لایب سان

Author(s): Boyle, Patrick E.; McDougall, Jesse

Publisher: De|G Press, Year: 2019

ISBN: 9781547401161,1547401168,9781547401215,1547401214

Contents vii Contents Chapter 1: Introduction to Derivatives  1 The Uses of Derivatives  1 Derivatives Underlyings  2 Derivatives Market Participants  2 Hedgers  2 Speculators  3 Arbitrageurs  3 Middlemen  4 How are Derivatives Traded?  5 Over-the-counter derivatives (OTC)  5 Exchange-traded Derivatives  6 Major Derivative Contract Types  6 Economic Function of Derivatives Markets  7 Criticisms of Derivatives Markets  7 Derivatives—A Zero Sum Game  8 Chapter 1 Questions  8 Chapter 2: Futures & Forwards  11 What Is a Future?  11 Origins of the Futures Markets  11 Standardization in Futures Markets  12 Futures Margin  12 What Is a Forward?  14 Pricing of Futures  14 Convenience Yield  16 Convergence of Futures Price to Spot Price  17 Backwardation and Contango  18 Hedging Motivation  19 Hedging with Futures  19 Should Companies Hedge?  20 Types of Orders in Futures Markets  21 Futures and Forwards Payoff Diagrams  22 Chapter 2 Questions  24 Chapter 3: Introduction to Options  27 What Is an Option?  27 Options Contract Specifications  27 Call Option  27 viii Contents Put Option  28 What Is an Options Premium?  29 What Are American and European Options?  29 Exchange-Traded and OTC Options  29 Options Payoff Diagrams  29 Options Expirations  31 Options Strikes  32 Intrinsic Value and Time Value  32 Types of Options Underlyings  33 Options Treatment of Dividends  33 Options Treatment of Special Dividends  33 Options Treatment of Stock Splits  34 Options Position Limits  34 Options Margin  35 Options Exercise  36 Options Transaction Costs  37 Trading Naked Options Positions  37 Options Clearing  38 Warrants, Convertible Bonds, and Employee Stock Options  39 Factors Impacting Stock Options Prices  40 The Impact of Spot Prices on Option Prices  40 Strike Price  40 Time to Maturity/Expiration  41 The Volatility of the Stock Price  41 Interest Rates  41 Expected Dividends  42 Chapter 3 Questions  42 Chapter 4: Simple Options Trading Strategies  45 Covered Calls  45 Protective Puts  47 Covered Puts  47 Protective Calls  48 Put Call Parity  49 Synthetic Options  50 Options Trading Strategies  51 Bull Spreads  51 Bear Spreads  53 Butterfly Spreads  55 Calendar Spreads  56 Contents ix Straddles  56 Strangles  58 Risk Reversals  58 Chapter 4 Questions  61 Chapter 5: Options Pricing History  63 The Market Utility of Options  63 The History of Options Pricing  64 Louis Bachelier  65 Expiry Payoffs: A Starting Point for Options Pricing  66 Chapter 5 Questions  67 Chapter 6: Binomial Tree Valuation  69 How Does a Binomial Tree Work?  69 The Portfolio Approach to Valuing Derivatives  69 The Risk-Neutral Binomial Tree Approach  73 How Can We Make This More Realistic?  75 The Multi-Period Binomial Model  75 Binomial Trees and American Options  78 Early Exercise of American Options  79 Volatility of the Underlying in Binomial Tree Valuations  81 Chapter 6 Questions  81 Chapter 7: The Black-Scholes Model  85 Assumptions of the Black-Scholes Model  85 Are the Black-Scholes Assumptions Reasonable?  86 Black-Scholes Notation  87 The Black-Scholes Equation  88 Black-Scholes Formula  88 Black-Scholes Interpretations  89 Inputs for the Black-Scholes Model  89 The Risk-Free Rate and Black-Scholes  89 The Standard Deviation of the Stock and Black-Scholes  89 Historic Volatility and Black-Scholes  90 Implied Volatility and Black-Scholes  91 Volatility Indices  91 European Options and Dividends  92 Merton’s Model  92 American Options and Black-Scholes  93 Chapter 7 Questions  95 x Contents Chapter 8: Option Sensitivities—The Greeks  97 Hedging  97 The Greeks  97 Delta Δ  98 Relationship Between Put and Call Delta  99 Gaining an Intuition of Delta  101 Delta-Neutral  101 Theta Θ  102 Rho ρ  103 Vega V  104 Gamma Γ  105 Other Second Order Greeks  105 Greeks and Moneyness  106 Creating Neutral Portfolios  107 Portfolios of Options and Shares  107 Chapter 8 Questions  108 Chapter 9: Dynamic Hedging  111 Dynamically Replicating a Call Option  112 Dynamic Hedging and Gamma  114 Volatility Arbitrage  114 Chapter 9 Questions  118 Chapter 10: Options on Indices, Futures, and Foreign Exchanges  121 Options on Stock Indices  121 Uses of Index Options  121 Beta  122 Dividends in the Index  123 Options on Futures  123 Foreign Exchange Options  125 Chapter 10 Questions  126 Chapter 11: Volatility Smiles  127 Implied Distributions  128 Volatility Terminology  131 Options Skew as a Measure of Fear  132 The Term Structure of Volatility  132 The Volatility Surface  133 Modeling Volatility  134 Chapter 11 Questions  135 Contents xi Chapter 12: Volatility & Variance Swaps  137 Volatility Swaps  137 Replication and Hedging of Volatility Swaps  138 Variance Swaps  139 Market Conventions  141 Replicating Variance Swaps  141 Pricing of Variance Swaps  142 Variance Swaps Market Developments  143 Chapter 12 Questions  143 Chapter 13: The Monte Carlo Method  145 How Does the Monte Carlo Method Work?  145 When Do You Use the Monte Carlo Method?  146 Monte Carlo and the Greeks  147 Chapter 13 Questions  147 Chapter 14: Exotics  149 Bermudan Options  149 Forward Start Option  149 Compound Options  150 Chooser Options  150 Barrier Options  151 Binary Options, also Known as Digital Options  152 Gap Option  152 Lookback Options  153 Asian Options  153 Rainbow Options  153 Basket Options  154 Quantos  154 Weather Derivatives  154 Energy Derivatives  155 Insurance Derivatives  155 Chapter 14 Questions  155 Chapter 15: Interest Rate Swaps  157 Interest Rates  157 Sovereign Rates  157 LIBOR Rates  157 Repurchase Agreements (Repo Rates)  158 Zero Coupon Rates  158 xii Contents Risk-Free Rate  158 Bond Prices and Interest Rates  158 Credit Spread  159 Compounding Reminder  159 Backing Out “Zero” Rates from Coupon Paying Bonds  159 Bootstrapping Example  160 Forward Rates  160 Forward Rate Calculation Example  161 Forward Rate Agreement  161 Forward Rate Gains/Losses Example  161 Swaps  162 The Commercial Need for Swaps  162 The ISDA Master Agreement  163 The Plain Vanilla Swap  164 A Swap Example  164 The Interest Rate Swaps Market  165 Interest Rate Swap Market Participants  166 The Importance of Swaps in Markets  167 Comparative Advantage  168 Interest Rate Swap Valuation  169 Interest Rate Swap Valuation Example  170 Currency Swaps  171 Currency Swap Example  171 Valuation of Currency Swaps  172 Dividend Swaps  172 Other Types of Swap  173 Credit Risk with Interest Rate Swaps  174 Deliverable Interest Rate Swap futures  175 Chapter 15 Questions  175 Chapter 16: Risk Management and Value at Risk  177 Sources of Risk  177 Strategies to Manage Risk  177 Principles of Risk Management  178 Prioritization in Risk Management  178 Risk Retention  178 Value at Risk  179 The History of VaR  180 Timing Conventions  180 Which VaR?  181 Contents xiii Two Ways to Calculate VaR  181 Simple Understanding of VaRThe Historical Approach  181 The Model Approach to Calculate VaR  183 Time-Varying Volatility  185 VaR in Derivatives Portfolios  185 The Flaws of VaR  186 Common Abuses of VaR  187 Criticisms of VaR  187 Expected Shortfall  188 Stress Testing  188 Risk Management Conclusion  188 Chapter 16 Questions  189 Chapter 17: Credit Derivatives  191 Ratings Agencies  191 Development of the Credit Derivatives Market  193 Credit Derivatives  194 The Effects of Securitization  194 Asset Backed Securities (ABS)  194 Credit Card Receivables  195 Collateralized Debt Obligations  196 CDOs and Default Correlation  197 CDOs Since the Financial Crisis of 2007–2008  198 Credit Default SwapsCDS  199 CDS Market Counterparty Risks  201 Implications of CDS  202 Criticisms of CDS  202 CDS Pricing  203 The Probability Model of Pricing CDS  203 The No-Arbitrage Approach to Pricing CDS  204 Credit Derivatives and the Financial Crisis of 2007–2008  204 Chapter 17 Questions  205 Chapter 18: Structured Products  207 Constant Proportion Portfolio Insurance (CPPI)  210 CPPI in Practice  210 Where Can Structured Products Go Wrong?  211 Structured Product Fees  213 Structured Products in a Low Interest Rate Environment  213 Dynamic Structured Products  214 xiv Contents Chapter 18 Questions  214 Chapter 19: Optionality in Corporate Structures  215 Common Shares Simulating a Call Option  215 Corporate Debt as a Short Put Option  217 Instruments with Optionality in the Corporate Structure  219 Callable Bonds  219 Convertible Bonds  220 Warrants  221 Capital Structure Arbitrage  221 A Reminder on Arbitrage  222 Why Might an Opportunity Exist in Capital Structure Arbitrage?  222 Capital Structure Arbitrage Caveats  223 Chapter 19 Questions  223 Chapter 20: Real Options  225 Other Approaches to Project Evaluation  225 Types of Real Option  226 When to Use Real Options Valuation  226 When Not to Use Real Options  227 Valuation Inputs for Real Options  227 Real Options Example  228 Criticisms of the Real Options Approach  228 Real Options Conclusion  229 Chapter 20 Questions  229 Index  231

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