Options, Futures, and Other Derivatives, Global Edition (English and Spanish Edition)

For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets Practitioners refer to it as “the bible;” in the university and college marketplace it's the best seller; and now it's been revised and updated to cover the industry's hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today's derivatives markets. This program provides a better teaching and learning experience—for you and your students. Here's how: NEW! Available with a new version of DerivaGem software—including two Excel applications, the Options Calculator and the Applications Builder Bridges the gap between theory and practice—a best-selling college text, and considered “the bible” by practitioners, it provides the latest information in the industry Provides the right balance of mathematical sophistication—careful attention to mathematics and notation Offers outstanding ancillaries to round out the high quality of the teaching and learning package Cover ......Page 1 Title Page......Page 4 Copyright Page......Page 5 Contents in Brief......Page 7 Contents......Page 8 List of Business Snapshots......Page 18 List of Technical Notes......Page 19 Preface......Page 20 Chapter 1.Introduction......Page 24 1.1 Exchange-traded markets......Page 25 1.2 Over-the-counter markets......Page 26 1.3 Forward contracts......Page 29 1.5 Options......Page 31 1.7 Hedgers......Page 34 1.8 Speculators......Page 37 1.9 Arbitrageurs......Page 39 1.10 Dangers......Page 40 Summary......Page 41 Practice questions......Page 42 Further questions......Page 44 2.1 Background......Page 47 2.2 Specification of a futures contract ......Page 49 2.3 Convergence of futures price to spot price......Page 51 2.4 The operation of margin accounts......Page 52 2.5 OTC markets......Page 55 2.6 Market quotes......Page 58 2.7 Delivery......Page 61 2.8 Types of traders and types of orders......Page 62 2.9 Regulation......Page 63 2.10 Accounting and tax......Page 64 Summary......Page 67 Practice questions......Page 68 Further questions......Page 70 3.1 Basic principles......Page 72 3.2 Arguments for and against hedging......Page 74 3.3 Basis risk......Page 77 3.4 Cross hedging......Page 81 3.5 Stock index futures......Page 85 3.6 Stack and roll......Page 91 Further reading......Page 93 Practice questions......Page 94 Further questions......Page 96 Appendix: Capital asset pricing model......Page 98 4.1 Types of rates......Page 100 4.2 Measuring interest rates......Page 102 4.4 Bond pricing......Page 105 4.5 Determining Treasury zero rates......Page 107 4.6 Forward rates......Page 109 4.7 Forward rate agreements......Page 111 4.8 Duration......Page 114 4.9 Convexity......Page 118 4.10 Theories of the term structure of interest rates......Page 119 Summary......Page 121 Practice questions......Page 122 Further questions......Page 125 5.1 Investment assets vs. consumption assets......Page 127 5.2 Short selling......Page 128 5.3 Assumptions and notation......Page 129 5.4 Forward price for an investment asset......Page 130 5.5 Known income......Page 133 5.7 Valuing forward contracts......Page 135 5.8 Are forward prices and futures prices equal?......Page 137 5.9 Futures prices of stock indices......Page 138 5.10 Forward and futures contracts on currencies......Page 140 5.11 Futures on commodities......Page 143 5.12 The cost of carry......Page 146 5.14 Futures prices and expected future spot prices......Page 147 Summary......Page 149 Practice questions......Page 151 Further questions......Page 153 6.1 Day count and quotation conventions......Page 155 6.2 Treasury bond futures......Page 158 6.3 Eurodollar futures......Page 163 6.4 Duration-based hedging strategies using futures......Page 168 Summary......Page 170 Practice questions......Page 171 Further questions......Page 173 Chapter 7.Swaps......Page 175 7.1 Mechanics of interest rate swaps......Page 176 7.2 Day count issues......Page 181 7.4 The comparative-advantage argument......Page 182 7.5 The nature of swap rates......Page 186 7.7 Valuation of interest rate swaps......Page 187 7.9 Fixed-for-fixed currency swaps ......Page 191 7.10 Valuation of fixed-for-fixed currency swaps ......Page 195 7.11 Other currency swaps......Page 198 7.12 Credit risk......Page 199 7.13 Other types of swaps ......Page 201 Summary......Page 203 Practice questions......Page 204 Further questions......Page 206 8.1 Securitization......Page 208 8.2 The US housing market......Page 212 8.3 What went wrong?......Page 216 8.4 The aftermath......Page 218 Summary......Page 219 Further reading......Page 220 Further questions......Page 221 9.1 The risk-free rate......Page 223 9.2 The OIS rate......Page 225 9.3 Valuing swaps and FRAs with OIS discounting......Page 228 9.4 OIS vs. LIBOR: Which is correct?......Page 229 9.5 Credit risk: CVA and DVA......Page 230 9.6 Funding costs......Page 232 Summary......Page 233 Practice questions......Page 234 Further questions......Page 235 10.1 Types of options......Page 236 10.2 Option positions......Page 238 10.3 Underlying assets......Page 240 10.4 Specification of stock options ......Page 241 10.6 Commissions......Page 246 10.7 Margin requirements......Page 247 10.8 The options clearing corporation......Page 249 10.10 Taxation......Page 250 10.12 Over-the-counter options markets......Page 252 Summary......Page 253 Practice questions......Page 254 Further questions......Page 255 11.1 Factors affecting option prices ......Page 257 11.3 Upper and lower bounds for option prices......Page 261 11.4 Put–call parity......Page 264 11.5 Calls on a non-dividend-paying stock......Page 268 11.6 Puts on a non-dividend-paying stock......Page 269 11.7 Effect of dividends ......Page 272 Summary......Page 273 Practice questions......Page 274 Further questions......Page 276 12.1 Principal-protected notes......Page 277 12.2 Trading an option and the underlying asset......Page 279 12.3 Spreads......Page 281 12.4 Combinations......Page 289 12.5 Other payoffs ......Page 292 Summary......Page 293 Practice questions......Page 294 Further questions......Page 295 13.1 A one-step binomial model and a no-arbitrage argument......Page 297 13.2 Risk-neutral valuation......Page 301 13.3 Two-step binomial trees......Page 303 13.4 A put example......Page 306 13.5 American options......Page 307 13.6 Delta......Page 308 13.7 Matching volatility with u and d......Page 309 13.9 Increasing the number of steps......Page 311 13.10 Using DerivaGem......Page 312 13.11 Options on other assets......Page 313 Summary......Page 316 Further reading......Page 317 Practice questions......Page 318 Further questions......Page 319 Appendix: Derivation of the Black–Scholes–Merton option-pricing formula from a binomial tree......Page 321 14.1 The Markov property......Page 325 14.2 Continuous-time stochastic processes......Page 326 14.3 The process for a stock price......Page 331 14.4 The parameters......Page 334 14.5 Correlated processes......Page 335 14.6 Itô’s lemma ......Page 336 14.7 The lognormal property......Page 337 Summary......Page 338 Practice questions......Page 339 Further questions......Page 340 Appendix: Derivation of Itô’s lemma ......Page 342 Chapter 15.The Black–Scholes–Merton model......Page 344 15.1 Lognormal property of stock prices......Page 345 15.2 The distribution of the rate of return......Page 346 15.3 The expected return......Page 347 15.4 Volatility......Page 348 15.5 The idea underlying the Black–Scholes–Merton differential equation ......Page 352 15.6 Derivation of the Black–Scholes–Merton differential equation ......Page 354 15.7 Risk-neutral valuation......Page 357 15.8 Black–Scholes–Merton pricing formulas......Page 358 15.9 Cumulative normal distribution function......Page 361 15.10 Warrants and employee stock options......Page 362 15.11 Implied volatilities......Page 364 15.12 Dividends......Page 366 Summary......Page 369 Further reading......Page 370 Practice questions......Page 371 Further questions......Page 373 Appendix: Proof of Black–Scholes–Merton formula using risk-neutral valuation......Page 375 16.1 Contractual arrangements......Page 377 16.2 Do options align the interests of shareholders and managers?......Page 379 16.3 Accounting issues......Page 380 16.4 Valuation......Page 381 16.5 Backdating scandals......Page 386 Summary......Page 387 Practice questions......Page 388 Further questions......Page 389 17.1 Options on stock indices......Page 390 17.2 Currency options......Page 392 17.3 Options on stocks paying known dividend yields......Page 395 17.4 Valuation of European stock index options......Page 397 17.5 Valuation of European currency options......Page 400 17.6 American options......Page 401 Further reading......Page 402 Practice questions......Page 403 Further questions......Page 405 18.1 Nature of futures options......Page 406 18.3 European spot and futures options......Page 409 18.4 Put–call parity......Page 410 18.5 Bounds for futures options......Page 411 18.6 Valuation of futures options using binomial trees......Page 412 18.7 Drift of a futures price in a risk-neutral world......Page 414 18.8 Black’s model for valuing futures options......Page 415 18.10 Futures-style options......Page 417 Summary......Page 418 Practice questions......Page 419 Further questions......Page 420 19.1 Illustration......Page 422 19.3 A stop-loss strategy......Page 423 19.4 Delta hedging......Page 425 19.5 Theta......Page 432 19.6 Gamma......Page 434 19.7 Relationship between delta, theta, and gamma......Page 437 19.8 Vega......Page 438 19.9 Rho......Page 440 19.10 The realities of hedging......Page 441 19.12 Extension of formulas......Page 442 19.13 Portfolio insurance......Page 445 Summary......Page 447 Practice questions......Page 449 Further questions......Page 451 Appendix: Taylor series expansions and hedge parameters......Page 453 20.1 Why the volatility smile is the same for calls and puts......Page 454 20.2 Foreign currency options......Page 456 20.3 Equity options......Page 459 20.4 Alternative ways of characterizing the volatility smile......Page 460 20.5 The volatility term structure and volatility surfaces......Page 461 20.6 Greek letters......Page 462 20.8 When a single large jump is anticipated......Page 463 Summary......Page 465 Practice questions......Page 466 Further questions......Page 468 Appendix: Determining implied risk-neutral distributions from volatility smiles......Page 470 21.1 Binomial trees......Page 473 21.2 Using the binomial tree for options on indices, currencies, and futures contracts......Page 481 21.3 Binomial model for a dividend-paying stock......Page 483 21.4 Alternative procedures for constructing trees......Page 488 21.5 Time-dependent parameters......Page 491 21.6 Monte Carlo simulation......Page 492 21.7 Variance reduction procedures......Page 498 21.8 Finite difference methods ......Page 501 Summary......Page 511 Further reading......Page 512 Practice questions......Page 513 Further questions......Page 515 22.1 The VaR measure......Page 517 22.2 Historical simulation......Page 520 22.3 Model-building approach......Page 524 22.4 The linear model......Page 527 22.5 The quadratic model......Page 532 22.6 Monte Carlo simulation......Page 534 22.7 Comparison of approaches......Page 535 22.9 Principal components analysis......Page 536 Further reading......Page 540 Practice questions......Page 541 Further questions......Page 542 23.1 Estimating volatility......Page 544 23.2 The exponentially weighted moving average model......Page 546 23.3 The GARCH (1,1) model......Page 548 23.4 Choosing between the models......Page 549 23.5 Maximum likelihood methods......Page 550 23.6 Using GARCH (1,1) to forecast future volatility......Page 555 23.7 Correlations......Page 558 23.8 Application of EWMA to four-index example......Page 561 Practice questions......Page 563 Further questions......Page 565 24.1 Credit ratings......Page 567 24.2 Historical default probabilities......Page 568 24.3 Recovery rates......Page 569 24.4 Estimating default probabilities from bond yield spreads......Page 570 24.5 Comparison of default probability estimates......Page 573 24.6 Using equity prices to estimate default probabilities......Page 576 24.7 Credit risk in derivatives transactions......Page 578 24.8 Default correlation......Page 584 24.9 Credit VaR......Page 587 Further reading......Page 590 Practice questions......Page 591 Further questions......Page 592 Chapter 25.Credit derivatives......Page 594 25.1 Credit default swaps......Page 595 25.2 Valuation of credit default swaps......Page 598 25.3 Credit indices......Page 602 25.4 The use of ?xed coupons......Page 603 25.7 Total return swaps......Page 604 25.8 Collateralized debt obligations......Page 606 25.10 Valuation of a synthetic CDO......Page 608 25.11 Alternatives to the standard market model......Page 615 Further reading......Page 617 Practice questions......Page 618 Further questions......Page 619 26.1 Packages......Page 621 26.2 Perpetual American call and put options......Page 622 26.3 Nonstandard American options......Page 623 26.4 Gap options......Page 624 26.7 Compound options......Page 625 26.8 Chooser options......Page 626 26.9 Barrier options......Page 627 26.10 Binary options......Page 629 26.11 Lookback options......Page 630 26.13 Asian options......Page 632 26.14 Options to exchange one asset for another......Page 634 26.15 Options involving several assets......Page 635 26.16 Volatility and variance swaps......Page 636 26.17 Static options replication......Page 639 Summary......Page 641 Practice questions......Page 642 Further questions......Page 644 Chapter 27.More on models and numerical procedures ......Page 647 27.1 Alternatives to Black–Scholes–Merton......Page 648 27.2 Stochastic volatility models......Page 653 27.3 The IVF model......Page 655 27.4 Convertible bonds......Page 656 27.5 Path-dependent derivatives......Page 659 27.6 Barrier options......Page 663 27.7 Options on two correlated assets......Page 666 27.8 Monte Carlo simulation and American options......Page 669 Summary......Page 673 Further reading......Page 674 Practice questions......Page 675 Further questions......Page 676 Chapter 28.Martingales and measures......Page 678 28.1 The market price of risk......Page 679 28.2 Several state variables......Page 682 28.3 Martingales......Page 683 28.4 Alternative choices for the numeraire......Page 684 28.5 Extension to several factors......Page 688 28.6 Black’s model revisited......Page 689 28.7 Option to exchange one asset for another......Page 690 28.8 Change of numeraire......Page 691 Summary......Page 692 Practice questions......Page 693 Further questions......Page 695 29.1 Bond options......Page 696 29.2 Interest rate caps and ?oors......Page 701 29.3 European swap options......Page 707 29.5 Hedging interest rate derivatives......Page 711 Summary......Page 712 Practice questions......Page 713 Further questions......Page 715 30.1 Convexity adjustments......Page 716 30.2 Timing adjustments......Page 720 30.3 Quantos......Page 722 Practice questions......Page 725 Further questions......Page 727 Appendix: Proof of the convexity adjustment formula......Page 728 31.1 Background......Page 729 31.2 Equilibrium models......Page 730 31.3 No-arbitrage models......Page 737 31.4 Options on bonds......Page 742 31.5 Volatility structures......Page 743 31.6 Interest rate trees ......Page 744 31.7 A general tree-building procedure......Page 746 31.8 Calibration......Page 755 31.9 Hedging using a one-factor model......Page 757 Further reading......Page 758 Practice questions......Page 759 Further questions......Page 761 32.1 The Heath, Jarrow, and Morton model......Page 763 32.2 The LIBOR market model......Page 766 32.3 Handling multiple zero curves......Page 776 32.4 Agency mortgage-backed securities......Page 778 Summary......Page 780 Practice questions......Page 781 Further questions......Page 782 33.1 Variations on the vanilla deal......Page 783 33.2 Compounding swaps......Page 785 33.3 Currency swaps......Page 786 33.4 More complex swaps......Page 787 33.5 Equity swaps......Page 790 33.6 Swaps with embedded options......Page 792 33.7 Other swaps......Page 794 Summary......Page 795 Practice questions......Page 796 Further questions......Page 797 34.1 Agricultural commodities......Page 798 34.2 Metals......Page 799 34.3 Energy products......Page 800 34.4 Modeling commodity prices......Page 802 34.5 Weather derivatives......Page 808 34.7 Pricing weather and insurance derivatives......Page 809 34.8 How an energy producer can hedge risks......Page 811 Further reading......Page 812 Practice questions......Page 813 Further questions......Page 814 35.1 Capital investment appraisal......Page 815 35.2 Extension of the risk-neutral valuation framework......Page 816 35.3 Estimating the market price of risk......Page 818 35.5 Evaluating options in an investment opportunity......Page 819 Further reading......Page 826 Further questions......Page 827 36.1 Lessons for all users of derivatives......Page 829 36.2 Lessons for financial institutions ......Page 833 36.3 Lessons for nonfinancial corporations ......Page 838 Further reading......Page 840 DerivaGem software......Page 863 Major exchanges trading futures and options......Page 868 Tables for N(x)......Page 869 Author index......Page 871 Subject index......Page 875 The full text downloaded to your computer With eBooks you can: search for key concepts, words and phrases make highlights and notes as you study share your notes with friends eBooks are downloaded to your computer and accessible either offline through the Bookshelf (available as a free download), available online and also via the iPad and Android apps. Upon purchase, you will receive via email the code and instructions on how to access this product. Time limit The eBooks products do not have an expiry date. You will continue to access your digital ebook products whilst you have your Bookshelf installed. For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets Practitioners refer to it as the bible; in the university and college marketplace it's the best seller; and now it's been revised and updated to cover the industry's hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitisation and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today's derivatives markets. This program provides a better teaching and learning experience-for you and your students. Here's how: Bridges the gap between theory and practice-a best-selling college text, and considered the bible by practitioners, it provides the latest information in the industry Provides the right balance of mathematical sophistication-careful attention to mathematics and notation For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets Practitioners refer to it as "the bible;" in the university and college marketplace it's the best seller; and now it's been revised and updated to cover the industry's hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today's derivatives markets. This program provides a better teaching and learning experience-for you and your students. Here's how: NEW! Available with a new version of DerivaGem software -including two Excel applications, the Options Calculator and the Applications Builder Bridges the gap between theory and practice -a best-selling college text, and considered "the bible" by practitioners, it provides the latest information in the industry Provides the right balance of mathematical sophistication -careful attention to mathematics and notation Offers outstanding ancillaries toround out the high quality of the teaching and learning package Introduction -- Mechanics Of Futures Markets -- Hedging Strategies Using Futures -- Interest Rates -- Determination Of Forward And Futures Prices -- Interest Rate Futures -- Swaps -- Securitization And The Credit Crisis Of 2007 -- Ois Discounting, Credit Issues, And Funding Costs -- Mechanics Of Options Markets -- Properties Of Stock Options -- Trading Strategies Involving Options -- Binomial Trees -- Wiener Processes And Itô's Lemma -- The Black-scholes-merton Model -- Employee Stock Options -- Options On Stock Indices And Currencies -- Futures Options -- The Greek Letters -- Volatility Smiles -- Basic Numerical Procedures -- Value At Risk - Extimating Volatilities And Correlations -- Credit Risk -- Credit Derivatives -- Exotic Options -- More On Models And Numerical Procedures -- Martingales And Measures -- Interest Rate Derivatives: The Standard Market Models -- Convexity, Timing, And Quanto Adjustments -- Interest Rate Derivatives: Models Of The Short Rate -- Hjm, Lmm, And Multiple Zero Curves -- Swaps Revisited -- Energy And Commodity Derivatives -- Real Options -- Derivatives Mishaps And What We Can Learn From Them. John C. Hull. Includes Bibliographical References And Indexes. This textbook bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today's derivatives markets