Derivatives An Introduction

ISBN-10: 0324273029

ISBN-13: 9780324273021

Edition: 2nd 2005 (Revised)

Authors: Robert A. Strong

List price: $172.95
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Bob Strong's practical, applied approach, and his ability to explain the intuition underlying the math, makes this text the first truly accessible, yet comprehensive, derivatives book.
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Book details

List price: $172.95
Edition: 2nd
Copyright year: 2005
Publisher: Cengage South-Western
Binding: Hardcover
Pages: 397
Size: 7.50" wide x 9.25" long x 0.75" tall
Weight: 1.848

Introductionp. 1
Introductionp. 1
Types of Derivativesp. 3
Optionsp. 3
Futures Contractsp. 3
Swapsp. 4
Product Characteristiesp. 4
Participants in the Derivatives Worldp. 5
Hedgingp. 5
Speculationp. 5
Arbitragep. 6
Uses of Derivativesp. 7
Risk Managementp. 7
Income Generationp. 8
Financial Engineeringp. 8
Effective Study of Derivativesp. 9
Appendixp. 11
A Review of Statistical Principles Useful in the Study of Derivativesp. 11
Basic Principles Of Stock Optionsp. 15
What Options Are and Where They Come Fromp. 16
Call Optionsp. 16
Put Optionsp. 17
Where Options Come Fromp. 18
Opening and Closing Transactionsp. 18
The Role of the Options Clearing Corporationp. 21
Why Options Are a Good Ideap. 21
Portfolio Risk Managementp. 22
Risk Transferp. 22
Financial Leveragep. 23
Income Generationp. 23
Where and How Options Tradep. 23
Exchangesp. 23
Over-the-Counter Optionsp. 24
Other Listed Optionsp. 25
Trading Mechanicsp. 26
The Option Premiump. 29
Intrinsic Value and Time Valuep. 29
Option Price Quotationsp. 29
Profits and Losses with Optionsp. 31
Understanding the Exercise of an Optionp. 31
Profit and Loss Diagramsp. 33
Buying a Call Optionp. 33
Writing a Call Optionp. 34
Buying a Put Optionp. 35
Writing a Put Optionp. 36
A Note on Margin Requirementsp. 37
Basic Option Strategies: Covered Calls And Protective Putsp. 41
Using Options as a Hedgep. 41
Protective Putsp. 42
Using Calls to Hedge a Short Positionp. 47
Writing Covered Calls to Protect Against Market Downturnsp. 50
Using Options to Generate Incomep. 52
Writing Calls to Generate Incomep. 52
Writing Puts to Generate Incomep. 55
Profit and Loss Diagrams with Seasoned Stock Positionsp. 58
Adding a Put to an Existing Stock Positionp. 58
Writing a Call Against an Existing Stock Positionp. 59
Improving on the Marketp. 60
Writing Calls to Improve on the Marketp. 60
Writing Puts to Improve on the Marketp. 61
Option Combinations and Spreadsp. 66
Combinationsp. 66
Spreadsp. 73
Types of Spreadsp. 73
Nonstandard Spreadsp. 83
Other Strategiesp. 85
Margin Considerationsp. 87
Evaluating Spreadsp. 90
Option Pricingp. 97
A Brief History of Options Pricingp. 98
The Early Workp. 98
The Middle Yearsp. 99
The Presentp. 99
Arbitrage and Option Pricingp. 100
Free Lunchesp. 100
The Theory of Put/Call Parityp. 101
The Binomial Option Pricing Modelp. 107
Put Pricing in the Presence of Call Options: Further Studyp. 112
Binomial Put Pricingp. 113
Binomial Pricing with Asymmetric Branchesp. 114
The Effect of Timep. 115
The Effect of Volatilityp. 116
Intuition into Black-Scholesp. 118
Continuous Time and Multiple Periodsp. 118
Option Pricing and the Roll of Dicep. 119
Appendixp. 126
Multi-Period Binomial Option Pricingp. 126
Option Pricing with Continuous Compoundingp. 126
Risk Neutrality and Implied Branch Probabilitiesp. 127
Extension of Two Periodsp. 128
Recombining Binomial Treesp. 131
Another Examplep. 131
Binomial Pricing with Lognormal Returnsp. 132
Multiperiod Binomial Put Pricingp. 134
Exploiting Arbitragep. 136
American vs. European Option Pricingp. 137
The Black-Scholes Option Pricing Modelp. 139
The Black-Scholes Option Pricing Modelp. 140
The Modelp. 140
Development and Assumptions of the Modelp. 140
Determinants of the Option Premiump. 141
Assumptions of the Black-Scholes Modelp. 143
Intuition Into the Black-Scholes Modelp. 147
Calculating Black-Scholes Prices from Historical Datap. 149
Call Valuesp. 149
Implied Volatilityp. 153
Calculating Implied Volatilityp. 153
An Implied Volatility Heuristicp. 154
Historical Versus Implied Volatilityp. 154
Pricing in Volatility Unitsp. 156
Volatility Smilesp. 158
Using Black-Scholes to Solve for the Put Premiump. 162
Problems Using the Black-Scholes Modelp. 162
Option Greeksp. 167
The Principal Option Pricing Derivativesp. 167
Deltap. 167
Measure of Option Sensitivityp. 168
Hedge Ratiop. 169
Likelihood of Becoming in-the-Moneyp. 169
Thetap. 170
Gammap. 171
Sign Relationshipsp. 172
Other Derivativesp. 173
Vegap. 173
Rhop. 174
The Greeks of Vegap. 175
Othersp. 175
Position Derivativesp. 175
An Examplep. 175
Caveats About Position Derivativesp. 175
Delta Neutralityp. 176
Calculating Delta Hedge Ratiosp. 177
Why Delta Neutrality Mattersp. 177
Two Markets: Directional and Speedp. 179
Directional Marketp. 179
Speed Marketp. 179
Combining Directional and Speed Marketsp. 179
Dynamic Hedgingp. 180
Minimizing the Cost of Delta Adjustmentsp. 181
Position Riskp. 182
Fundamentals Of The Futures Marketp. 190
The Concept of Futures Contractsp. 191
The Futures Promisep. 191
Why We Have Futures Contractsp. 194
Ensuring the Promise Is Keptp. 195
Market Mechanicsp. 196
Types of Ordersp. 196
Ambience of the Marketplacep. 198
Creation of a Contractp. 200
Market Participantsp. 201
Hedgersp. 201
Processorsp. 202
Speculatorsp. 204
Scalpersp. 205
The Clearing Processp. 206
Matching Tradesp. 206
Accounting Supervisionp. 208
Intramarket Settlementp. 211
Settlement Pricesp. 212
Deliveryp. 212
Principles of Futures Contract Pricingp. 213
The Expectations Hypothesisp. 213
Normal Backwardationp. 214
A Full Carrying Charge Marketp. 215
Reconciling the Three Theoriesp. 217
Spreading with Commodity Futuresp. 217
Intercommodity Spreadsp. 217
Intermarket Spreadsp. 218
Intracommodity Spreadsp. 218
Why Spread in the First Place?p. 219
Stock Index Futuresp. 223
Stock Indexes and Their Futures Contractsp. 223
Stock Indexesp. 224
Stock Index Futures Contractsp. 227
The SandP 500 Stock Index Futures Contractp. 227
Pricing of Stock Index Futuresp. 228
Basis Convergencep. 232
Use of Stock Index Futuresp. 232
Speculationp. 232
Spreadingp. 233
Arbitragep. 233
Anticipation of Stock Purchase or Salep. 234
Hedgingp. 234
Hedging with Stock Index Futuresp. 235
Systematic and Unsystematic Riskp. 235
The Need to Hedgep. 236
The Hedge Ratiop. 236
Hedging in Retrospectp. 239
Adjusting Market Riskp. 241
Foreign Exchange Futuresp. 245
Foreign Exchange Riskp. 246
FX Risk and Interest Ratesp. 247
The Concept of Exposurep. 248
Accounting Exposurep. 248
Economic Exposurep. 248
FX Risk from a Business Perspectivep. 249
FX Risk from an Investment Perspectivep. 251
Forward Ratesp. 252
Purchasing Power Parityp. 253
Interest Rate Parityp. 254
Foreign Currency Futuresp. 256
Pricing of Foreign Exchange Futures Contractsp. 256
Dealing with the Riskp. 258
Dealing with the Exposurep. 258
A Business Examplep. 258
An Investment Examplep. 260
Key Issues in Foreign Exchange Risk Managementp. 261
Fundamentals Of Interest Rate Futuresp. 265
Interest Rate Futuresp. 266
Treasury Bills, Eurodollars, and Their Futures Contractsp. 266
Characteristics of U.S. Treasury Billsp. 266
The Treasury Bill Futures Contractp. 268
Characteristics of Eurodollarsp. 269
The Eurodollar Futures Contractp. 269
Speculating with T-Bill Futuresp. 271
Hedging with T-Bill Futuresp. 272
Treasury Bonds and Their Futures Contractsp. 273
Characteristics of U.S. Treasury Bondsp. 273
Pricing of Treasury Bondsp. 274
The Treasury Bond Futures Contractp. 275
Dealing with Coupon Differencesp. 275
The Matter of Accrued Interestp. 278
Delivery Proceduresp. 279
The Invoice Pricep. 280
Cheapest to Deliverp. 281
Pricing Interest Rate Futures Contractsp. 282
Arbitrage with T-Bill Futuresp. 285
Delivery Optionsp. 286
Spreading with Interest Rate Futuresp. 287
TED Spreadp. 287
The NOB Spreadp. 289
Other Spreads with Financial Futuresp. 290
Futures Contracts And Portfolio Managementp. 294
The Concept of Immunizationp. 295
Bond Risksp. 295
Duration Matchingp. 296
Bank Immunizationp. 298
Duration Shiftingp. 301
Hedging with Interest Rate Futuresp. 303
Increasing Duration with Futuresp. 304
Disadvantages of Immunizingp. 306
Altering Asset Allocation with Futuresp. 308
Tactical Changesp. 308
Initial Situationp. 309
Bond Adjustmentp. 310
Stock Adjustmentp. 310
Neutralizing Cashp. 311
Swaps And Interest Rate Optionsp. 315
Interest Rate Swapsp. 316
Immunizing with Interest Rate Swapsp. 322
Exploiting Comparative Advantage in the Credit Marketp. 324
Foreign Currency Swapsp. 325
Circus Swapp. 329
Swap Variationsp. 329
Interest Rate Optionsp. 330
Interest Rate Capp. 330
Interest Rate Floorp. 332
Calculating Cap and Floor Payoffsp. 333
Interest Rate Collarp. 334
Swaptionp. 334
Swap Pricingp. 340
Intuition Into Swap Pricingp. 340
Swaps as a Pair of Bondsp. 341
Swaps as a Series of Forward Contractsp. 341
Swaps as a Pair of Option Contractsp. 342
Solving for the Swap Pricep. 342
The Role of the Forward Curve for LIBORp. 343
Implied Forward Ratesp. 344
Initial Condition Pricingp. 346
Quoting the Swap Pricep. 348
Counterparty Risk Implicationsp. 349
Valuing an Off-Market Swapp. 350
Hedging the Swapp. 351
Hedging Against a Parallel Shift in the Yield Curvep. 352
Hedging Against Any Shift in the Yield Curvep. 353
Tailing the Hedgep. 355
Pricing a Currency Swapp. 356
Other Derivative Assetsp. 361
Futures Optionsp. 361
Characteristicsp. 362
Speculating with Futures Optionsp. 365
Spreading with Futures Optionsp. 365
Basis Risk with Spreadsp. 365
Hedging with Futures Optionsp. 366
Speculators and Hedgingp. 367
Early Exercise of Futures Optionsp. 368
Pricing Futures Optionsp. 368
Disposing of Valuable Optionsp. 369
Futures Option Deltasp. 370
Implied Volatilityp. 370
Warrantsp. 370
Characteristicsp. 371
Pricingp. 371
Hedging with Stock Warrantsp. 373
Other Derivative Assetsp. 374
Characteristicsp. 375
A Note on the Pricing of Foreign Currency Optionsp. 375
When-Issued Stockp. 376
Common Stock Trading on a When-Issued Basisp. 377
Financial Engineering And Risk Managementp. 381
Financial Engineeringp. 382
Engineering an Optionp. 383
Gamma Riskp. 388
Risk Managementp. 390
Managing Company Riskp. 391
A Case Studyp. 392
Managing Market Riskp. 395
Contemporary Issuesp. 401
Long-Term Capital Managementp. 402
Value at Riskp. 403
VAR Calculationp. 405
New Product Developmentp. 406
Weather Derivativesp. 406
Telecom Capacityp. 409
Rental Capsp. 409
Equity Swapsp. 410
Program Tradingp. 411
Implementationp. 412
The Open Outcry and Specialist Systemsp. 413
FAS 133p. 414
Requirementsp. 414
Criticismp. 415
Implicationsp. 416
Glossaryp. 419
Self Test Answersp. 435
Indexp. 440
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