 Calculations Without Vba
D.2 How To Learn Vba
D.3 Calculations With Vba
D.4 Storing and Retrieving Variables In a Worksheet
D.5 Using Excel Functions From Within Vba
D.6 Checking For Conditions
D.7 Arrays
D.8 Iteration
D.9 Reading And Writing Arrays
D.10 Miscellany
Glossary
References
Index
commodity and derivatives markets tybms pdf
commodity and derivatives markets
commodity derivatives markets and applications pdf
financial derivatives markets in india
mastering derivatives markets
