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Derivatives : Theory and Practice
Derivatives : Theory and Practice
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Author(s): Cuthbertson, Keith
ISBN No.: 9781119595595
Pages: 912
Year: 201912
Format: Trade Paper
Price: $ 89.63
Dispatch delay: Dispatched between 7 to 15 days
Status: Available

About the Authors xxvii About the Companion Site xxix Preface xxxi Chapter 1 Derivative Securities 1 1.1 Forwards and Futures 2 1.2 Options 7 1.3 Swaps 14 1.4 Hedging, Speculation, and Arbitrage 16 1.5 Short-Selling 18 1.6 Summary 20 Exercises 21 Part I Forwards and Futures 23 Chapter 2 Futures Markets 25 2.1 Trading on Futures Markets 25 2.


2 Futures Exchanges and Traders 29 2.3 Margins and Marking-to-Market 30 2.4 Summary 36 Exercises 36 Chapter 3 Forward and Futures Prices 39 3.1 Pricing Forward Contracts 39 3.2 Dividends, Storage Costs, and Convenience Yield 46 3.3 Commodity Futures 49 3.4 Value of a Forward Contract 53 3.5 Summary 57 Exercises 57 Chapter 4 Futures: Hedging and Speculation 59 4.


1 Hedging Using Futures 59 4.2 Novel Futures Contracts 67 4.3 Speculation 70 4.4 Summary 72 Exercises 73 Chapter 5 Index Futures 75 5.1 Stock Index Futures (SIF) 76 5.2 Index Arbitrage 78 5.3 Hedging 81 5.4 Tailing the Hedge 88 5.


5 Summary 89 Appendix 5: Hedge Ratios 89 Exercises 93 Chapter 6 Strategies: Stock Index Futures 95 6.1 Underpriced Stocks: Hedging Market Risk 95 6.2 Overpriced Stocks: Hedging Market Risk 98 6.3 Market-neutral Hedge Fund 100 6.4 Long-Short Hedge Fund 101 6.5 Changing Stock Market Exposure 104 6.6 Merger Arbitrage 106 6.7 Summary 109 Appendix 6.


A: Stock Picking and Market Risk 110 Appendix 6.B: Market Timing 112 Appendix 6.C: Hedging: Long-Short Portfolio 114 Appendix 6.D: Merger Arbitrage and Hedging 116 Exercises 117 Chapter 7 Currency Forwards and Futures 119 7.1 FX-Futures Contracts 120 7.2 Pricing FX-Forward Contracts 123 7.3 Pricing FX-Futures Contracts 126 7.4 Hedging and Speculation: Forwards 127 7.


5 Hedging and Speculation: Futures 129 7.6 Summary 132 Appendix 7: Hedging Using FX-Futures 133 Exercises 135 Part II Fixed Income: Cash Markets 137 Chapter 8 Interest Rates 139 8.1 LIBOR, Repos, Fed Funds, and OIS Rates 139 8.2 Day-Count Conventions 141 8.3 Forward Rates 146 8.4 Forward Rate Agreements (FRAs) 150 8.5 Summary 154 Exercises 154 Chapter 9 Bond Markets 157 9.1 Prices, Yields, and Return 158 9.


2 Pricing Coupon Bonds 165 9.3 Summary 168 Exercises 169 Chapter 10 Bonds: Duration and Convexity 171 10.1 Yield Curve 171 10.2 Duration and Convexity 173 10.3 Summary 178 Appendix 10: Duration and Convexity 179 Exercises 181 Part III Fixed Income Futures Contracts 183 Chapter 11 Interest Rate Futures 185 11.1 Three-month Eurodollar Futures Contract 186 11.2 Sterling 3-month Futures Contract 188 11.3 T-bill Futures 188 11.


4 Futures Price and Forward Rates 189 11.5 Pricing Interest Rate Futures 190 11.6 Arbitrage: Implied Repo Rate 193 11.7 Speculation 195 11.8 Spread Trades 196 11.9 Summary 199 Appendix 11.A: Futures Prices and Interest Rates 200 Exercises 203 Chapter 12 Hedging with Interest Rate Futures 205 12.1 Number of Futures Contracts 206 12.


2 Different Types of Hedge 210 12.3 Hedging: T-bill and Eurodollar Futures 214 12.4 Eurodollar Stack Hedge 217 12.5 Summary 221 Appendix 12: Hedge Ratios 222 Exercises 224 Chapter 13 T-bond Futures 227 13.1 Contract Specifications 228 13.2 Conversion Factor and Cheapest-to-Deliver 230 13.3 Hedging Using T-Bonds 234 13.4 Hedging: Further Issues 235 13.


5 Market Timing 238 13.6 Wild Card Play 239 13.7 Pricing T-bond Futures 240 13.8 T-bond Futures Spreads 244 13.9 Summary 247 Appendix 13.A: Hedging: Duration and Market Timing 248 Appendix 13.B: Implied Repo Rate and Arbitrage 250 Exercises 251 Part IV Options 253 Chapter 14 Options Markets 255 14.1 Market Organisation 255 14.


2 Call Options 261 14.3 Put Options 268 14.4 Intrinsic Value and Time Value 273 14.5 Summary 276 Exercises 277 Chapter 15 Uses of Options 279 15.1 Protective Put 279 15.2 Put-Call Parity: European Options 282 15.3 Guaranteed Bond 283 15.4 Other Options 286 15.


5 Summary 288 Exercises 289 Chapter 16 Black-Scholes Model 291 16.1 Determinants of Option Prices 291 16.2 Black-Scholes 296 16.3 Are Stocks Less Risky in the Long Run? 303 16.4 Delta Hedging 306 16.5 Implied Volatility 308 16.6 Summary 311 Appendix 16: Price Bounds on European Options 312 Exercises 313 Chapter 17 Option Strategies 315 17.1 Synthetic Securities 316 17.


2 Bull and Bear Spreads 320 17.3 Straddle, Strangle, Butterfly, and Condor 324 17.4 Horizontal (Time, Calendar) Spreads 333 17.5 Summary 335 Exercises 335 Chapter 18 Stock Options and Stock Index Options 337 18.1 Options on Stocks 337 18.2 Stock Index Options (SIO) 342 18.3 Summary 345 Appendix 18.A: Static Hedge: Index Puts 345 Appendix 18.


B: Dynamic Delta Hedge 346 Exercises 346 Chapter 19 Foreign Currency Options 349 19.1 Contract Specifications 349 19.2 Speculation 350 19.3 Hedging Foreign Currency Exposure 353 19.4 Other Currency Options 358 19.5 Summary 358 Exercises 359 Chapter 20 Options on Futures 363 20.1 Market Conventions 363 20.2 Price Bounds on European Futures Options 366 20.


3 Trading Strategies 367 20.4 Summary 370 Exercises 371 Part V Options Pricing 373 Chapter 21 BOPM: Introduction 375 21.1 One-Period BOPM 375 21.2 Risk-neutral Valuation 379 21.3 Determinants of Call Premium 382 21.4 Pricing a European Put Option 383 21.5 Summary 384 Appendix 21: No-arbitrage Conditions 385 Exercises 386 Chapter 22 BOPM: Implementation 389 22.1 Generalising the BOPM 390 22.


2 Replication Portfolio 393 22.3 BOPM to Black-Scholes 396 22.4 Summary 398 Appendix 22: Delta Hedging and Arbitrage 399 Exercises 402 Chapter 23 BOPM: Extensions 405 23.1 American Options 405 23.2 Options on Other Underlying Assets 407 23.3 Options on Futures Contracts 409 23.4 Options on Dividend-paying Stocks 412 23.5 Summary 414 Appendix 23: BOPM and Risk-neutral Valuation 415 Exercises 419 Chapter 24 Analysis of Black-Scholes 421 24.


1 Volatility 421 24.2 Testing Black-Scholes 425 24.3 Limitations of Black-Scholes 428 24.4 Summary 431 Exercises 432 Chapter 25 Pricing European Options 435 25.1 What do N (d1) and N (d2) Represent? 435 25.2 European Options: Dividend Paying Stocks 436 25.3 Foreign Currency and Futures Options 437 25.4 Put-Call Parity 440 25.


5 Summary 443 Exercises 444 Chapter 26 Pricing Options: Monte Carlo Simulation 447 26.1 Brownian Motion: Parallel Universe 447 26.2 Pricing a European Call 449 26.3 Variance Reduction Methods 454 26.4 The Greeks 455 26.5 Multiple Stochastic Factors 456 26.6 Path-dependent Options 459 26.7 Summary 460 Appendix 26: MCS, Several Stochastic Variables 461 Exercises 464 Part VI The Greeks 467 Chapter 27 Delta Hedging 469 27.


1 Delta 469 27.2 Dynamic Delta Hedging 473 27.3 Summary 481 Exercises 481 Chapter 28 The Greeks 483 28.1 Different Greeks 483 28.2 Hedging with the Greeks 491 28.3 Greeks and the BOPM 496 28.4 Summary 498 Appendix 28: Black-Scholes and the Greeks 499 Exercises 502 Chapter 29 Portfolio Insurance 503 29.1 Static Hedge 504 29.


2 Dynamic Portfolio Insurance 507 29.3 Summary 513 Exercises 514 Part VII Advanced Options 517 Chapter 30 Other Options 519 30.1 Corporate Equity and Debt 519 30.2 Warrants 522 30.3 Equity Collar 524 30.4 Summary 526 Exercises 527 Chapter 31 Exotic Options 529 31.1 Three-period BOPM 530 31.2 Asian Options 531 31.


3 Other Exotics: Lookbacks, Barrier, Compound, and Chooser 535 31.4 Summary 542 Exercises 543 Chapter 32 Energy and Weather Derivatives 545 32.1 Energy Contracts 546 32.2 Hedging with Energy Futures 549 32.3 Energy Swaps 552 32.4 Weather Derivatives 557 32.5 Reinsurance and CAT Bonds 562 32.6 Summary 562 Exercises 563 Part VIII Swaps 567 Chapter 33 Interest Rate Swaps 569 33.


1 Using Interest Rate Swaps 571 33.2 Cash Flows in a Swap 573 33.3 Settlement and Price Quotes 575 33.4 Terminating a Swap 577 33.5 Comparative Advantage 577 33.6 Summary 581 Appendix 33: Comparative Advantage with Swap Dealer 581 Exercises 583 Chapter 34 Pricing Interest Rate Swaps 585 34.1 Cash Flows in a Swap 586 34.2 Floating Rate Note (FRN) 587 34.


3 Pricing a Swap: Short Method 589 34.4 Pricin.


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