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Derivatives: Theory and Practice, 1st Edition

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Derivatives: Theory and Practice, 1st Edition

Keith Cuthbertson, Dirk Nitzsche

ISBN: 978-1-119-59559-5 October 2019 912 Pages

About the Authors

About the Companion Site

Preface

Chapter 1. Derivative Securities

1. Forwards and Futures

2. Options

3. Swaps

4. Hedging, Speculation and Arbitrage

5. Short-Selling

6. Summary

Part I: Forwards and Futures

Chapter 2. Futures Markets

1. Trading on Futures Markets

2. Margins and Marking-to-Market

3. Summary

Chapter 3. Forward and Futures Prices

1. Pricing Forward Contracts

2. Dividends, Storage Cost and Convenience Yield

3. Commodity Futures

4. Value of a Forward Contract

5. Summary

Chapter 4. Futures: Hedging and Speculation

1. Hedging Using Futures

2. Cross-Hedge

3. Rolling Hedge

4. Novel Futures Contracts

5. Speculation

6. Summary

Chapter 5. Index Futures

1. Stock Index Futures

2. Index Arbitrage

3. Hedging

4. Tailing the hedge

5. Summary

6. Appendix: Hedge Ratios

Chapter 6. Strategies Using Stock Index Futures

1. Underpriced Stocks

2. Overpriced Stocks

3. Market-neutral Hedge Fund

4. Long-Short Hedge Fund

5. Changing Stock Market Exposure

6. Merger Arbitrage

7. Summary

Appendix I. Stock Picking & Market Risk

Appendix II. Market Timing

Appendix III. Hedging: Long-Short Portfolio

Chapter 7. Currency Forwards and Futures

1. FX-Futures Contracts

2. Pricing FX-Forward Contracts

3. Pricing FX-Futures Contracts

4. Hedging & Speculation: Forwards

5. Hedging & Speculation: Futures

6. Summary

Appendix. Hedging Using FX Futures

Part II: Fixed Income: Cash Markets

Chapter 8. Interest Rates

1. LIBOR, Repos, Fed Funds & OIS Rates

2. Day-Count Conventions

3. Forward Rates

4. Forward Rate Agreements, FRAs

5. Summary

Chapter 9. Bond Markets

1. Prices, Yields and Returns

2. Pricing Coupon-Bonds

3. Summary

Chapter 10. Duration and Convexity

1. Yield Curves

2. Duration & Convexity

3. Summary

4. Appendix: Duration & Convexity

Part III: Fixed-Income Futures Contracts

Chapter 11. Interest rate futures

1. Three-Month Eurodollar Futures Contract

2. Sterling 3-Month Futures Contract

3. T-Bill Futures Contract

4. Futures Price & Forward Rates

5. Pricing Interest Rate Futures

6. Arbitrage: Implied Repo Rate

7. Speculation

8. Spread Trades

9. Summary

10. Appendix: Futures Prices & Interest Rates

Chapter 12. Hedging Using Interest Rate Futures

1. Number of Futures Contracts

2. Different Types of Hedge

3. Hedging: T-Bill & Eurodollar Futures

4. Eurodollar Stack Hedge

5. Summary

6. Appendix: Hedge Ratios

Chapter 13. T-Bond Futures

1. Contract Specifications

2. Conversion Factor & Cheapest to Deliver

3. Hedging using T-Bonds

4. Hedging: Further Issues

5. Market Timing

6. Wild Card Play

7. Pricing T-Bond Futures

8. T-Bond Futures Spreads

9. Summary

Appendix I: Duration & Market Timing

Appendix II: Implied Repo Rate & Arbitrage

Part IV: Options

Chapter 14. Options Markets

1. Market Organisation

2. Call Options

3. Put Options

4. Intrinsic Value & Time Value

5. Summary

Chapter 15. Uses of Options

1. Protective Put

2. Put-Call Parity: European Options

3. Guaranteed Bond

4. Other Options

5. Summary

Chapter 16. Black-Scholes Model

1. Determinants of Options Prices

2. Black-Scholes

3. Are Stocks Less Risky In The Long Run?

4. Delta-Hedging

5. Implied Volatility

6. Summary

7. Appendix I: Price Bounds on European Options

Chapter 17. Option Strategies

1. Synthetic Securities

2. Bull & Bear Spreads

3. Straddle, Strangle, Butterfly & Condor

4. Horizontal (Time, Calendar) Spreads

5. Summary

Chapter 18. Stock Options and Stock Index Options

1. Options on Stocks

2. Stock Index Options, SIO

3. Summary

4. Appendix I: Static Hedge: Index Puts

5. Appendix II: Dynamic Delta-Hedge

Chapter 19. Foreign Currency Options

1. Contract Specifications

2. Speculation

3. Hedging Foreign Currency Exposure

4. Other Currency Options

5. Summary

Chapter 20. Options on Futures

1. Market Conventions

2. Price Bounds on Futures Options

3. Trading Strategies

4. Summary

Part V: Options Pricing

Chapter 21. BOPM: Introduction

1. One-Period BOPM

2. Risk-Neutral Valuation

3. Determinants of Call Premium

4. Pricing a European Put Option

5. Summary

6. Appendix: No-Arbitrage Conditions

Chapter 22. BOPM: Implementation

1. Generalising the BOPM

2. Replication Portfolio

3. BOPM to Black-Scholes

4. Summary

5. Appendix: Delta-Hedging & Arbitrage

Chapter 23. BOPM: Extensions

1. American Options

2. Options on Other Underlying Assets

3. Options on Futures Contracts

4. Options on Dividend-Paying Stocks

5. Summary

6. Appendix: BOPM & Risk-Neutral Valuation

Chapter 24. Analysis of Black Scholes

1. Volatility

2. Testing Black-Scholes

3. Limitations of Black-Scholes

4. Summary

Chapter 25. Pricing European Options

1. European Options: Dividend-Paying Stocks

2. Foreign Currency & Futures Options

3. Put-Call Parity

4. Summary

Chapter 26. Pricing Options: Monte-Carlo Simulation

1. Brownian Motion: Parallel Universe

2. Variance Reduction Methods

3. The Greeks

4. Multiple Stochastic Factors

5. Path-Dependent Options

6. Summary

7. Appendix I: MCS, Several Stochastic Variables

Part VI: The Greeks

Chapter 27. Delta Hedging

1. Delta

2. Dynamic Delta-Hedging

3. Summary

Chapter 28. The Greeks

1. Different Greeks

2. Hedging with the Greeks

3. Greeks and the BOPM

4. Summary

5. Appendix: Black-Scholes & the Greeks

Chapter 29. Portfolio Insurance

1. Static Hedge

2. Dynamic Portfolio Insurance

3. Summary

Part VII: Advanced Options

Chapter 30. Other Options

1. Corporate Equity & Debt

2. Warrants

3. Equity Collar

4. Summary

Chapter 31. Exotic Options

1. Three-Period BOPM

2. Asian Options

3. Other Exotics: Lookbacks, Barrier, Compound & Chooser

4. Summary

Chapter 32. Energy and Weather Derivatives

1. Energy Contracts

2. Hedging with Energy Futures

3. Energy Swaps

4. Weather Derivatives

5. Reinsurance & CAT Bonds

6. Summary

Part VIII: Swaps

Chapter 33. Interest Rate Swaps

1. Using Interest Rate Swaps

2. Cash Flows in a Swap

3. Settlement and Price Quotes

4. Terminating a Swap

5. Comparative Advantage

6. Summary

7. Appendix: Comparative Advantage with Swap Dealer

Chapter 34. Pricing Interest Rate Swaps

1. Cash Flows in A Swap

2. Floating Rate Note, FRN

3. Pricing a Swap (Short-Method)

4. Pricing a Swap (Forward-Rate Method)

5. Market Value of a Swap

6. Swap-Delta and PVBP

7. Summary

8. Appendix: Value of an FRN using Arbitrage

Chapter 35. Other Interest Rate Swaps

1. Uses

2. Pricing a Fixed-Fixed Currency Swap

3. Valuing a Fixed-Fixed Currency Swap

4. Summary

Appendix I: Pricing a Currency Swap

Appendix II: Valuation of a Currency Swap

Chapter 36. Currency Swaps

1. Swap Deals

2. Pricing Non-Standard Swaps

3. Hedging Interest Rate Swaps

4. Credit Risk

5. Summary

Chapter 37. Equity Swaps

1. Equity-for-LIBOR: Fixed Notional Principal

2. Unhedged Cross-Currency Equity Swap

3. Hedged Cross-Currency Equity Swap

4. Pricing Equity Swaps

5. Summary

Appendix I: Valuation of Equity-for-LIBOR Swap

Part IX: Fixed Income Derivatives

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

1. Options on T-Bonds and Eurodollars

2. Caplets and Floorlets

3. Interest Rate Cap

4. Interest Rate Floor

5. Interest Rate Collar

6. Summary

Chapter 39. Swaption, Forward Swap & MBS

1. Swaptions

2. Forward Swap

3. Mortgage-Backed Securities, MBS

4. Hedging Fixed-Income Derivatives

5. Summary

Chapter 40. Pricing: Black’s Model and MCS

1. Black’s Model: European Options

2. Pricing a Cap Using MCS

3. European Swaption: Black’s Model

4. Summary

Chapter 41. Pricing Fixed Income Derivatives: BOPM

1. No-Arbitrage Approach

2. Pricing a Coupon Bond

3. Pricing Options

4. Pricing a Callable Bond

5. Pricing Caps

6. Pricing FRAs

7. Pricing a Swaption

8. Pricing FRNs with Embedded Options

9. More Lattices

10. Summary

Part X: Credit Derivatives

Chapter 42. Credit Default Swaps, CDS

1. Credit Risk and CDS

2. Speculation with CDS

3. Contract Details

4. Pricing and Valuation

5. Bond Yields and the CDS Spread

6. Credit Indices and other CDS Contracts

7. Derivatives on the CDS Spread

8. Summary

Chapter 43. Securitisation: ABS and CDOS

1. ABS and ABS-CDOs

2. Credit Enhancement

3. Losses on ABS and ABS-CDOs

4. Sub-Prime Crisis, 2007-8

5. Synthetic CDOs

6. Single-Tranche Trading

7. Total-Return Swap

8. Summary

Part XI: Market Risk

Chapter 44. Value at Risk: VaR

1. Introduction

2. Value at Risk: VaR

3. Forecasting Volatility

4. Backtesting

5. Capital Adequacy

6. Summary

Chapter 45. VaR: Other Portfolios

1. Single-Index Model

2. VaR for Coupon-Bonds

3. VaR: Options

4. Summary

5. Appendix: VaR for Foreign Assets

Chapter 46. VaR: Alternative Measures

1. Historical Simulation

2. Bootstrapping

3. Monte-Carlo Simulation

4. Alternative Methods

5. Summary

Part XII: Price Dynamics

Chapter 47. Asset Price Dynamics

1. Stochastic Processes

2. Geometric Brownian Motion and Ito’s Lemma

3. Distribution of Log Stock Price and Stock Price

4. Summary

5. Appendix: Ito’s Lemma

Chapter 48. Black-Scholes PDE

1. Risk-Neutral Valuation and Black-Scholes PDE

2. Finite Difference Methods

3. Summary

4. Appendix: Derivation of Black-Scholes PDE

Chapter 49. Equilibrium Models: Term Structure

1. Risk-Neutral Valuation

2. Models of the Short-Rate

3. Pricing using Continuous Time Models

4. Bond Prices and Derivatives Prices

5. Summary

Glossary

Bibliography

Index