You are previewing Derivatives: Markets, Valuation, and Risk Management.
O'Reilly logo
Derivatives: Markets, Valuation, and Risk Management

Book Description

Robert Whaley has more than twenty-five years of experience in the world of finance, and with this book he shares his hard-won knowledge in the field of derivatives with you. Divided into ten information-packed parts, Derivatives shows you how this financial tool can be used in practice to create risk management, valuation, and investment solutions that are appropriate for a variety of market situations.

Note: CD-ROM/DVD and other supplementary materials are not included as part of eBook file.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Contents
  5. Preface
    1. DERIVATIVE MARKETS
    2. FUNDAMENTALS OF VALUATION
    3. FORWARD/FUTURES/SWAP VALUATION
    4. OPTION VALUATION
    5. STOCK DERIVATIVES
    6. STOCK INDEX DERIVATIVES
    7. CURRENCY DERIVATIVES
    8. INTEREST RATE DERIVATIVES
    9. COMMODITY DERIVATIVES
    10. LESSONS LEARNED
    11. OPTVAL™
    12. REFERENCES
  6. Acknowledgments
  7. About the Author
  8. Part One: Derivative Markets
    1. Chapter 1: Derivative Contracts and Markets
      1. FORWARDS
      2. OPTIONS
      3. WHY DO DERIVATIVES MARKETS EXIST?
      4. EVOLUTION OF DERIVATIVES MARKETS
      5. ATTRIBUTES OF EXCHANGE-TRADED DERIVATIVE MARKETS
      6. ATTRIBUTES OF OTC DERIVATIVE MARKETS
      7. SUMMARY
      8. REFERENCES AND SUGGESTED READINGS
      9. APPENDIX 1: SQUEEZING THE SOYBEAN MARKET
  9. Part Two: Fundamentals of Valuation
    1. Chapter 2: Assumptions and Interest Rate Mechanics
      1. UNDERLYING ASSUMPTIONS
      2. INTEREST RATE MECHANICS
      3. DISCOUNT BONDS
      4. COUPON-BEARING BONDS
      5. TERM STRUCTURE OF INTEREST RATES
      6. STOCK VALUATION
      7. SUMMARY
      8. REFERENCES AND SUGGESTIONS FOR FURTHER READING
      9. APPENDIX 2A: TAYLOR SERIES EXPANSION OF BOND VALUE
      10. APPENDIX 2B: SUM OF A GEOMETRIC PROGRESSION
    2. Chapter 3: Relation between Return and Risk
      1. UTILITY THEORY
      2. PORTFOLIO THEORY
      3. CAPITAL ASSET PRICING MODEL
      4. PORTFOLIO PERFORMANCE MEASUREMENT
      5. SUMMARY
      6. REFERENCES AND SUGGESTED READINGS
  10. Part Three: Forwards/Futures/Swap Valuation
    1. Chapter 4: No-Arbitrage Price Relations: Forwards, Futures, Swaps
      1. UNDERSTANDING CARRY COSTS/BENEFITS
      2. VALUING FORWARDS
      3. VALUING FUTURES
      4. IMPLYING FORWARD NET CARRY RATES
      5. VALUING SWAPS
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
    2. Chapter 5: Risk Management Strategies: Futures
      1. EXPECTED RETURN AND RISK
      2. HEDGING PRICE RISK
      3. HEDGING REVENUE RISK
      4. HEDGING MARGIN RISK
      5. HEDGING PORTFOLIO VALUE
      6. HEDGING MULTIPLE SOURCES OF RISK
      7. ESTIMATION ISSUES
      8. SUMMARY
      9. REFERENCES AND SUGGESTED READINGS
  11. Part Four: Option Valuation
    1. Chapter 6: No-Arbitrage Price Relations: Options
      1. OPTIONS AND FORWARDS
      2. CONTINUOUS RATES
      3. DISCRETE FLOWS
      4. NO-ARBITRAGE FUTURES OPTIONS RELATIONS
      5. NO-ARBITRAGE INTER-MARKET RELATIONS
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
    2. Chapter 7: Valuing Standard Options Analytically
      1. INTUITION OF RISK-NEUTRAL VALUATION
      2. LOG-NORMAL PRICE DISTRIBUTION
      3. VALUING A EUROPEAN-STYLE CALL OPTION
      4. VALUING A EUROPEAN-STYLE PUT OPTION
      5. MEASURING RISK OF EUROPEAN-STYLE OPTIONS
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
      8. APPENDIX 7A: APPLICATIONS OF ITO'S LEMMA
      9. APPENDIX 7B: RELATION BETWEEN THE CONTINUOUSLY COMPOUNDED MEAN RETURN AND THE MEAN CONTINUOUSLY COMPOUNDED RETURN
      10. APPENDIX 7C: APPROXIMATION OF THE UNIVARIATE NORMAL PROBABILITY
      11. APPENDIX 7D: DERIVATION OF BLACK-SCHOLES/MERTON OPTION VALUATION FORMULA
      12. APPENDIX 7E: DERIVATION OF THE “GREEKS”
    3. Chapter 8: Valuing Nonstandard Options Analytically
      1. ALL-OR-NOTHING OPTIONS
      2. GAP OPTIONS
      3. CONTINGENT PAY OPTIONS
      4. FORWARD-START OPTIONS
      5. RATCHET OPTIONS
      6. CHOOSER OPTIONS
      7. EXCHANGE OPTIONS
      8. OPTIONS ON THE MAXIMUM AND THE MINIMUM
      9. COMPOUND OPTIONS
      10. LOOKBACK OPTIONS
      11. BARRIER OPTIONS
      12. SUMMARY
      13. REFERENCES AND SUGGESTED READINGS
      14. APPENDIX 8A: APPROXIMATION OF THE BIVARIATE NORMAL PROBABILITY
    4. Chapter 9: Valuing Options Numerically
      1. BINOMIAL METHOD
      2. TRINOMIAL METHOD
      3. MONTE CARLO SIMULATION
      4. QUADRATIC APPROXIMATION
      5. MEASURING RISK NUMERICALLY
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
    5. Chapter 10: Risk Management Strategies: Options
      1. EXPECTED RETURN AND RISK
      2. MANAGING UNEXPECTED CHANGES
      3. PROFIT FUNCTIONS
      4. BREAKEVEN PROBABILITIES
      5. EXPECTED TERMINAL PROFIT/RETURN
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
  12. Part Five: Stock Derivatives
    1. Chapter 11: Stock Products
      1. MARKETS
      2. VALUATION
      3. TRADING AND RISK MANAGEMENT STRATEGIES
      4. SUMMARY
      5. REFERENCES AND SUGGESTED READINGS
      6. APPENDIX 11A: EXACT VALUATION OF AMERICAN-STYLE CALL OPTION ON A DIVIDEND-PAYING STOCK
    2. Chapter 12: Corporate Securities
      1. VALUING CORPORATE BONDS
      2. VALUING SUBORDINATED DEBT
      3. VALUING WARRANTS
      4. VALUING CONVERTIBLE BONDS
      5. SUMMARY
      6. REFERENCES AND SUGGESTED READINGS
    3. Chapter 13: Compensation Agreements
      1. STANDARD EMPLOYEE STOCK OPTIONS
      2. VESTING PERIOD
      3. EARLY EXERCISE
      4. CONSTANT DIVIDEND YIELD MODELS
      5. ESOs WITH INDEXED EXERCISE PRICES
      6. ESOs WITH RELOAD FEATURES
      7. EMPLOYEE STOCK PURCHASE PLANS
      8. SUMMARY
      9. REFERENCES AND SUGGESTED READINGS
  13. Part Six: Stock Index Derivatives
    1. Chapter 14: Stock Index Products: Futures and Options
      1. MARKETS
      2. COMPOSITION OF STOCK INDEXES
      3. NO-ARBITRAGE RELATIONS AND VALUATION
      4. RISK MANAGEMENT LESSONS: BARINGS BANK PLC
      5. RETURN/RISK MANAGEMENT STRATEGIES
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
    2. Chapter 15: Stock Index Products: Strategy Based
      1. INSURING STOCK PORTFOLIOS
      2. INDEX OPTION BUY-WRITE STRATEGIES
      3. VOLATILITY DERIVATIVES
      4. SUMMARY
      5. REFERENCES AND SUGGESTED READINGS
      6. APPENDIX 15A: CONSTRUCTION OF THE CBOE'S MARKET VOLATILITY INDEX (VIX)
  14. Part Seven: Currency Derivatives
    1. Chapter 16: Currency Products
      1. MARKETS
      2. VALUATION
      3. RISK MANAGEMENT LESSON: AWA LTD.
      4. RISK MANAGEMENT
      5. SUMMARY
      6. REFERENCES AND SUGGESTED READINGS
  15. Part Eight: Interest Rate Derivatives
    1. Chapter 17: Interest Rate Products: Futures and Options
      1. MARKETS
      2. NO-ARBITRAGE RELATIONS AND VALUATION
      3. RISK MANAGEMENT APPLICATIONS
      4. SUMMARY
      5. REFERENCES AND SUGGESTED READINGS
    2. Chapter 18: Interest Rate Products: Swaps
      1. ESTIMATING THE ZERO-COUPON YIELD CURVE
      2. INTEREST RATE SWAPS
      3. RISK MANAGEMENT LESSON: ORANGE COUNTY INVESTMENT POOL
      4. INTEREST RATE CAPS, FLOORS, AND COLLARS
      5. VALUATION OF SWAPTIONS
      6. SUMMARY
      7. REFERENCES AND SUGGESTED READINGS
    3. Chapter 19: Credit Products
      1. CREDIT PRODUCT MARKETS
      2. TOTAL RETURN SWAP
      3. CREDIT DEFAULT SWAP
      4. CREDIT-LINKED NOTES
      5. SYNTHETIC COLLATERALIZED DEBT OBLIGATIONS
      6. CREDIT SPREAD FORWARD
      7. RISK MANAGEMENT LESSON: STATE OF WISCONSIN INVESTMENT BOARD
      8. CREDIT SPREAD OPTIONS
      9. SUMMARY
      10. REFERENCES AND SUGGESTED READINGS
    4. Chapter 20: Valuing Interest Rate Products Numerically
      1. CONSTANT-PARAMETER MODELS
      2. NO-ARBITRAGE MODELS OF INTEREST RATES
      3. BOND VALUATION
      4. BOND OPTION VALUATION
      5. SUMMARY
      6. REFERENCES AND SUGGESTED READINGS
  16. Part Nine: Commodity Derivatives
    1. Chapter 21: Commodity Products
      1. NET COST-OF-CARRY RELATION
      2. ENERGY: PETROLEUM
      3. RISK MANAGEMENT LESSONS: MG REFINING & MARKETING
      4. AGRICULTURAL: SOYBEANS
      5. METALS: GOLD
      6. OTHER: WINE
      7. SUMMARY
      8. REFERENCES AND SUGGESTED READINGS
  17. Part Ten: Lessons Learned
    1. Chapter 22: Key Lessons
  18. Appendices
    1. Appendix A: Elementary Statistics
      1. OBJECTIVES
      2. POPULATION VERSUS SAMPLE
      3. RANDOM VARIABLES
      4. PROPERTIES OF EXPECTATION OPERATORS
      5. ESTIMATION
      6. PROBABILITY DISTRIBUTIONS
      7. REFERENCES AND SUGGESTED READINGS
    2. Appendix B: Regression Analysis
      1. OBJECTIVES
      2. SIMPLE LINEAR REGRESSION
      3. OLS REGRESSION THROUGH ORIGIN
      4. MULTIPLE LINEAR REGRESSION
      5. REFERENCES AND SUGGESTED READINGS
    3. Appendix C: Statistical Tables
    4. Appendix D: Glossary of Derivatives-Related Terms
  19. About the CD-ROM
    1. INTRODUCTION
    2. SYSTEM REQUIREMENTS
    3. USING THE CD WITH WINDOWS
    4. WHAT'S ON THE CD
    5. CUSTOMER CARE
  20. Index