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Derivatives: Theory and Practice

Derivatives: Theory and Practice

Autorzy
Wydawnictwo John Wiley & Sons Inc
Data wydania 18/10/2019
Liczba stron 912
Forma publikacji książka w miękkiej oprawie
Poziom zaawansowania Dla profesjonalistów, specjalistów i badaczy naukowych
ISBN 9781119595595
Kategorie Finanse i rachunkowość
261.00 PLN (z VAT)
$67.68 / €61.01 / £51.53 /
Produkt dostępny
Dostawa 2 dni
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Opis książki

Three experts provide an authoritative guide to the theory and practice of derivatives Derivatives: Theory and Practice and its companion website explore the practical uses of derivatives and offer a guide to the key results on pricing, hedging and speculation using derivative securities. The book links the theoretical and practical aspects of derivatives in one volume whilst keeping mathematics and statistics to a minimum. Throughout the book, the authors put the focus on explanations and applications. Designed as an engaging resource, the book contains commentaries that make serious points in a lighthearted manner. The authors examine the real world of derivatives finance and include discussions on a wide range of topics such as the use of derivatives by hedge funds and the application of strip and stack hedges by corporates, while providing an analysis of how risky the stock market can be for long-term investors, and more. To enhance learning, each chapter contains learning objectives, worked examples, details of relevant finance blogs technical appendices and exercises.

Derivatives: Theory and Practice

Spis treści

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 Pricing a Swap: Forward Rate Method 591


34.5 Market Value of a Swap 593


34.6 Swap Delta and PVBP 596


34.7 Summary 597


Appendix 34: Value of an FRN Using Arbitrage 597


Exercises 598


Chapter 35 Other Interest Rate Swaps 601


35.1 Swap Deals 601


35.2 Pricing Non-standard Swaps 603


35.3 Hedging Interest Rate Swaps 608


35.4 Credit Risk 614


35.5 Summary 615


Exercises 616


Chapter 36 Currency Swaps 617


36.1 Uses 617


36.2 Pricing a Fixed-Fixed Currency Swap 620


36.3 Valuing a Fixed-Fixed Currency Swap 622


36.4 Summary 625


Appendix 36.A: Pricing a Currency Swap 626


Appendix 36.B: Valuation of a Currency Swap 628


Exercises 629


Chapter 37 Equity Swaps 631


37.1 Equity-for-LIBOR: Fixed Notional Principal 632


37.2 Unhedged Cross-currency Equity Swap 634


37.3 Hedged Cross-currency Equity Swap 635


37.4 Pricing Equity Swaps 636


37.5 Summary 643


Appendix 37: Valuation of Equity-for-LIBOR Swap 643


Exercises 644


Part IX Fixed Income Derivatives 647


Chapter 38 T-Bond Option, Caps, Floors and Collar 649


38.1 Options on T-Bonds and Eurodollars 649


38.2 Caplets and Floorlets 650


38.3 Interest Rate Cap 655


38.4 Interest Rate Floor 657


38.5 Interest Rate Collar 658


38.6 Summary 661


Exercises 662


Chapter 39 Swaptions, Forward Swaps, and MBS 665


39.1 Swaptions 665


39.2 Forward Swaps 668


39.3 Mortgage-backed Securities (MBS) 670


39.4 Hedging Fixed Income Derivatives 675


39.5 Summary 677


Exercises 678


Chapter 40 Pricing Fixed Income Options: Black's Model and MCS 681


40.1 Black's Model: European Options 682


40.2 Pricing a Caplet Using MCS 684


40.3 European Swaption: Black's Model 685


40.4 Summary 688


Exercises 688


Chapter 41 Pricing Fixed Income Derivatives: BOPM 691


41.1 No-arbitrage Approach: BOPM 692


41.2 Pricing a Coupon Bond 697


41.3 Pricing Options 697


41.4 Pricing a Callable Bond 700


41.5 Pricing Caps 701


41.6 Pricing FRAs 702


41.7 Pricing a Swaption 704


41.8 Pricing FRNs with Embedded Options 705


41.9 More Lattices 708


41.10 Summary 709


Exercises 710


Part X Credit Derivatives 713


Chapter 42 Credit Default Swaps (CDS) 715


42.1 Credit Risk and CDS 716


42.2 Speculation with CDS 717


42.3 Contract Details 719


42.4 Pricing and Valuation 720


42.5 Bond Yields and the CDS Spread 725


42.6 Credit Indices and other CDS Contracts 727


42.7 Derivatives on the CDS Spread 727


42.8 Summary 729


Exercises 730


Chapter 43 Securitisation, ABSs and CDOs 731


43.1 ABSs and ABS-CDOs 731


43.2 Credit Enhancement 736


43.3 Losses on ABSs and ABS-CDOs 738


43.4 Sub-prime Crisis 2007-8 740


43.5 Synthetic CDOs 743


43.6 Single Tranche Trading 744


43.7 Total Return Swap 746


43.8 Summary 747


Exercises 748


Part XI Market Risk 749


Chapter 44 Value at Risk 751


44.1 Introduction 751


44.2 Value at Risk (VaR) 752


44.3 Forecasting Volatility 761


44.4 Backtesting 763


44.5 Capital Adequacy 766


44.6 Summary 767


Exercises 768


Chapter 45 VaR: Other Portfolios 769


45.1 Single Index Model 769


45.2 VaR for Coupon Bonds 773


45.3 VaR: Options 777


45.4 Summary 779


Appendix 45.A: VaR for Foreign Assets 779


Appendix 45.B: Single Index Model (SIM) 780


Appendix 45.C: Cash Flow Mapping 782


Exercises 784


Chapter 46 VaR: Alternative Measures 787


46.1 Historical Simulation 787


46.2 Bootstrapping 792


46.3 Monte Carlo Simulation 795


46.4 Alternative Methods 799


46.5 Summary 803


Exercises 804


Part XII Price Dynamics 807


Chapter 47 Asset Price Dynamics 809


47.1 Stochastic Processes 810


47.2 Geometric Brownian Motion (GBM) and Ito's Lemma 812


47.3 Distribution of Log Stock Price and Stock Price 814


47.4 Summary 817


Appendix 47: Ito's Lemma 817


Exercises 818


Chapter 48 Black-Scholes PDE 821


48.1 Risk-Neutral Valuation and Black-Scholes PDE 821


48.2 Finite Difference Methods 826


48.3 Summary 830


Appendix 48: Derivation of Black-Scholes PDE 830


Exercises 833


Chapter 49 Equilibrium Models: Term Structure 835


49.1 Risk-neutral Valuation 836


49.2 Models of the Short-Rate 837


49.3 Pricing Using Continuous Time Models 839


49.4 Bond Prices and Derivative Prices 841


49.5 Summary 843


Exercises 844


Glossary 845


Bibliography 867


Author Index 871


Subject Index 873

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