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Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options

Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options

Andrew M. Chisholm

ISBN: 978-0-470-97295-3

Jun 2010

250 pages

Select type: E-Book



The book is a step-by-step guide to derivative products. By distilling the complex mathematics and theory that underlie the subject, Chisholm explains derivative products in straightforward terms, focusing on applications and intuitive explanations wherever possible. Case studies and examples of how the products are used to solve real-world problems, as well as an extensive glossary and material on the latest derivative products make this book a must have for anyone working with derivative products.

1. The Market Background.

Derivatives building blocks.

Market participants.

Origins and development of derivatives.

The modern OTC derivatives market.

Exchange-traded futures and options.

Chapter summary.

2. Equity and Currency Forwards.


The forward price.

Components of the forward price.

Forward price and expected payout.

Foreign exchange forwards.

Managing currency risk.

Hedging with FX forwards.

The forward FX rate.

Forward points.

FX swaps.

Applications of FX swaps.

Chapter summary.

3. Forward Rate Agreements.


FRA application: corporate borrower.

Results of the FRA hedge.

FRA payment dates and settlement.

The FRA as two payment legs.

Dealing in FRAs.

Forward interest rates.

Chapter summary.

4. Commodity and Bond Futures.


Commodity futures.

Futures prices and the basis.

Bond futures.

Gilt and Euro bund futures.

The cheapest-to-deliver.

Chapter summary.

5. Interest Rate and Equity Futures.


Interest rate futures.

Trading interest rate futures.

Hedging with interest rate futures.

Interest rate futures prices.

Equity index futures.

The margining system.

Single stock futures.

Chapter summary.

6. Interest Rate Swaps.


Sterling interest rate swap.

Hedging with interest rate swaps.

Dollar interest rate swap.

Summary of IRS applications.

Swap rates and credit risk.

Cross-currency swaps.

Gains from cross-currency swap.

Chapter summary.

7. Equity and Credit Default Swaps.

Equity swaps.

Monetizing corporate cross-holdings.

Other applications of equity swaps.

Equity index swaps.

Hedging equity swaps.

Credit default swaps.

Credit default swap premium.

Chapter summary.

8. Fundamentals of Options.


Call option: intrinsic and time value.

Long call expiry payoff.

Short call expiry payoff.

Put option: intrinsic and time value.

Long put expiry payoff.

Short put expiry payoff.

Chapter summary.

9. Hedging with Options.


Forward hedge revisited.

Protective put.

Payoff profile of protective put.

Changing the put strike.

Equity collar.

Zero-cost equity collar.

Collars and forwards.

Protective put with barrier option.

Covered call writing (buy–write).

Chapter summary.

10. Exchange-Traded Equity Options.


UK stock options on LIFFE.

Stock options: call expiry payoff.

US-listed stock options.

CME options on S&P 500 R_ index futures.

FT-SE 100 index options.

Expiry payoff of FT-SE 100 call.

Exercising FT-SE 100 index options.

Chapter summary.

11. Currency Options.


Currency options and forwards.

Results from the option hedge.

Zero-cost collar.

Reducing premium on FX hedges.

Compound options.

Exchange-traded currency options.

Hedging with exchange-traded options.

FX covered call writing.

Chapter summary.

12. Interest Rate Options.


OTC interest rate options.

Hedging with interest rate calls.

Caps, floors and collars.


Eurodollar options.

Euro and sterling interest rate options.

Bond options.

Exchange-traded bond options.

Bund and gilt bond options.

Chapter summary.

13. Option Valuation Concepts.


The concept of expected payout.

Inputs to the Black–Scholes model.

Historical volatility.

Implied volatility.

Share price simulations.

Value of a call and put option.

Pricing currency options.

Pricing interest rate options.

Chapter summary.

14. Option Sensitivities: The ‘Greeks’.




Delta, gamma and expiry.




Signs of the ‘Greeks’.

Chapter summary.

15. Managing Trading Risks on Options.


Delta risk on a short call.

Delta hedging and gamma.

Profit from a short call position.

Chasing the delta.

Practical constraints on hedging.

Chapter summary.

16. Option Trading Strategies.


Bull spread.

Bull position with digital options.

Bear spread.

Put or bear ratio spread.

Long straddle.

Chooser option.

Short straddle.

Managing the gamma risk.

Calendar or time spread.

Chapter summary.

17. Convertible and Exchangeable Bonds.


Investors in convertible bonds.

Issuers of convertible bonds.

CB measures of value.

Conversion premium and parity.

Other factors affecting CB value.

Participation rates.

Mandatorily convertibles and exchangeables.

Structuring a mandatorily exchangeable.

Chapter summary.

18. Structured Securities: Examples.


Capital protection equity-linked notes.

Expiry value of 100% capital protection notes.

100% participation notes.

Capped participation notes.

Average price notes.

Locking in interim gains: cliquet options.


Synthetic securitization.

Chapter summary.

Appendix A: Financial Calculations.

Appendix B: Glossary of Terms.

Appendix C: Further Information.