About the Author vii

CHAPTER 1 DERIVATMIVAER KEATNDS INSTRUMENTS

1 INTRODUCTION
2 TYPES OF DERIVATIVES
2.1 Forward Commitments
2.2 Contingent Claims
3 DERIVATIVE MARKETS: PAST AND PRESENT
4 HOW BIG IS THE DERIVATIVES MARKET
5 THE PURPOSES OF DERIVATIVE MARKETS
6 CRITICISMS OF DERIVATIVE MARKETS
7 ELEMENTARY PRINCIPLES OF DERIVATIVE PRICING
KEY POINTS
PROBLEMS
SOLUTIONS
CHAPTER 2 FORWARDM ARKEATNDS CONTRACTS
1 INTRODUCTION
1.1 Delivery and Settlement of a Forward Contract
1.2 Default Risk and Forward Contracts
1.3 Termination of a Forward Contract
2 THE STRUCTURE OF GLOBAL FORWARD MARKETS
3 TYPES OF FORWARD CONTRACTS
3.1 Equity Forwards
3.2 Bond and Interest Rate Forward Contracts
3.3 Currency Forward Contracts
3.4 Other Types of Forward Contracts
4 PRICING AND VALUATION OF FORWARD CONTRACTS
4.1 Generic Pricing and Valuation of a Forward Contract
4.2 Pricing and Valuation of Equity Forward Contracts
4.3 Pricing and Valuation of Fixed-Income and Interest Rate Forward Contracts
4.4 Pricing and Valuation of Currency Forward Contracts
5 CREDIT RISK AND FORWARD CONTRACTS
6 THE ROLE OF FORWARD MARKETS
KEY POINTS
PROBLEMS
SOLUTIONS
1 INTRODUCTION
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CHAPTER 4
1.1 A Brief History of Futures Markets
1.2 Public Standardized Transactions
1.3 Homogenization and Liquidity
1.4 The Clearinghouse, Daily Settlement, and Performance Guarantee
1.5 Regulation
2 FUTURES TRADING
3 THE CLEARINGHOUSE, MARGINS, AND PRICE LIMITS
4 DELIVERY AND CASH SETTLEMENT
5 FUTURES EXCHANGES
6 TYPES OF FUTURES CONTRACTS
6.1 Short-Term lnterest Rate Futures Contracts
6.2 Intermediate- and Long-Term lnterest Rate Futures Contracts
6.3 Stock lndex Futures Contracts
6.4 Currency Futures Contracts
7 PRICING AND VALUATION OF FUTURES CONTRACTS
7.1 Generic Pricing and Valuation of a Futures Contract
7.2 Pricing lnterest Rate Futures
7.3 Pricing Stock lndex Futures
7.4 Pricing Currency Futures
7.5 Futures Pricing: A Recap
8 THE ROLE OF FUTURES MARKETS AND EXCHANGES
KEY POINTS
PROBLEMS
SOLUTIONS
OPTIONM ARKEATNDS CONTRACTS
1 INTRODUCTION
2 BASIC DEFINITIONS AND ILLUSTRATIONS OF OPTIONS CONTRACTS
2.1 Basic Characteristics of Options
2.2 Some Examples of Options
2.3 The Concept of Moneyness of an Option
3 THE STRUCTURE OF GLOBAL OPTIONS MARKETS
3.1 Over-the-counter Options Markets
3.2 Exchange-Listed Options Markets
4 TYPES OF OPTIONS
4.1 Financial Options
4.2 Options on Futures
4.3 Commodity Options
4.4 Other Types of Options
5 PRINCIPLES OF OPTION PRICING
5.1 Payoff Values
5.2 Boundary Conditions
5.3 The Effect of a Difference in Exercise Price
5.4 The Effect of a Difference in Time to Expiration
5.5 Put-Call Parity
5.6 American Options, Lower Bounds, and Early Exercise
5.7 The Effect of Cash Flows on the Underlying Asset
5.8 The Effect of lnterest Rates and Volatility
5.9 Option Price Sensitivities
6 DISCRETE-TIME OPTION PRICING: THE BINOMIAL MODEL
6.1 The One-Period Binomial Model
6.2 The Two-Period Binomial Model
6.3 Binomial Put Option Pricing
6.4 Binomial lnterest Rate Option Pricing
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6.5 American Options
6.6 Extending the Binomial Model
7 CONTINUOUS-TIME OPTION PRICING:
THE BLACK-SCHOLES-MERTON MODEL
7.1 Assumptions of the Model
7.2 The Black-Scholes-Merton Formula
7.3 Inputs to the Black-Scholes-Merton Model
7.4 The Effect of Cash Flows on the Underlying
7.5 The Critical Role of Volatility
8 PRICING OPTIONS ON FORWARD AND FUTURES CONTRACTS
AND AN APPLICATION TO INTEREST RATE OPTION PRICING
8.1 Put-Call Parity for Options on Forwards
8.2 Early Exercise of American Options on Forward and Futures Contracts
8.3 The Black Model
8.4 Application of the Black Model to lnterest Rate Options
9 THE ROLE OF OPTIONS MARKETS
KEY POINTS
APPENDIX 4A
PROBLEMS
SOLUTIONS
CHAPTER 5 SWAP MARKEATNDS CONTRACTS
1 INTRODUCTION
1.1 Characteristics of Swap Contracts
1.2 Termination of a Swap
2 THE STRUCTURE OF GLOBAL SWAP MARKETS
3 TYPES OF SWAPS
3.1 Currency Swaps
3.2 lnterest Rate Swaps
3.3 Equity Swaps
3.4 Commodity and Other Types of Swaps
4 PRICING AND VALUATION OF SWAPS
4.1 Equivalence of Swaps and Other Instruments
4.2 Pricing and Valuation
4.3 Some Concluding Comments on Swap Valuation
5 VARIATIONS OF SWAPS
6 SWAPTIONS
6.1 Basic Characteristics of Swaptions
6.2 Uses of Swaptions
6.3 Swaption Payoffs
6.4 Pricing and Valuation of Swaptions
6.5 Forward Swaps
7 CREDIT RISK AND SWAPS
8 THE ROLE OF SWAP MARKETS
KEY POINTS
PROBLEMS
SOLUTIONS
CHAPTER 6 RISK MANAGEMAEPNPLTIC ATIONOSF FORWARDA ND
FUTURESS TRATEGIES
1 INTRODUCTION
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xii Contents
CHAPTER 7
CHAPTER 8