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| Acknowledgements | |
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| The Origins and Growth of the Market | |
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| Definitions | |
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| Derivatives Building Blocks | |
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| Market Participants | |
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| Supporting Organizations | |
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| Early Origins of Derivatives | |
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| Derivatives in the USA | |
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| Overseas Developments, Innovation and Expansion | |
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| An Example of Recent Innovation: Weather Derivatives | |
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| Temperature-Linked Derivatives | |
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| The Wild Beast of Finance? | |
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| Lessons from Recent History | |
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| Creative Destruction and Contagion Effects | |
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| The Modern OTC Derivatives Market | |
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| The Exchange-Traded Derivatives Market | |
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| Chapter Summary | |
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| Equity and Currency Forwards | |
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| Introduction | |
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| Equity Forward Contract | |
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| The Forward Price | |
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| The Forward Price and Arbitrage Opportunities | |
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| The Forward Price and the Expected Payout | |
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| Foreign Exchange Forwards | |
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| Managing Currency Risk | |
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| Hedging with an Outright Forward FX Deal | |
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| The Forward Foreign Exchange Rate | |
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| The Forward FX Rate and Arbitrage Opportunities | |
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| Forward Points | |
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| FX Swaps | |
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| Applications of FX Swaps | |
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| Chapter Summary | |
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| Forward Rate Agreements | |
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| Introduction | |
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| FRA Case Study: Corporate Borrower | |
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| Results of the FRA Hedge | |
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| The FRA as Two Payment Legs | |
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| Dealing in FRAs | |
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| Forward Interest Rates | |
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| Chapter Summary | |
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| Commodity and Bond Futures | |
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| Introduction | |
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| The Margining System and the Clearing House | |
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| Users of Futures Contracts | |
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| Commodity Futures | |
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| Futures Prices and the Basis | |
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| US Treasury Bond Futures | |
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| US Treasury Bond Futures: Delivery Procedures | |
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| Gilt and Euro-Bund Futures | |
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| The Cheapest-to-Deliver (CTD) Bond | |
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| Chapter Summary | |
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| Interest Rate and Equity Futures | |
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| Introduction | |
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| Eurodollar Futures | |
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| Trading Eurodollar Futures | |
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| Hedging with Interest Rate Futures | |
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| Interest Rate Futures Prices | |
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| Equity Index Futures | |
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| Applications of S&P 500 Index Futures | |
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| FT-SE 100 Index Futures Contracts | |
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| Establishing Net Profits and Losses | |
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| Single Stock Futures (SSFs) | |
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| Chapter Summary | |
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| Interest Rate Swaps | |
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| Introduction | |
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| Interest Rate Swap Structure | |
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| Basic Single-Currency Interest Rate Swap | |
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| The Swap as a Package of Spot and Forward Deals | |
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| Rationale for the Swap Deal | |
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| Swap Terminology and Swap Spreads | |
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| Typical Swap Applications | |
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| Interest Rate Swap Variants | |
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| Cross-Currency Interest Rate Swaps | |
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| Net Borrowing Costs using a Cross-Currency Swap | |
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| Inflation Swaps | |
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| Chapter Summary | |
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| Equity and Credit Default Swaps | |
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| Introduction to Equity Swaps | |
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| Equity Swap Case Study | |
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| Other Applications of Equity Swaps | |
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| Equity Index Swaps | |
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| Hedging an Equity Index Swap | |
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| Credit Default Swaps | |
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| Credit Default Swap: Basic Structure | |
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| Credit Default Swap Applications | |
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| Credit Spreads | |
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| The CDS Premium and the Credit Spread | |
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| Pricing Models for CDS Premium | |
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| Index Credit Default Swaps | |
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| Basket Credit Default Swaps | |
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| Chapter Summary | |
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| Fundamentals of Options | |
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| Introduction | |
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| Definitions | |
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| Types of Options | |
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| Basic Option Trading Strategies | |
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| Long Call: Expiry Payoff Profile | |
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| Short Call: Expiry Payoff Profile | |
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| Long Put: Expiry Payoff Profile | |
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| Short Put: Expiry Payoff Profile | |
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| Summary: Intrinsic and Time Value | |
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| Hedging with Options | |
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| Chapter Overview | |
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| Futures Hedge Revisited | |
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| Protective Put | |
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| Hedging with ATM Put Option | |
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| Covered Call Writing | |
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| Equity Collar | |
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| Zero-Cost Equity Collar | |
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| Protective Put with a Barrier Option | |
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| Behaviour of Barrier Options | |
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| Chapter Summary | |
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| Exchange-Traded Equity Options | |
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| Introduction | |
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| Basic Concepts | |
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| CBOE Stock Options | |
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| UK Stock Options on NYSE Liffe | |
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| CME S&P 500 Index Options | |
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| FT-SE 100 Index Options | |
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| Chapter Summary | |
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| Currency or FX Options | |
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| Introduction | |
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| Users of Currency Options | |
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| Hedging FX Exposures with Options: Case Study | |
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| Graph Of Hedged And Unhedged Positions | |
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| Hedging with a Zero-Cost Collar | |
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| Reducing Premium on FX Hedges | |
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| Compound Options | |
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| Exchange-Traded Currency Options | |
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| Chapter Summary | |
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| Interest Rate Options | |
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| Introduction | |
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| OTC Interest Rate Options | |
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| OTC Interest Rate Option Case Study | |
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| Hedging a Loan with a Caplet | |
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| Interest Rate Cap | |
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| Interest Rate Collar | |
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| Interest Rate Swap and Swaption | |
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| Summary of Interest Rate Hedging Strategies | |
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| Eurodollar Options | |
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| Euro and Sterling Interest Rate Options | |
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| Bond Options | |
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| Exchange-Traded Bond Options | |
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| Chapter Summary | |
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| Option Valuation Concepts (1) | |
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| Introduction | |
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| The Concept of a Riskless Hedge | |
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| A Simple Option Pricing Model | |
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| Option Fair Value | |
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| Extending the Binomial Model | |
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| Cost of Dynamic Hedging | |
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| The Black-Scholes Option Pricing Model | |
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| Historical Volatility | |
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| Measuring and Using Volatility | |
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| Chapter Summary | |
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| Option Valuation Concepts (2) | |
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| Introduction | |
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| Problems with Historical Volatility | |
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| Implied Volatility | |
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| Black-Scholes Model Assumptions | |
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| Value of a Call Option | |
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| Value of a Put Option | |
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| Equity Index and Currency Options | |
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| Pricing Interest Rate Options | |
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| Chapter Summary | |
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| Option Sensitivities: The 'Greeks' | |
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| Introduction | |
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| Delta (� or �) | |
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| Delta Behaviour | |
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| Delta as the Hedge Ratio | |
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| The Effects of Changes in Delta | |
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| Readjusting the Delta Hedge | |
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| Gamma (� or �) | |
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| Gamma and the Spot Price of the Underlying | |
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| Gamma and Time to Expiry | |
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| Theta (�) | |
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| Vega or Kappa (�) | |
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| Rho (�) | |
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| Summary of Greeks | |
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| Chapter Summary | |
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| Option Trading Strategies (1) | |
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| Introduction | |
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| Bull Spread | |
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| Bull Position with Digital Options | |
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| Spot Price and CON Value | |
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| Bear Spread | |
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| The Greeks for the Bear Spread | |
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| Put or Bear Ratio Spread | |
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| Long Straddle | |
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| Long Straddle Current Payoff Profile | |
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| Potential Risks with a Long Straddle | |
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| Chapter Summary | |
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| Option Trading Strategies (2) | |
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| Introduction | |
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| Chooser Option | |
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| Short Straddle | |
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| Short Straddle Current Payoff Profile | |
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| Potential Profits with a Short Straddle | |
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| Managing the Risk on a Short Straddle | |
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| Short Strangle | |
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| New Ways of Trading Volatility | |
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| Calendar or Time Spread | |
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| Chapter Summary | |
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| Convertible and Exchangeable Bonds | |
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| Introduction | |
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| Investors in Convertible Bonds | |
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| Issuers of Convertible Bonds | |
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| CB Measures of Value | |
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| Conversion Premium and Parity | |
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| Other Factors Affecting CB Values | |
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| Convertible Arbitrage | |
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| Convertible Arbitrage Example | |
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| Profits and Risks with the CB Arbitrage Trade | |
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| Mandatorily Convertibles and Exchangeables | |
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| Structuring a Mandatorily Exchangeable (ME) Bond | |
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| Chapter Summary | |
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| Structured Securities | |
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| Introduction | |
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| Capital Protection Equity-Linked Notes | |
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| Expiry Value of 100% Capital Protection Notes | |
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| 100% Participation Equity-Linked Notes | |
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| Capped Participation Equity-Linked Notes | |
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| Average Price Notes | |
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| Locking in Interim Gains: Cliquet Options | |
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| Securitization and CDOs | |
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| The Basic CDO Structure | |
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| Rationale for Securitization | |
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| Synthetic CDOs | |
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| Chapter Summary | |
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| Clearing, Settlement and Operational Risk | |
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| Introduction | |
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| Risk Management in General | |
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| Settlement of Exchange-Traded Derivatives | |
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| Major Clearing Houses | |
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| Confirmation and Settlement of OTC Deals | |
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| Controlling Counterparty Risk on OTC Derivatives | |
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| Operational Risk | |
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| Best Practice in Operational Risk Management | |
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| Chapter Summary | |
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| Financial Calculations | |
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| Exotic Options | |
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| Glossary of Terms | |
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| Index | |