Chapter 1： Introduction 1
11 FuturesContracts 1
12 HistoryofFutures Markets2
13 The Over-the-Counter Market4
14 ForwardContracts6
15 Options7
16 History of Options Markets 10
17 Types ofTrader11
18 Hedgers 11
19 Speculators 14
110 Arbitrageurs 17
111 Dangers 18
Summary 18
FurtherReading 20
Quiz 20
PracticeQuestions 20
FurtherQuestions 22
Chapter 2： Futures Markets and Central Counterparties 24
21 Opening and ClosingFuturesPositions 24
22 SpecicationofaFuturesContract 25
23ConvergenceofFutures PricetoSpotPrice28
24 The Operation ofMargin Accounts 29
25 OTC Markets 32
26 MarketQuotes 35
27 Delivery 37
28 TypesofTrader andTypesof Order38
29 Regulation39
210 Accounting andTax 40
211 Forward vsFuturesContracts42
Summary 44
FurtherReading 45
Quiz 45
PracticeQuestions 46
FurtherQuestions 47
Chapter 3： Hedging Strategies Using Futures 49
31 Basic Principles49
32 Arguments for and Against Hedging 52
33 Basis Risk 55
34 Cross Hedging59
35 Stock IndexFutures63
36 Stack andRoll69
Summary70
Further Reading72
Quiz72
PracticeQuestions 73
FurtherQuestions 74
Appendix：ReviewofKeyConceptsin Statistics and theCAPM 76
Chapter 4： Interest Rates 81
41 Types of Rates81
42 SwapRates83
43 The Risk-Free Rate84
44 Measuring Interest Rates 85
45 ZeroRates87
46 Bond Pricing 88
47 Determining Zero Rates 89
48 ForwardRates93
49 ForwardRateAgreements95
410 Theoriesof theTerm Structureof InterestRates97
Summary 100
Further Reading101
Quiz101
PracticeQuestions 102
FurtherQuestions 103
Appendix： Exponential and LogarithmicFunctions 105
Chapter 5： Determination of Forward and Futures Prices 107
51 Investment Assets vsConsumption Assets 107
52 Short Selling 108
53 Assumptions and Notation 109
54 ForwardPrice for an Investment Asset110
55 Known Income113
56 Known Yield115
57 ValuingForwardContracts115
58 AreForward Prices andFutures Prices Equal? 118
59 Futures Prices of Stock Indices 118
510 Forward andFuturesContracts on Currencies121
511 Futures onCommodities124
512 TheCost of Carry 127
513 Delivery Options127
514 Futures Prices and Expected Spot Prices128
Summary 130
Further Reading131
Contents vii
Quiz 132
PracticeQuestions132
FurtherQuestions 134
Chapter 6： Interest Rate Futures136
61 DayCount andQuotationConventions136
62 Treasury BondFutures139
63 EurodollarFutures143
64 Duration148
65 Duration-Based Hedging Strategies UsingFutures152
Summary 156
FurtherReading 157
Quiz 157
PracticeQuestions158
FurtherQuestions 159
Chapter 7： Swaps 161
71 Mechanics of Interest Rate Swaps162
72 DayCount Issues 167
73 Conrmations167
74 TheComparative-Advantage Argument168
75 Valuationof InterestRateSwaps171
76 How theValue Changes through Time174
77 Fixed-for-Fixed Currency Swaps 175
78 Valuation ofFixed-for-Fixed Currency Swaps 178
79 Other Currency Swaps 180
710 Credit Risk 181
711 Credit Default Swaps182
712 OtherTypes of Swaps183
Summary 184
FurtherReading 185
Quiz 185
PracticeQuestions186
FurtherQuestions 188
Chapter 8： Securitization and the Credit Crisis of 2007 190
81 Securitization190
82 The US HousingMarket194
83 WhatWentWrong?198
84 The Aftermath200
Summary 202
FurtherReading 202
Quiz 203
PracticeQuestions203
FurtherQuestions 204
Chapter 9： Mechanics of Options Markets 205
91 Types of Option 205
92 OptionPositions208
93 Underlying Assets210
94 Specication of Stock Options211
95 Trading 215
96 Commissions216
97 MarginRequirements 217
98 The Options ClearingCorporation 219
99 Regulation220
910 Taxation220
911 Warrants, Employee Stock Options, andConvertibles221
912 Over-the-Counter Options Markets 222
Summary 223
Further Reading223
Quiz224
PracticeQuestions 224
FurtherQuestions 225
Chapter 10： Properties of Stock Options 227
101 Factors Aecting Option Prices227
102 Assumptions and Notation 231
103 Upper and Lower Bounds for Option Prices 232
104 PutCallParity 235
105 Calls ona Non-Dividend-Paying Stock 239
106 Puts ona Non-Dividend-Paying Stock 241
107 Eect of Dividends 243
Summary 244
FurtherReading 245
Quiz 245
PracticeQuestions 246
FurtherQuestions247
Chapter 11： Trading Strategies Involving Options 249
111 Principal-Protected Notes 249
112 Strategies Involvinga Single Option anda Stock 251
113 Spreads 253
114 Combinations261
115 OtherPayos 264
Summary 264
FurtherReading 265
Quiz 265
PracticeQuestions 266
FurtherQuestions266
Chapter 12： Introduction to Binomial Trees 268
121 AOne-Step BinomialModel anda No-Arbitrage Argument268
122 Risk-NeutralValuation 272
123 Two-StepBinomialTrees274
124 A Put Example 277
125 American Options 278
126 Delta 279
127 Determining u and d 280
128 Increasing the Numberof Time Steps 281
129 Using DerivaGem 282
Contents ix
1210 Options on Other Assets282
Summary287
Further Reading287
Quiz287
PracticeQuestions 288
FurtherQuestions289
Appendix： Derivation of the BlackScholesMerton Option Pricing
Formula from BinomialTree291
Chapter 13： Valuing Stock Options： The BlackScholesMerton Model293
131 Assumptions about How Stock Prices Evolve294
132 ExpectedReturn297
133 Volatility298
134 EstimatingVolatilityfrom HistoricalData299
135 Assumptions Underlying BlackScholesMerton 301
136 The Key No-Arbitrage Argument302
137 The BlackScholesMertonPricingFormulas304
138 Risk-NeutralValuation306
139 ImpliedVolatilities307
1310 Dividends309
Summary311
Further Reading312
Quiz313
PracticeQuestions 313
FurtherQuestions 315
Appendix： The Early Exercise of American Call Options on
Dividend-Paying Stocks 316
Chapter 14： Employee Stock Options 318
141 Contractual Arrangements318
142 Do Options Align the Interests of Shareholders and Managers?320
143 Accounting Issues321
144 Valuation323
145 Backdating Scandals324
Summary325
Further Reading326
Quiz326
PracticeQuestions 327
FurtherQuestions 327
Chapter 15： Options on Stock Indices and Currencies328
151 Options on Stock Indices328
152 Currency Options331
153 Options on StocksPaying Known Dividend Yields333
154 Valuation of European Stock Index Options 335
155 Valuation of European Currency Options 338
156 American Options339
Summary340
Further Reading341
Quiz341
PracticeQuestions 341
FurtherQuestions343
Chapter 16： Futures Options and Blacks Model 344
161 NatureofFutures Options 344
162 Reasons for thePopularityofFutures Options 346
163 European SpotandFutures Options 347
164 PutCallParity347
165 Bounds forFutures Options 349
166 AFuturesPrice as an AssetProviding a Yield 349
167 BlacksModel forValuingFutures Options 350
168 Using Blacks ModelInsteadof BlackScholesMerton 350
169 Valuation ofFutures Options Using BinomialTrees351
1610 AmericanFutures Options vs American Spot Options 354
1611 Futures-Style Options354
Summary 355
FurtherReading 356
Quiz 356
PracticeQuestions 356
Further Questions357
Chapter 17： The Greek Letters 359
171 Illustration 359
172 Naked andCoveredPositions 360
173 Greek Letter Calculation 362
174 Delta 363
175 Theta 369
176 Gamma 371
177 Relationship Between Delta, Theta, and Gamma 374
178 Vega378
179 Rho 377
1710 TheRealities of Hedging 379
1711 Scenario Analysis 379
1712 Extension ofFormulas 380
1713 Creating Options Synthetically forPortfolio Insurance 382
1714 StockMarketVolatility 385
Summary 385
FurtherReading 387
Quiz 387
PracticeQuestions 388
Further Questions389
Chapter 18： Binomial Trees in Practice 391
181 The Binomial Model fora Non-Dividend-Paying Stock 391
182 Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts 398
183 The Binomial Model fora Dividend-Paying Stock 401
184 Extensionsof the BasicTree Approach 405
185 Alternative Procedure forConstructingTrees 407
186 Monte Carlo Simulation 407
Contents xi
Summary409
Further Reading410
Quiz410
PracticeQuestions 411
FurtherQuestions412
Chapter 19： Volatility Smiles 413
191 Foreign Currency Options413
192 Equity Options416
193 TheVolatilityTerm Structure andVolatility Surfaces418
194 Whena Single Large JumpIs Anticipated420
Summary421
Further Reading422
Quiz423
PracticeQuestions 423
FurtherQuestions424
Appendix： Why the Put Volatility Smile is the Same as the Call
Volatility Smile426
Chapter 20： Value at Risk and Expected Shortfall 428
201 TheVaR and ES Measures428
202 Historical Simulation431
203 Model-Building Approach436
204 Generalization of Linear Model 439
205 Quadratic Model444
206 EstimatingVolatilities andCorrelations446
207 Comparison of Approaches451
208 BackTesting 452
Summary452
Further Reading453
Quiz453
PracticeQuestions 454
FurtherQuestions455
Chapter 21： Interest Rate Options 458
211 Exchange-Traded Interest Rate Options 458
212 Embedded Bond Options460
213 Blacks Model460
214 European Bond Options462
215 Interest Rate Caps464
216 EuropeanSwap Options469
217 Term Structure Models472
Summary473
Further Reading473
Quiz474
PracticeQuestions 474
FurtherQuestions475
Chapter 22： Exotic Options and Other Nonstandard Products 477
221 Exotic Options477
222 Agency Mortgage-Backed Securities 484
223 Nonstandard Swaps 485
Summary 492
FurtherReading 492
Quiz 493
PracticeQuestions 493
FurtherQuestions494
Chapter 23： Credit Derivatives 496
231 Credit Default Swaps 497
232 Valuation of Credit Default Swaps501
233 TotalReturn Swaps505
234 CDSForwards and Options 506
235 Credit Indices 507
236 The Use ofFixedCoupons 507
237 Collateralized Debt Obligations 509
Summary 511
FurtherReading 512
Quiz 512
PracticeQuestions 513
FurtherQuestions513
Chapter 24： Weather, Energy, and Insurance Derivatives 515
241 Weather Derivatives515
242 Energy Derivatives 516
243 Insurance Derivatives 519
Summary 520
FurtherReading 520
Quiz 521
PracticeQuestions 521
FurtherQuestion 522
Chapter 25： Derivatives Mishaps and What We Can Learn From Them 523
251 Lessons for All Users of Derivatives 523
252 Lessons forFinancial Institutions 527
253 Lessons for NonnancialCorporations 532
Summary 534
FurtherReading 534
Answers to Quiz Questions 535
Glossary of Terms 535
DerivaGem Software 535
Major Exchanges Trading Futures and Options 535
Table for NexT535
內容試閱：
Preface
I was originally persuaded to write this book by colleagues who liked my book Options, Futures, and Other Derivatives, but found the material a little too advanced for their students. Fundamentals of Futures and Options Markets covers some of the same ground as Options, Futures, and Other Derivatives, but in a way that readers who have had limited training in mathematics .nd easier to understand. One important di.erence between the two books is that there is no calculus in this book. Fundamentals is suitable for undergraduate and graduate elective courses o.ered by business, economics, and other faculties. In addition, many practitioners who want to improve their under-standing of futures and options markets will .nd the book useful.
Instructors can use this book in a many di.erent ways. Some may choose to cover onlythe.rst12chapters, .nishingwith binomialtrees.For thosewhowanttodomore, there are many di.erent sequences in which Chapters 13 to 25 can be covered. From Chapter 18 onward, each chapter has been designed so that it is independent of the others and can be included in or omitted from a course without causing problems. I recommend .nishing a course with Chapter 25, which students always .nd interesting and entertaining.
What s New in This Edition?
Many changes have been made to update material and improve the presentation. The derivatives markets move toward OIS discounting has continued since the eighthedition was written. This has allowed me to streamline the material in the .rst seven chapters of Fundamentals. LIBOR discounting is no longer presented as a way to value instruments such as swaps and forward rate agreements. The valuation of these instruments requires
a forward rates for the rate used to calculate payments usually LIBOR and b the zero-coupon risk-free zero curve used for discounting usually the OIS zero curve.Most instructors will .nd the new presentation appealing and more logical. It can be extended to situations where payments are dependent on any risky rate. Other changes include：
1.
Moreonthenewregulations concerningthetradingand clearingofOTCderivatives.
2.
A major revision of the swaps chapter Chapter 7 to improve the presentation of material and re.ect the derivative markets move to OIS discounting.
3.
A fuller description of the impact of daily settlement when futures contracts are used for hedging.
4.
More details on the calculation and use of Greek letters.
5.
More discussion of the expected shortfall measure, re.ecting its increasing importance.
xiv
Pr
efa
ce
6.
A
ne
w
v
ersi
on
of
the
softw
ar
e
DerivaGem
,
tailor
ed
to
the
need
s
of
r
eaders
of
this
book.
Other
Points
of
Distinction
Software
DerivaGem
F
undamen
tals
4.00
DG
400f
is
includ
ed
with
this
book.
This
con
sis
ts
of
two
Excel
applic
a
tions
：
the
Options
Cal
cula
tor
and
the
Appl
ica
tions
Builde
r
.
The
Options
Calcula
tor
consis
ts
of
ea
s
y-to-use
softw
ar
e
for
valui
ng
many
of
the
deriva
tiv
es
discus
sed
in
this
book.
The
Appli
ca
tions
Bui
lder
consis
ts
of
a
num
ber
of
Exc
el
functi
ons
fr
om
which
users
can
build
their
o
wn
applica
tions
.
It
includes
some
sampl
e
applic
a
tions
and
enab
les
s
tuden
ts
to
e
xplor
e
the
pr
ope
rties
of
options
a
nd
numeri
cal
pr
ocedur
es.
It
also
allo
ws
mor
e
inter
es
ting
assignment
s
to
be
de
signed.
The
soft
w
ar
e
is
describ
ed
mor
e
fully
a
t
the
end
of
the
book.
Upd
a
tes
to
the
softw
ar
e
can
be
do
wnl
oaded
fr
om
my
w
ebsite：
www-2.
r
otman.ut
or
onto.ca
.
hull
End-of-Chapter
Problems
At
the
end
of
ea
ch
chap
ter
e
xcept
the
las
t
ther
e
ar
e
sev
en
quiz
ques
tions
,
which
s
tudents
can
use
to
pr
o
vide
a
quick
tes
t
of
their
unde
rs
tanding
of
the
k
e
y
con
cepts.
The
answ
ers
to
these
ar
e
giv
en
a
t
the
end
of
the
book.
In
addition,
ther
e
ar
e
a
mu
ltitude
of
pr
a
ctice
ques
tions
and
further
ques
tions
in
the
book.
For the Instructor
The following supplements are available with this text：
. PowerPoint Presentations adopting instructors can adapt the slides to meet their
needs . Instructors Manual including answers to both practice questions and further
questions
John Hull
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