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PART V: OPTIONS PRICING
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PART V: OPTIONS PRICING
by Niall O'Sullivan, Dirk Nitzsche, Keith Cuthbertson
Derivatives
Cover
About the Authors
About the Companion Site
Preface
STUDENT LEARNING
FINANCE BLOGS
SLIDES
EXERCISES
EXCEL AND MATLAB
ACKNOWLEDGEMENTS
CHAPTER 1: Derivative Securities
1.1. FORWARDS AND FUTURES
1.2. OPTIONS
1.3. SWAPS
1.4. HEDGING, SPECULATION, AND ARBITRAGE
1.5. SHORT-SELLING
1.6. SUMMARY
EXERCISES
NOTES
PART I: FORWARDS AND FUTURES
CHAPTER 2: Futures Markets
2.1 TRADING ON FUTURES MARKETS
2.2 FUTURES EXCHANGES AND TRADERS
2.3 MARGINS AND MARKING-TO-MARKET
2.4 SUMMARY
EXERCISES
NOTES
CHAPTER 3: Forward and Futures Prices
3.1 PRICING FORWARD CONTRACTS
3.2 DIVIDENDS, STORAGE COSTS, AND CONVENIENCE YIELD
3.3 COMMODITY FUTURES
3.4 VALUE OF A FORWARD CONTRACT
3.5 SUMMARY
EXERCISES
NOTES
CHAPTER 4: Futures: Hedging and Speculation
4.1 HEDGING USING FUTURES
4.2 NOVEL FUTURES CONTRACTS
4.3 SPECULATION
4.4 SUMMARY
EXERCISES
NOTES
CHAPTER 5: Index Futures
5.1 STOCK INDEX FUTURES (SIF)
5.2 INDEX ARBITRAGE
5.3 HEDGING
5.4 TAILING THE HEDGE
5.5 SUMMARY
APPENDIX 5: HEDGE RATIOS
EXERCISES
NOTES
CHAPTER 6: Strategies: Stock Index Futures
6.1 UNDERPRICED STOCKS: HEDGING MARKET RISK
6.2 OVERPRICED STOCKS: HEDGING MARKET RISK
6.3 MARKET-NEUTRAL HEDGE FUND
6.4 LONG-SHORT HEDGE FUND
6.5 CHANGING STOCK MARKET EXPOSURE
6.6 MERGER ARBITRAGE
6.7 SUMMARY
APPENDIX 6.A: STOCK PICKING AND MARKET RISK
APPENDIX 6.B: MARKET TIMING
APPENDIX 6.C: HEDGING: LONG-SHORT PORTFOLIO
APPENDIX 6.D: MERGER ARBITRAGE AND HEDGING
EXERCISES
NOTES
CHAPTER 7: Currency Forwards and Futures
7.1 FX-FUTURES CONTRACTS
7.2 PRICING FX-FORWARD CONTRACTS
7.3 PRICING FX-FUTURES CONTRACTS
7.4 HEDGING AND SPECULATION: FORWARDS
7.5 HEDGING AND SPECULATION: FUTURES
7.6 SUMMARY
APPENDIX 7: HEDGING USING FX-FUTURES
EXERCISES
NOTE
PART II: FIXED INCOME: CASH MARKETS
CHAPTER 8: Interest Rates
8.1 LIBOR, REPOS, FED FUNDS, AND OIS RATES
8.2 DAY-COUNT CONVENTIONS
8.3 FORWARD RATES
8.4 FORWARD RATE AGREEMENTS (FRAS)
SUMMARY
EXERCISES
NOTES
CHAPTER 9: Bond Markets
9.1 PRICES, YIELDS, AND RETURN
9.2 PRICING COUPON BONDS
9.3 SUMMARY
EXERCISES
NOTE
CHAPTER 10: Bonds: Duration and Convexity
10.1 YIELD CURVE
10.2 DURATION AND CONVEXITY
10.3 SUMMARY
APPENDIX 10: DURATION AND CONVEXITY
EXERCISES
NOTE
PART III: FIXED INCOME FUTURES CONTRACTS
CHAPTER 11: Interest Rate Futures
11.1 THREE-MONTH EURODOLLAR FUTURES CONTRACT
11.2 STERLING 3-MONTH FUTURES CONTRACT
11.3 T-BILL FUTURES
11.4 FUTURES PRICE AND FORWARD RATES
11.5 PRICING INTEREST RATE FUTURES
11.6 ARBITRAGE: IMPLIED REPO RATE
11.7 SPECULATION
11.8 SPREAD TRADES
11.9 SUMMARY
APPENDIX 11.A: FUTURES PRICES AND INTEREST RATES
EXERCISES
NOTES
CHAPTER 12: Hedging with Interest Rate Futures
12.1 NUMBER OF FUTURES CONTRACTS
12.2 DIFFERENT TYPES OF HEDGE
12.3 HEDGING: T-BILL AND EURODOLLAR FUTURES
12.4 EURODOLLAR STACK HEDGE
12.5 SUMMARY
APPENDIX 12: HEDGE RATIOS
EXERCISES
NOTES
CHAPTER 13: T-bond Futures
13.1 CONTRACT SPECIFICATIONS
13.2 CONVERSION FACTOR AND CHEAPEST-TO-DELIVER
13.3 HEDGING USING T-BONDS
13.4 HEDGING: FURTHER ISSUES
13.5 MARKET TIMING
13.6 WILD CARD PLAY
13.7 PRICING T-BOND FUTURES
13.8 T-BOND FUTURES SPREADS
13.9 SUMMARY
APPENDIX 13.A: HEDGING: DURATION AND MARKET TIMING
APPENDIX 13.B: IMPLIED REPO RATE AND ARBITRAGE
EXERCISES
NOTES
PART IV: OPTIONS
CHAPTER 14: Options Markets
14.1 MARKET ORGANISATION
14.2 CALL OPTIONS
14.3 PUT OPTIONS
14.4 INTRINSIC VALUE AND TIME VALUE
14.5 SUMMARY
EXERCISES
NOTES
CHAPTER 15: Uses of Options
15.1 PROTECTIVE PUT
15.2 PUT–CALL PARITY: EUROPEAN OPTIONS
15.3 GUARANTEED BOND
15.4 OTHER OPTIONS
15.5 SUMMARY
EXERCISES
NOTES
CHAPTER 16: Black–Scholes Model
16.1 DETERMINANTS OF OPTION PRICES
16.2 BLACK–SCHOLES
16.3 ARE STOCKS LESS RISKY IN THE LONG RUN?
16.4 DELTA HEDGING
16.5 IMPLIED VOLATILITY
16.6 SUMMARY
APPENDIX 16: PRICE BOUNDS ON EUROPEAN OPTIONS
EXERCISES
NOTES
CHAPTER 17: Option Strategies
17.1 SYNTHETIC SECURITIES
17.2 BULL AND BEAR SPREADS
17.3 STRADDLE, STRANGLE, BUTTERFLY, AND CONDOR
17.4 HORIZONTAL (TIME, CALENDAR) SPREADS
17.5 SUMMARY
EXERCISES
NOTES
CHAPTER 18: Stock Options and Stock Index Options
18.1 OPTIONS ON STOCKS
18.2 STOCK INDEX OPTIONS (SIO)
18.3 SUMMARY
APPENDIX 18.A: STATIC HEDGE: INDEX PUTS
APPENDIX 18.B: DYNAMIC DELTA HEDGE
EXERCISES
NOTES
CHAPTER 19: Foreign Currency Options
19.1 CONTRACT SPECIFICATIONS
19.2 SPECULATION
19.3 HEDGING FOREIGN CURRENCY EXPOSURE
19.4 OTHER CURRENCY OPTIONS
19.5 SUMMARY
EXERCISES
CHAPTER 20: Options on Futures
20.1 MARKET CONVENTIONS
20.2 PRICE BOUNDS ON EUROPEAN FUTURES OPTIONS
20.3 TRADING STRATEGIES
20.4 SUMMARY
EXERCISES
NOTES
PART V: OPTIONS PRICING
CHAPTER 21: BOPM: Introduction
21.1 ONE-PERIOD BOPM
21.2 RISK-NEUTRAL VALUATION
21.3 DETERMINANTS OF CALL PREMIUM
21.4 PRICING A EUROPEAN PUT OPTION
21.5 SUMMARY
APPENDIX 21: NO-ARBITRAGE CONDITIONS
EXERCISES
NOTES
CHAPTER 22: BOPM: Implementation
22.1 GENERALISING THE BOPM
22.2 REPLICATION PORTFOLIO
22.3 BOPM TO BLACK–SCHOLES
22.4 SUMMARY
APPENDIX 22: DELTA HEDGING AND ARBITRAGE
EXERCISES
NOTES
CHAPTER 23: BOPM: Extensions
23.1 AMERICAN OPTIONS
23.2 OPTIONS ON OTHER UNDERLYING ASSETS
23.3 OPTIONS ON FUTURES CONTRACTS
23.4 OPTIONS ON DIVIDEND-PAYING STOCKS
23.5 SUMMARY
APPENDIX 23: BOPM AND RISK-NEUTRAL VALUATION
EXERCISES
NOTES
CHAPTER 24: Analysis of Black–Scholes
24.1 VOLATILITY
24.2 TESTING BLACK–SCHOLES
24.3 LIMITATIONS OF BLACK–SCHOLES
24.4 SUMMARY
EXERCISES
NOTES
CHAPTER 25: Pricing European Options
25.1 WHAT DO N(d1) AND N(d2) REPRESENT?
25.2 EUROPEAN OPTIONS: DIVIDEND PAYING STOCKS
25.3 FOREIGN CURRENCY AND FUTURES OPTIONS
25.4 PUT–CALL PARITY
25.5 SUMMARY
EXERCISES
NOTE
CHAPTER 26: Pricing Options: Monte Carlo Simulation
26.1 BROWNIAN MOTION: PARALLEL UNIVERSE
26.2 PRICING A EUROPEAN CALL
26.3 VARIANCE REDUCTION METHODS
26.4 THE GREEKS
26.5 MULTIPLE STOCHASTIC FACTORS
26.6 PATH-DEPENDENT OPTIONS
26.7 SUMMARY
APPENDIX 26: MCS, SEVERAL STOCHASTIC VARIABLES
EXERCISES
NOTES
PART VI: THE GREEKS
CHAPTER 27: Delta Hedging
27.1 DELTA
27.2 DYNAMIC DELTA HEDGING
27.3 SUMMARY
EXERCISES
NOTES
CHAPTER 28: The Greeks
28.1 DIFFERENT GREEKS
28.2 HEDGING WITH THE GREEKS
28.3 GREEKS AND THE BOPM
28.4 SUMMARY
APPENDIX 28: BLACK–SCHOLES AND THE GREEKS
EXERCISES
NOTES
CHAPTER 29: Portfolio Insurance
29.1 STATIC HEDGE
29.2 DYNAMIC PORTFOLIO INSURANCE
29.3 SUMMARY
EXERCISES
NOTE
PART VII: ADVANCED OPTIONS
CHAPTER 30: Other Options
30.1 CORPORATE EQUITY AND DEBT
30.2 WARRANTS
30.3 EQUITY COLLAR
30.4 SUMMARY
EXERCISES
NOTES
CHAPTER 31: Exotic Options
31.1 THREE-PERIOD BOPM
31.2 ASIAN OPTIONS
31.3 OTHER EXOTICS: LOOKBACKS, BARRIER, COMPOUND, AND CHOOSER
31.4 SUMMARY
EXERCISES
NOTES
CHAPTER 32: Energy and Weather Derivatives
32.1 ENERGY CONTRACTS
32.2 HEDGING WITH ENERGY FUTURES
32.3 ENERGY SWAPS
32.4 WEATHER DERIVATIVES
32.5 REINSURANCE AND CAT BONDS
32.6 SUMMARY
EXERCISES
NOTES
PART VIII: SWAPS
CHAPTER 33: Interest Rate Swaps
33.1 USING INTEREST RATE SWAPS
33.2 CASH FLOWS IN A SWAP
33.3 SETTLEMENT AND PRICE QUOTES
33.4 TERMINATING A SWAP
33.5 COMPARATIVE ADVANTAGE
33.6 SUMMARY
APPENDIX 33: COMPARATIVE ADVANTAGE WITH SWAP DEALER
EXERCISES
NOTES
CHAPTER 34: Pricing Interest Rate Swaps
34.1 CASH FLOWS IN A SWAP
34.2 FLOATING RATE NOTE (FRN)
34.3 PRICING A SWAP: SHORT METHOD
34.4 PRICING A SWAP: FORWARD RATE METHOD
34.5 MARKET VALUE OF A SWAP
34.6 SWAP DELTA AND PVBP
34.7 SUMMARY
APPENDIX 34: VALUE OF AN FRN USING ARBITRAGE
EXERCISES
NOTES
CHAPTER 35: Other Interest Rate Swaps
35.1 SWAP DEALS
35.2 PRICING NON-STANDARD SWAPS
35.3 HEDGING INTEREST RATE SWAPS
35.4 CREDIT RISK
35.5 SUMMARY
EXERCISES
NOTES
CHAPTER 36: Currency Swaps
36.1 USES
36.2 PRICING A FIXED-FIXED CURRENCY SWAP
36.3 VALUING A FIXED-FIXED CURRENCY SWAP
36.4 SUMMARY
APPENDIX 36.A: PRICING A CURRENCY SWAP
APPENDIX 36.B: VALUATION OF A CURRENCY SWAP
EXERCISES
NOTES
CHAPTER 37: Equity Swaps
37.1 EQUITY-FOR-LIBOR: FIXED NOTIONAL PRINCIPAL
37.2 UNHEDGED CROSS-CURRENCY EQUITY SWAP
37.3 HEDGED CROSS-CURRENCY EQUITY SWAP
37.4 PRICING EQUITY SWAPS
37.5 SUMMARY
APPENDIX 37: VALUATION OF EQUITY-FOR-LIBOR SWAP
EXERCISES
NOTES
PART IX: FIXED INCOME DERIVATIVES
CHAPTER 38: T-Bond Option, Caps, Floors and Collar
38.1 OPTIONS ON T-BONDS AND EURODOLLARS
38.2 CAPLETS AND FLOORLETS
38.3 INTEREST RATE CAP
38.4 INTEREST RATE FLOOR
38.5 INTEREST RATE COLLAR
38.6 SUMMARY
EXERCISES
NOTES
CHAPTER 39: Swaptions, Forward Swaps, and MBS
39.1 SWAPTIONS
39.2 FORWARD SWAPS
39.3 MORTGAGE-BACKED SECURITIES (MBS)
39.4 HEDGING FIXED INCOME DERIVATIVES
39.5 SUMMARY
EXERCISES
NOTES
CHAPTER 40: Pricing Fixed Income Options: Black's Model and MCS
40.1 BLACK'S MODEL: EUROPEAN OPTIONS
40.2 PRICING A CAPLET USING MCS
40.3 EUROPEAN SWAPTION: BLACK'S MODEL
40.4 SUMMARY
EXERCISES
NOTE
CHAPTER 41: Pricing Fixed Income Derivatives: BOPM
41.1 NO-ARBITRAGE APPROACH: BOPM
41.2 PRICING A COUPON BOND
41.3 PRICING OPTIONS
41.4 PRICING A CALLABLE BOND
41.5 PRICING CAPS
41.6 PRICING FRAS
41.7 PRICING A SWAPTION
41.8 PRICING FRNS WITH EMBEDDED OPTIONS
41.9 MORE LATTICES
41.10 SUMMARY
EXERCISES
NOTES
PART X: CREDIT DERIVATIVES
CHAPTER 42: Credit Default Swaps (CDS)
42.1 CREDIT RISK AND CDS
42.2 SPECULATION WITH CDS
42.3 CONTRACT DETAILS
42.4 PRICING AND VALUATION
42.5 BOND YIELDS AND THE CDS SPREAD
42.6 CREDIT INDICES AND OTHER CDS CONTRACTS
42.7 DERIVATIVES ON THE CDS SPREAD
42.8 SUMMARY
EXERCISES
NOTES
CHAPTER 43: Securitisation, ABSs and CDOs
43.1 ABS AND ABS-CDO
43.2 CREDIT ENHANCEMENT
43.3 LOSSES ON ABS AND ABS-CDO
43.4 SUB-PRIME CRISIS 2007–8
43.5 SYNTHETIC CDO
43.6 SINGLE TRANCHE TRADING
43.7 TOTAL RETURN SWAP
43.8 SUMMARY
EXERCISES
NOTES
PART XI: MARKET RISK
CHAPTER 44: Value at Risk
44.1 INTRODUCTION
44.2 VALUE AT RISK (VAR)
44.3 FORECASTING VOLATILITY
44.4 BACKTESTING
44.5 CAPITAL ADEQUACY
44.6 SUMMARY
EXERCISES
NOTES
CHAPTER 45: VaR: Other Portfolios
45.1 SINGLE INDEX MODEL
45.2 VaR FOR COUPON BONDS
45.3 VaR: OPTIONS
45.4 SUMMARY
APPENDIX 45.A: VaR FOR FOREIGN ASSETS
APPENDIX 45.B: SINGLE INDEX MODEL (SIM)
APPENDIX 45.C: CASH FLOW MAPPING
EXERCISES
NOTES
CHAPTER 46: VaR: Alternative Measures
46.1 HISTORICAL SIMULATION
46.2 BOOTSTRAPPING
46.3 MONTE CARLO SIMULATION
46.4 ALTERNATIVE METHODS
46.5 SUMMARY
EXERCISES
NOTES
PART XII: PRICE DYNAMICS
CHAPTER 47: Asset Price Dynamics
47.1 STOCHASTIC PROCESSES
47.2 GEOMETRIC BROWNIAN MOTION (GBM) AND ITO'S LEMMA
47.3 DISTRIBUTION OF LOG STOCK PRICE AND STOCK PRICE
47.4 SUMMARY
APPENDIX 47: ITO'S LEMMA
EXERCISES
NOTES
CHAPTER 48: Black–Scholes PDE
48.1 RISK-NEUTRAL VALUATION AND BLACK–SCHOLES PDE
48.2 FINITE DIFFERENCE METHODS
48.3 SUMMARY
APPENDIX 48: DERIVATION OF BLACK–SCHOLES PDE
EXERCISES
NOTE
CHAPTER 49: Equilibrium Models: Term Structure
49.1 RISK-NEUTRAL VALUATION
49.2 MODELS OF THE SHORT-RATE
49.3 PRICING USING CONTINUOUS TIME MODELS
49.4 BOND PRICES AND DERIVATIVE PRICES
49.5 SUMMARY
EXERCISES
NOTES
Glossary
Bibliography
Author Index
Subject Index
End User License Agreement
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CHAPTER 20: Options on Futures
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CHAPTER 21: BOPM: Introduction
PART V
OPTIONS PRICING
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